Author of the “Digital Era”
Founder and CEO of Fintech Solutions LLC
While traditional banks were busy developing the financial monitoring, security and regulatory compliance departments, new players appeared on the banking market. The names differ – mobile banks, non-incumbent or incumbent-challenger banks, online banks or neobanks.
To begin with, all neobanks can be divided into three categories:
#1. Standalone neobanks
Among the most prominent representatives of this category are Starling (UK), Atom (UK), Tandem (UK), Monzo (UK), Revolut (UK), Loot (UK), Paytm (India), Neat (Hong Kong), etc. Usually, such banks do not provide a full range of banking services. Most often, neobanks launch niche products – they choose 1-3 key services for their users. At the same time, such services are ten times more convenient and better than similar offers of the traditional banks. For example, Revolut value proposition is about “no hidden fees for abroad transfers, and no rubbish exchange rates”.
#2 Neobanks created by traditional players
Under pressure from customers, technology, smartphones and new players, classic banks are well aware of the need for change. Unfortunately they are simply not able to change quickly. The existing legacy – IT infrastructure, inconsistency in banking systems and technologies, poorly digitized processes, branch networks – are holding back the digital future. In this situation, a great way out is to create a stand-alone new product – neobank. Examples include ING bank’s Di-Ba (8.8 million customers), Hello Bank by BNP Paribas (the project started in 2013 and has already accumulated more than 2.5 million customers in 5 countries, of which 1.5 million customers – in Germany), and, of course, Monobank from Universalbank in Ukraine. Often, such projects are aimed at new customer bases and the migration of existing customers is minimal.
#3 New players, backed by BigTech – GAFA (Google, Apple, Facebook, Amazon) or BAT (Baidu, Alibaba, Tencent).
Obviously, those neobanks that have tech giants behind them have serious advantages. Technology companies are already very good at attracting customers, they own big users data bases, and the digital environment for them is their natural habitat. Due to the margins of BigTech companies in their core products, on their way to gaining the new market share, the prices on the financial products might be much lower than the offers of the banks.
Let us look at several cases: Kakao bank by Kakao Talk (Korea), launched in 2017, attracted 2 million customers within the first 2 weeks. By 2019, their customer base has grown and reached 6 million users, representing 15% of Korea’s adult population. China did not lag behind with its banks. Another great case – MYbank and WeBank, led by Alibaba and Tencend. WeBank currently boasts 60 million customers in 500 cities of China thanks to Tencend’s extensive social network. MYBank, behind which Alibaba’s most powerful trading platform, is offering loans to 5.7 million customers from the micro and small business segment. Another major advantage of tech giants in terms of financial services is the ability to subsidize the financial services of their neobanks, for example, lending, due to the marginality of their other services. Thus, the cost will be much lower than that of traditional banks. It is difficult for banks to compete, since financial services are their main business.
According to the estimations of the experts of the largest international banking groups digitalization will bring banks a cost reduction of 30-50%, mainly due to a decrease in the number of employees (approximate numbers – 45% by 2030). At the same time, competition and new players will reduce the profitability of traditional banks by 10-30%. Neobanks most often choose payments as their main offer. So it’s not difficult to predict that first of all, traditional banks will begin to lose profitability in this service. The other two pieces of the pie that banks will have to share with new players will be lending and deposits. Fintech startups are also incredibly good in finance and asset management, so here the competition is also growing.
Neobanks are good?
Here are the main advantages of new players:
- Intuitive navigation in the application and ease of access to financial services.
- Transparency in the product line and competitive pricing.
- Personalized banking with a niche product or service.
- Open ecosystem capable of rapid scaling. The launch of a new product on the market is carried out in a short time.
- Very fast and easy collaboration with tech startups.
Factors determining the growth of neobanks
- Changed customers expectations. Neobanks often build a much more comfortable seamless service, satisfying customers needs.
- New technologies. Cloud solutions, platforms of new generations, artificial intelligence, work with big data, biometrics.
- Regulation. Due to tough regulation, banks “tightened their belts”. And it’s easier for new players – the regulation requirements often do not apply to them or light version is used.
- The growth of large technology companies and platforms. New players enter the financial market, and their client base is very extensive.
- Financing. Fintech attracts attention, and consequently, significant investment. Favorable financial support is an excellent condition for the growth of neobanks.
