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Neobanks at crossroads: decreased funding and valuations demand strategic changes

After generous investments in 2021, investors are looking for a return, yet neobanks need to shift their focus to achieve profitability

Neobank

Neobanks at crossroads: decreased funding and valuations demand strategic changes. Source: shutterstock.com

The new report from Insider Intelligence highlights the challenges neobanks are facing and possible solutions. At present, digital banks are predominantly focused on customer acquisition. The study suggests a few changes in short- and long-term challenger strategies that need to take place in today’s uncertain economic environment. 

Short-term trends

  • Reducing perks and zero-fee products or services will help cut down on expenses. However, this won’t be enough for sustainable profitability. Thus, neobanks must find new ways to generate revenue from existing customers in the long run.
  • Increasing deposits and transactions number will drive up revenues, as neobanks profit through interchange fees. Incentives like a high-yield savings account might increase deposits. However, they will likely also drive up costs, so count that in.
  • New lending products and BNPL options will provide an additional source of revenue. Such offers may be a more cost-efficient method for increasing income.
  • Neobanks at risk should seek a buyer. If the business is under threat, consider selling it. As valuations are low now, large financial institutions may as well enhance their business with a neobank acquisition.

Long-term strategies

  • Offering a subscription-based, super-app-like experience will enhance profitability. Neobanks may also expand to more profitable sectors like investing, home lending, and small business banking.
  • Prepare for tougher rules and regulations. Historically, neobanks have enjoyed softer regulation, but as consumer protection agencies like the CFPB and the FCA strengthen their control over financial services, challengers might also undergo thorough scrutiny. 
  • Struggling neobanks will eventually get pushed out by megafintechs and Big Tech. These global institutions will step in as primary banking providers unless neobanks change their strategies accordingly.

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Nina Bobro

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https://payspacemagazine.com/

Nina is passionate about financial technologies and environmental issues, reporting on the industry news and the most exciting projects that build their offerings around the intersection of fintech and sustainability.