The pandemic did not bring the expected success to neobanks. Along with the increasing popularity of such services, new regulatory changes have emerged that have made their lives more difficult. Specialists from the Boosty Labs, a company that focuses on neo banking application development, analyze neobanking trends and prospects.
Neobank is a fintech company that provides banking services exclusively in a remote format (via a mobile application, online banking, instant messengers and social networks). At the same time, a neobank may not have a banking license. In the absence of a license, it provides banking services in partnership with a traditional bank. A digital bank is a bank without physical branches, all services are provided in a remote format, there is a banking license. A challenger bank is a new bank with a physical presence, but, as a rule, there are few branches, services are mainly provided in a remote format, and there is a banking license.
Until recently, unconditional success was predicted for neobanks. Some analysts even believed that they would displace traditional banks from the direct interaction with customers. Recently, however, there have been reports of very modest financial success, and more often of losses of many neobanks. Thus, according to the company Accenture, British neobanks lose $11 per client on average per year. Many neobanks around the world are expanding their activities in the field of lending, but few succeed in it.
Let's look at the most striking examples of neobanks in the world.
Since the EU is one of the leaders in improving the regulation of the fintech industry, let's start with the German N26 (Number 26). Fintech company Number26 was founded in 2013 by Valentin Stalf and Maximilian Tayenthal in order to make banking easier and more transparent for people around the world.
You can open an account in N26 remotely. You fill out the online registration form, confirm your identity by photographing the document, and in five to seven working days you receive the card through the delivery service. If the delivery address is in Germany itself, the identity can be verified via video chat or by visiting the branch of the partner delivery service (PostIdent).
Now the number of N26 clients has exceeded seven million. The bank is represented in 25 markets, its offices are located in Berlin, Barcelona, Madrid, Milan, Paris, Vienna, New York and São Paulo, with a total of approximately 1,500 employees of 80 nationalities. Another 200 people are planned to be hired this year.
The N26 provides most of the basic banking services – there is even travel insurance and payday loans. Bank cards can be connected to Apple Pay, Google Pay and some other payment systems. In addition, through partner services, you can invest in the European securities market.
N26 does not publish its financial statements. It is only known that in 2020 the bank's net loss from its main European business amounted to 110 million euros. However, this is less than 165 million euros in losses in 2019. The total revenues of N26 in 2020 were not disclosed, but in 2019 they amounted to 100 million euros (43.6 million euros a year earlier). Quite good indicators, but so far the bank's expenses are growing at the same rate as income.
Chime was founded in San Francisco in 2013 by Chris Britt and Ryan King. They now hold the positions of Chief Executive Officer (CEO) and Chief Technology Officer (CTO), respectively. The company has not yet received a banking license, although such attempts have been made. The Bancorp Bank and Stride Bank act as Chime's partners to issue plastic cards.
Chime is an easy-to-use application. The account is opened remotely (the method of verifying the entered personal data is not disclosed), the card is delivered within five to ten days. There is no monthly bill or credit card payment. The interest on the savings account is quite high for American banks – 0.5% per annum. The client receives incoming receipts faster than in other banks.
Chime's main source of income is commission payments that the merchant pays to the bank that issued the card. In addition, Chime earns on the difference in the percentage that it pays to its customers on the balance in the savings account (money can be automatically credited to it), and the interest that banks pay Chime for the use of customer funds; plus the income goes to the payment for cash withdrawal from ATMs. Chime runs aggressive ad campaigns to attract customers. In 2020, Chime even became an official sponsor of the Dallas Mavericks basketball club. Chime did not disclose its financial results.
One of the leaders of Brazilian neobanks is NuBank. It is also the largest fintech company in Latin America.
One of the main advantages of NuBank over traditional banks in Latin America is the ability for customers to fully manage their money, accounts and cards through an online application. One of the main goals of the founder of NuBank was to simplify the customer experience and solve issues through technology (not visits and many calls to the bank). NuBank has provided access to banking products to those who previously could not get them or who had difficult access to them. Before the advent of NuBank, not all Latin Americans had the opportunity to get a full-fledged international credit card.