At traditional banks, everything changed as a result of several financial crises – profitability dropped significantly, business growth slowed down, and at the same time, the costs of complying with regulatory standards increased.
Banking in the old way doesn’t work anymore. It is the storm in the banking system. Thanks to the first wave, there is the emergence of neobanks created by former bankers and talents from other business segments, tired of the banking bureaucracy. During the second wave, neobanks became a new business project for traditional banks.
Interestingly, neobanks often attract talented employees from outside of the banking sector. At the same time, a real boom of new players was seen in the UK. This is due to the fact that the response to the financial crisis of 2008 in all countries was different. For example, in the USA, the regulator tightened the requirements for banks so much that it became almost impossible to obtain a license. At the same time, the UK made a strategic decision to create a more competitive market by facilitating entry for new players.
Neobanks-beginners have a very interesting approach to launching new products. The main difference is their speed to market. Take, for example, Monzo Bank in the UK. Neobank started very quickly on prepaid cards in order to get the first customers’ reviews as quickly as possible and to fine-tune the products. And already with a formed customer base, the bank launched all other retail products. Neobank Starling was launched only in the mobile version, and very dynamically built a complete set of APIs, which ultimately monetizes well.
What is the target audience of neobanks?
- SME. Medium and small businesses were not at all lucky and happy – banks were never attentive enough to them. SMEs have so much “pain” associated with banking services that they will gladly escape to neobanks.
- Underbanked customers, including the younger generation.
- A growing middle class, millennials, freelancers, developers, and geeks.
- Immigrants working in other countries and helping their families.
Neobanks winning the battle?
However, the sky is not cloudless for the neobanks. Among the main difficulties that the new players face, we can name the following:
- Trust. Neobanks have no history, so it’s more difficult for them to solve the issue of trust with users. In case that the traditional bank or a BigTech are backing up the Neobank, then the customers will have no doubt about its reputation.
- The high cost of attracting customers. The market is still crowded with banks and other players. And if they do not have their own client base, then attracting new users is expensive.
- No offline presence. The costs associated with the network for neobanks are minimal, but to ensure a full cycle of financial services for customers, they will still need ATMs, and in some cases branches and managers.
- Profitability. This is almost a key problem, especially for standalone neobanks. In most of the launch strategies, in order to conquer new users and markets, neobanks offer their service for the lowest price or even for free. The estimation was that customers will switch to a new bank bringing all their money. However, this did not happen. People’s desire to try new things and their love of innovation have been greatly overestimated. A person is ready to make an extra effort to change the bank if the advantage is very significant. Better yet, just a free service. So what happened in reality, was that customers began to use the services offered by neobanks, but only very cheap or free services. Users still keep their money with traditional banks, this is a matter of trust. And neobanks already have millions or even tens of millions of users, but each of them generates a loss because they only use free or low-margin services.
Users like neobanks for simple and comfortable solutions, transparent and fair pricing. In addition, new players often cooperate with other startups, and their service thereby becomes more flexible, faster, more intuitive.
What do we mean by banking services? In fact, all services at the end are around payments, deposits, loans and finance management. We don’t really need much more than that. But what if all these services are automated and thanks to artificial intelligence, users can easily choose from the best offers already analyzed, based on our behavioral characteristics? Presumably, only 20% of customers need more advanced personalized services.
As the result of monetary revolution, on the way from barter and coins, money turned first into banknotes, then into payment cards, and now we are more than comfortable to have our money under control in our smartphones. The world’s largest players in the mobile payment market are AliPay (AntFinancial) and WeChatPay (Tencent). Each of these companies has more than 1 billion active users. How many banks have the same size of their customer base?
BigTech companies are moving towards financial services for their users. Their main offers are lending and deposits.
Next to traditional banks, new players appear – tech giants, fintech startups and neobanks. Their influence will greatly change the world of payments and investments. The expected loss in volume by traditional players in the payment market can range from 30% to 50%. At the same time, the reasons of these losses will be very diverse: robotics, online platforms, new scoring models, low tariffs for neobank services. It is difficult to compete with fintech startups, since they often work on the principle of a small team, very high speed, and very low costs.
As a result, banks are likely to revise their business models, considering options for new roles for themselves – become a platform or a participant of the platform, or provide banking-as-a-service to new players.
Anastasiya Shevchenko is also a Partner of the international marketplace for Startups and Corporations collaboration called Let’sPartner. Click here to find out more about the project.
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