Neobanks: Are They Really Challenging?

In surfing this week, I found a great article on my friend Amit Goel‘s website GoMedici.com. The company has just completed a deep dive into the world of challenger banks or, as they term them, neobanks. The time for neobanks is now. Here’s their summary of thinking:

Neobanking 2.0: Global Deep Dive 2020

Just like how quantum theory questioned stereotypical notions of physics and challenged common ideas around concepts of reality, neobanks are doing something similar to the banking industry. Digital banking is no longer a theory; it has evolved to become part of our everyday lives. In this article, we look at the growth of Neobanking, its success story, and share a few snippets from our recently launched Neobanking 2.0 Report.

Neobanks offer banking services to customers directly on their mobile phones or via other digital platforms. Unlike traditional banks, these banks do not have any physical branches. They largely target younger generation customers who are willing to accept a bank that has no physical presence. They are able to attract millions of customers with superior customer experience and product offerings. In many cases, these banks focus on underserved segments in SME/retail. This helps them acquire customers on a larger scale, thanks to the improved UX they offer.

Are Neobanks Perfect Challengers?

Neobanks are viewed as a direct challenge to the status quo of the established traditional banks, with their lower cost structure and hyper-personal customer experience. With all the advantages and features compared to traditional banking, neobanks face a fair share of difficulties. With a huge consumer base, these banks are still facing a challenge in terms of long-term profitability.

(Click on image to enlarge)

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In Europe, we have witnessed these digital-only banks scaling their customer base at an unprecedented rate and taking a big portion of the traditional banks’ market share. This trend is evident in the European regions, where UK neobanks have added almost 20 million customers. A 2019 report by AT Kearney found that European neobanks gained more than 15 million customers between 2011 and 2019; by 2023, neobanks are projected to have up to 85 million customers over the age of 14 which is equivalent to 20% of Europe’s population. However, we have witnessed an inverse relation: the larger the consumer base, the more the losses these banks incur. So, even with a large consumer base and increased popularity over recent years, profitability has been an enormous challenge for these neobanks.

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