The account is opened remotely, there are no bank branches and their own ATMs. The delivery time of the card depends on the region and can take up to 30 days. There is no monthly bill or credit card. There is only an optional fee when connecting to the bonus program. NuBank's main sources of income are commissions when paying for purchases with its cards and interest on loans issued.
Applications for NuBank credit cards were submitted by 36 million Brazilians (it took months to wait for such a card at the first stages, it is still far from satisfying all applications), plus 12 million people have digital accounts. But even here the business is not yet generating income. NuBank had a net loss of BRL 95 million (approximately $17 million) in the first half of 2020, up 32% from a year earlier.
Neobank had 19.9 billion Brazilian reais (approximately $3.5 billion) in cash, 48% more than in December of the previous year. The volume of transactions is 54% more than in the first half of 2019. At the same time, NuBank still does not have a full-fledged banking license and cannot attract funds from individuals for deposits.
One of the leaders of Indian fintech is InstantPay. The company was founded in 2013 in New Delhi as a subsidiary of SMSdaak India Ltd. At the end of 2016, she attracted investments from Singapore-based RB Investments and Kaleden Holdings in the amount of three to five million dollars. The main partner banks are ICICI Bank, Axis Bank, IndusInd Bank and Yes Bank.
InstantPay provides its clients with a full range of banking services. Up to a million payments per day go through the company. Average total volume of transactions for the quarter is $1 billion. In 2019, InstantPay began providing services to small and medium businesses. The company pays great attention to the development of API banking (more often called Open Banking).
InstantPay's range of financial services is not yet very wide – for example, the company does not yet issue loans to individuals, and investment opportunities are limited to deposits and digital gold (securities denominated in gold). One of the main products is prepaid cards, which allow access to financial services for those who do not have a bank account, and also give the opportunity to top up their bank account with cash in a network of micro-branches (Digi Kendras) countrywide.
InstantPay expects to generate operating income (revenue) in the amount of 3.5 billion rupees (approximately $49 million) in the 2021st financial year, which is almost double the 1.85 billion rupees, which the company started operating in fiscal 2020 (ended March 2020). But the company does not report the amount of profit or loss.
The situation with fintech (https://boostylabs.com/fintech) in each specific region is highly dependent on the level of development of the country's financial system, traditions and features of national regulation. Let's try to highlight common points.
Let's start with cross-border payments. Due to globalization, neobanks strive to facilitate cross-border payments between people and businesses around the world. For example, Transferwise or Synapse offer OpenAPI solutions for cross-border transfers, fintechs Adyen and Checkout solve the problem of settlements with companies in different countries.
The second trend is an attempt to solve the problem of low monetization of their customers. In fact, neobanks are becoming more and more like traditional banks in terms of their range of products. Recently, neobanks have been trying to offer the user the maximum number of products (including non-banking ones) so that the demand for all services can be satisfied within the application – for example, insurance products, investments, cryptocurrency, and so on.
Another trend is the launch of lending. It is difficult for a bank to monetize its audience without a credit component. The transactional model will strive to reduce commissions (everyone will offer services for free), so the one who knows how to lend will win. This is where traditional banks earn their main income.
In the past few years, neobanks in their development are moving away from the monoline model, that is, businesses that are focused on one function and a narrow set of services and products, to digital (digital-first) banks, where digital channels of interaction and technologies are at the heart of providing a wide range financial services.
There are also a number of specific trends: focus on those market segments where traditional financial services often do not provide competitive conditions (for example, freelance, SMEs); hyper personalization; development of products using cryptocurrencies and crypto instruments, entering new markets and international development.
In part, this set overlaps with the next general trend – the search for unoccupied niches in which to specialize. Due to the increasing control of local regulators, more local and niche solutions are emerging, such as RazorPay in India. The strengthening and development of such fintech services will be facilitated by trends in digital ID, open banking, electronic KYC and remote identification.
Specialized banks for certain niches are being launched - banks for children, banks for the elderly. Banks for SMEs are actively growing (neobanks are also launching separate applications for business – Revolut, Monzo, Starling), which realized that the business needs a radically different product.
Development of neobanks is heavily influenced by regulation. This became especially true in the midst of a pandemic. While the coronavirus restrictions have increased the appeal of digital solutions in all walks of life, it has also affected the regulation of the entire financial services industry, which has hit many neobanks.
