The well-known neobank model After several years, the neobank model is by now familiar. Most operate exclusively online and offer customers digital-first, mobile-friendly products and services, often with lower fees and lower interest rates, and accessible via an easy-to-use smartphone app. Services vary from basic online banking and debit/credit card to loans, investments and savings: up to merchant accounts, insurance - and even equity trading and cryptocurrency. Neobanks typically start off by specialising in particular products and services. But for many, the ultimate aim is to build a multicountry, full-service digital bank offering multiple products and services - including current accounts, loans, international payments, insurance and investments. New technology means fewer financial burdens Unlike incumbent banks, neobanks don’t have the financial burden of staffing and managing traditional physical branches. They also benefit from not having legacy technology assets and overheads to maintain. They can pursue profitability without the cost burdens of infrastructure, physical premises, staff, and - initially, at least - shareholder dividend payouts. Neobanks’ use of cloud technology means they avoid having to spend heavily up-front on expensive IT infrastructure. And thanks to standardised open banking APIs, neobanks can build and bring to market products and services that enable faster, more frictionless fund transfers between account holders, other financial providers, and transactions with merchants. With these foundations in place - and sustained by a steady flow of private equity cash - neobanks are free to focus their time and effort on creating and launching easyto-use current accounts and other products that prioritise a topnotch customer experience. They also have the freedom and flexibility to come up with other innovative digital-based services for customers to access and use online or on their mobile phones. They can test and then roll out new digital features and products quickly and easily - and then tear them down just as quickly and easily if they don’t work out. Taking on customer frustrations The rise of neobanks comes at a time when customers have become dissatisfied and frustrated with established incumbent banks for a number of reasons - a lack of transparency, an absence of useful new features, plus hidden or expensive fees for everything from overdrafts to closing your current account and moving to another bank. Focusing on customer frustration and other pain points is central to neobanks’ ongoing success. As consumer trust in neobanks grows and users become more confident and familiar with technology, incumbent banks are set to lose customers and market share. Reaching niche and underserved markets The retail banking market is overcrowded. But neobanks are finding pockets of opportunities with significant but underserved sub-markets - such as millennials, gig economy workers and microbusinesses. It’s an approach that’s paying off. Neobanks are squeezing the market share of older established banks from both ends: at one end, with personal accounts and other consumer-facing services, and more recently at the other end with business-focused offerings such as buy-to-let loans for property investments and bridging loans for small businesses. Banking after the pandemic Neobanks were already in a strong position before the Covid-19 pandemic. But the consequences of the pandemic have created new opportunities for them. Small and medium businesses need access to extra credit to help their recovery from the economic slowdown caused by Covid-19. In addition, people who were stuck at home during national lockdowns are now using online and mobile banking services significantly more than they did so previously. These changes have reportedly accelerated digital banking’s progress by up to ten years. F i nanc i a l Innov a t i on & F i nTech 62 Finance Monthly.
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