- Špela Mihelin
Disrupting Banking: How Neobanks are Changing the Financial Industry
Author: Špela Mihelin
Source: Lemur Legal
A few years ago, neobanks started springing onto the market, bent on transforming banking as we know it into its next version. The process of managing a bank account has become simpler, quicker, and more efficient. The question is, how much of a threat are neobanks to traditional, "old school” banks?
What is a neobank?
Neobanks are 100% digital; most often, they offer their services solely through a mobile app. From the client’s perspective, they offer a more user-friendly experience of traditional banking services, with the addition of the most advanced solutions provided in cooperation with other fintech providers (eg. crypto exchanges, crowdlending platforms, asset management services, etc.). The neobank landscape is quite lively and competitive as apps race to add more and more services and features in a quest to build “the platform that has it all”.
The most notable examples of neobanks are N26, Revolut, Starling and Monzo. The sector has seen rapid growth over the past few years, as the number of existing neobanks has increased to more than 50 (eg. GoBank, Holvi, Qapital, Xinja, Pepper, etc.).
The most notable examples of neobanks are N26, Revolut, Starling, and Monzo. The sector has seen rapid growth over the past few years, as the number of existing neobanks has increased to more than 50 (eg. GoBank, Holvi, Qapital, Xinja, Pepper, etc.).
How are neobanks challenging traditional banks?
With traditional banks, opening an account is an elaborate process that starts in the physical branch office. Although these offices allow banks to have close, in-person contact with their customers, it's safe to say that neobanks developed their own, more modern way of providing good customer service.
Modern banking features allow neobanks’ customers to be flexible; the bank is accessible as long as you’ve got a smartphone or tablet and an internet connection, and you can open an account within a couple of minutes. Suddenly, opening a bank account is as simple as registering as a user of any other online platform.
Most neobanks offer a free debit card that can be managed directly from the mobile app and support international payments with current exchange rates, without the additional charges. An up-to-date balance of your account is always available for viewing in the in-app dashboard, and all transactions and payments appear directly.
Furthermore, compared to traditional banks, neobanks offer a more personalized and user-friendly experience. They provide users with sub-accounts for budgeting and organizing their money, automatic categorization of their spending, monthly overviews, etc. Oftentimes, if the issue you are dealing with is not already addressed in the FAQ segment, you can get help by contacting customer support through the app’s built-in chat feature.
What business model do neobanks use?
The arrival of the EU's Payment Services Directive (PSD2) introduced an important, major change to the EU banking industry, on which neobanks heavily rely on nowadays. Since the PSD2 sees users as the center of the regulatory system and gives them more freedom and more choices, customers must be able to use any digital device (cards, apps, ATMs, mobile phones etc.) to transact and pay. This so-called open banking allows neobanks to easily integrate third-party services or data in order to offer a complete and more personalized banking experience.
Berlin-based N26 is one of the neobanks that has taken advantage of the new regulation and adjusted their services to it. Their focus is to develop and offer their own products and solutions while still partnering up with third parties to offer customers more than just a personal finance app. N26 offers loans using services from Lending Club Platform, cross-border money transfers using infrastructure from TransferWise, and savings management via fintech Nutmeg. These kinds of partnerships do not only allow N26 to modify the app to fit their customers’ emerging needs, but also to earn commission by cross-selling related products (such as insurance). From a user’s perspective, it’s also important that the experience of using all these various financial services is completely seamless, meaning that user is not aware whether they are N26 services or third-party services.
Most neobanks are running the “user race”. Building scale has been a priority for many neobanks, even if it affects profitability.
Another feature that neobanks turned to their advantage is the lack of need for physical branches and their maintenance. This allows them to start their business with less capital, to bear lower costs, and to focus their investments on the development of new technologies. Currently, neobanks are generally making their money by charging for premium accounts and services. Although neobanks are indeed low-cost, they are also low-earning. So, what’s the catch?
Most neobanks are running the “user race”. Building scale has been a priority for many neobanks, even if it affects profitability. As they are relatively new on the market, their current goal is to acquire as many customers as possible.
Time will tell if these approaches can provide neobanks with the required revenue to “stay in the game” for the long-run, or if they’ll just be acquired by traditional banks, which could be the end-game (or "exit strategy”) for a fair number of them. In any case, it is clear that financial services providers are being pushed to better serve and support their customers.