It is rather difficult to single out general trends in regulation. Even from the general trend for obtaining licenses, there are a large number of exceptions, such as InstantPay and NuBank. Neobanks are increasingly seeking to obtain banking licenses. This is partly driven by regulators who are trying to bring the market in line (previously fintechs were traditionally launched in the gray zone without a license, which allowed them to grow quickly and cheaply),
The second reason for obtaining a license is lending. With a banking license, you can use deposits (cheap financing) for lending. This allows neobanks to offer similar loan conditions to their clients.
In general, the existing requirements, including regulatory ones, lead to an interesting situation. On the one hand, banks must become profitable faster, which forces them to look for ways to achieve financial stability. On the other hand, the deteriorating conditions after the coronavirus restrictions make it difficult to make money on existing business models. It is for this reason that many neobanks are now actively entering new markets (for example, Revolut has chosen a strategy of wide expansion with the support of Visa) and are looking for directions where rates and other conditions are more acceptable
For most clients of neobanks, they are still not the main bank. Apparently, they have not yet managed to earn a sufficient level of trust, and in a crisis, trust and reliability are the most valuable goods. In addition, it seems that investors are starting to get tired of the constant unprofitableness of neobanks and are beginning to demand faster profit. It will be very difficult to do this without increasing the cost of services.
If we talk about the EU, then there is a real boom in fintech. Everything necessary for the development of neobanks was done at the start, now control measures are being taken within the working model.
For example, restrictions on anonymous wallets are being introduced, tools for remote identification are changing. A promising change, which is still only in the project, is the digital ID of a European citizen. Its implementation will affect all industries, including financial services. Another interesting initiative is the creation of a unified pan-European payment system for businesses and people.
The success of neobanks in Europe, where their penetration rate is several times higher than in the United States or Latin America, is mainly due to regulatory initiatives to provide open APIs for payment companies and fintechs, as well as other initiatives in Open Banking. “Many countries are actively exploring the possibilities of such regulation and are implementing the first initiatives.
For example, in Australia, the regulator ordered the opening of the API of the four largest banks, and developed Asian countries (for example, Singapore, Hong Kong, South Korea) and the United States are actively exploring such opportunities. If open banking initiatives are introduced in these countries, it will be easier for neobanks to integrate into the existing infrastructure of traditional financial intermediaries.
The situation in Great Britain is noticeably different from that in Europe. One of the toughest regulatory requirements was put forward there: in 2020, the UK proposed to tighten control over the profitability and sustainability of the business models of neobanks and other organizations transforming traditional financial services.
If these requirements go through all the legislative stages, neobanks may be required to guarantee financial stability, including in relation to risk management, and requirements for capital, strengthening of management. At the same time, the potential profitability or financial stability should be clear within five years after registration. Requirements for obtaining a license also remain, especially if neobank begins to provide services for lending and keeping clients' money in their accounts.
The situation in the United States is somewhat similar to the European one, only with a slight lag. The US is striving for the Open Banking concept, which is already being successfully used in the EU. The prerequisites for the application of this concept have already been, but real changes can be expected if amendments are adopted, allowing the client to give access to his financial data to third parties. In the United States, in the next couple of years, the launch of a fast payment system (FedNow) is also expected, similar to the British Faster Payments. All this will lead to the "explosion" of fintech.
Due to the pandemic, digital remote identification is being widely implemented in Canada, the "rails" of banking clearing systems for instant settlements on large transactions are being built, and electronic signatures are being legalized for all industries. So now in Canada, there is an increase in financial institutions that are building international fintech businesses.
This will mean leveling the playing field for traditional banks and neobanks and increasing competition between them. And in Brazil, there is now an increase in neobanks. By the way, Brazil, like a number of other countries (Chile, Uruguay and others) actually copies the European GDPR-regulation (General Data Protection Regulation).
The business models of most neobanks are aimed at optimizing costs and reducing the margins of the banking business. However, they are highly dependent on cooperation with traditional banks. In an environment of low rates and possible measures to stimulate consumption (for example, imposing negative rates or charging fees for keeping funds in an account), such a business model can be especially vulnerable. Therefore, the markets of Latin America and Africa are interesting destinations for neobanks.