Traditional banks are losing their hegemony to a new breed of digital only banks without a so called ‘brick and mortar’ building. These digital apps are disrupting the way consumers have been looking at banking for eons. Although, neobanks have been in existence since the early 2000s, it gained a major market interest after the 2008 financial crisis which resulted in heavy financial loses and a general resentment towards the incumbents. Building on this new wave of distrust and capitalizing on the negative perceptions of customers towards traditional banks, neobanks are growing at an astonishing rate and filling the gaps the incumbents have left in terms of customer experience and convenience.

According to Zion’s Market Research May 2019 report, neobanks are growing at a rate of 46.5% and will hit a value of USD 394.6 billion by 2026. Today, the estimated users of neobanks globally stand at 39 million, thanks to their focused niches like the gig economy and thin files along with their exceptionally innovative product offerings. Moreover, the rise in consumer interest has rapidly scaled the number of neobanks currently available in the market, where before consumers were worried about safety and security of their investments, today they are more comfortable with banking out of a mobile phone.

Neobanks provides their customers with highly extravagant features which were never a part of traditional banking, leading them to question and mistrust the incumbents more than ever. Some of the common neobank features include

  • User-friendly and engaging app experience
  • 24/7 chatbot support
  • High security features
  • Personalized offers depending on your income and expense cycle
  • No monthly fees and low services costs
  • Higher FD and savings interest rates
  • Innovative investment and tracking tools
  • Free debit cards with no annual fee and accessible across a wide range of ATM network
  • Seamless account opening, payments, deposits and other banking services
  • International money payments and transfers at very low rates
  • One app for multiple accounts
  • Easily accessible anytime anywhere
  • Over-draft protection
  • Sign-up incentives and so on.

With such amazing offerings and innovative product line, neobanks are truly taking the financial market by storm but, what is the secret behind their rapid success? Let’s explore the reasons behind the astronomic rise of neobanks and how the consumers and government alike are encouraging these “sagely financial upstarts”.

  • Fintech-friendly regulations

The blame for the 2008 financial crisis which resulted in the loss of millions of jobs and dollars was laid squarely on the banking sector along with their individualistic governance, lack of transparency and risky investments. To reverse the economic damage and mitigate the causes of the crisis the government found new avenues to strengthen the financial ecosystem with the help of fintechs by slowly and meticulously bringing in some fintech-friendly regulations and creating regulatory sandboxes that dictated the terms and conditions of these new and innovative type of banking model that lacked physical branches.

The US was the first country to set up a sandbox-like framework called the Consumer Financial Protection Bureau (CFPB) in 2012. This was soon followed by the UK in 2015 by the FCA who coined the term “regulatory sandbox”, which is now prevalent across the globe to encourage financial innovations. According to Ivo Jenik and Kate Lauer “A regulatory sandbox is a framework set up by a financial sector regulator to allow small scale, live testing of innovations by private firms in a controlled environment (operating under a special exemption, allowance, or other limited, time-bound exception) under the regulator’s supervision.”

The staunch support of the government and the changing consumer landscape for agile and a transparent banking system have added extra brownie points to the steady growth of neobanks. Moreover, their increased focus on customer satisfaction and experience has brought about a new wave of expectations in the consumers which the traditional banks have never been able to fulfil.

  • Innovating towards gratification

Today’s consumers are spoilt for choice by the retail and e-commerce providers and thus, it is little wonder they would like to expect the same agility and convenience in other aspects of their day to day life including banking. A major chunk of the neobank customers are millennials who do not have the time or the patience to deal with the lengthy processes offered by traditional banks. Neobanks offer such overactive, ever on the move people with banking solutions at their fingertips and some typically catering to their exclusive needs. The advent of smartphones has only added to their expectations of ‘instant gratification’.

Although, most neobanks offer similar basic offerings like free accounts, zero paperwork and high interest rates, certain neobanks are going out of the way to make their offerings unique and attractive. For example, Revolut has been rated the most trustworthy neobank and Starling Bank the best in financial marketplace with over 11 Fintech partners. Moreover, some neobanks are also offering spending trackers and saving pots that will help consumers keep a track of their savings and spending. Add free debit cards, a few free ATM withdrawals and low rates on international transactions these banks are offering services the traditional banks have never dreamt of offering their customers which has greatly increased their customer base and loyalty quotient.

  • Bull’s Eye approach to customer embracement

The greatest flaw in the traditional banking system that led to the enormous rise of neobanks is the wide chasm they left in terms of service penetration and customer inclusion. There are about 1.7 billion adults in the world who belong to the so called “unbanked population” and their exclusion is largely based on their lack of documentation, economic status or as simple as a restrictive geographical location. To add to this the incumbents have also largely neglected the rising populace belonging to the ‘gig economy’ and the SMEs.

With such a vast market space left underserved, the neobanks have conquered it all with some very simplistic banking offerings and highly focused customer experiences. Moreover, with more than two-third of the unbanked population having access to a smart phone it was just the matter of crafting the ideal set of solution for particular segments to include them into the land of the banked.

After much study of the market and customer segmentation analysis, the neobanks have identified four niches that would be their key to success, the gig economy, the unbanked, the thin files and the SMEs. There are neobanks servicing a particular segment by providing highly specific tailor-made solutions to cater to these highly neglected groups. For example, Oxygen, a US based neobank caters exclusively to the gig economy member including freelancer and contractors, Albo, a Mexican neobanks to the unbanked populace, Monese, a UK based neobank to the thin files and Fluidly, a London based neobank to the SMEs.

In addition, to the above three factors, the lack of transparency, the reluctance to embrace the new and the negligence towards financial inclusion by the incumbents has all tipped the scales in favor of the neobanks. To give credit to where it is due, the neobanks have also done their research well and have understood the loop holes the traditional banks have left. Moreover, with careful data analysis and understanding the pulse and the grievances of the customers with their traditional financial providers these financial saviors have magnanimously swooped down to fill in the gaps to make a success out of their business strategy while capturing the hearts of millions of consumers and stabilizing their trust with the economists and regulators.

Perspectives

The rising numbers of neobank customers and profits alike indicate the fact that these new digital only banks are nimble and proactive and can be an easy inclusion in a customer’s life. The basic idea of “convenience and agility” is driving the shift from branch to branchless which is empowered by the emergence of smart-phones. The new generation customer along with their evolving behavior has provided a new angle to their financial service providers, where they are viewed as a facilitator of transactions who would enable them to manage their money proactively. With the adoption of next-gen technologies like AI and ML, neobanks are truly focusing on customer needs by integrating insightful data and prescriptive analytics to develop innovative products that are customer-centric to deliver opportunities that can deepen relationships and drive change.

In our neobank blog series coming next is “The Neobank Success Story – A False Promise or A Sure Shot” where we explore how neobanks are thriving and making a profit with their ‘O so sagely’ approach to banking.

Vidya Ramakrishnan

Vidya is a content marketer with over 12 years of progressive experience in content management, marketing, and client servicing. She is a B2B and aims to deliver customer delight with her eclectic mix of skills that she has picked over her years of carving her content career. She is fascinated by the next-gen digital technologies and has spent many curious years reading, understanding, and writing about how these technologies work and can influence lives in the future.