Neobanking
is taking off across the world, seeing faster and more transparent financial
solutions entering the market and proving successful among consumers. In 2024,
neobanking transaction values are projected to reach more than $6.37 trillion,
surpassing the GDP of Japan, the third largest economy globally.

With
more people than ever banking online, and consumers in developing regions
seeking affordable, reliable, and faster peer-to-peer and cross-border payment
solutions, neobanking is perhaps only at the cusp of completely revolutionizing
the global financial
landscape.

For
nearly a decade, neobanking has been reshaping how businesses conduct transactions and
consumers can leverage financial technology
solutions. The term ‘neobanks’ was first coined back in 2017. However, by this
time the technology and financial software capabilities provided by these
startups had been around since 2013.

Fast-forward
past a pandemic, the supersonic rise of remote working, economic turbulence,
and neobanking is fast taking on a new form, proving to be more efficient and
reliable compared to traditional
banks.

Although
neobanks’ success isn’t solely embedded in the fast and reliable services these
companies can offer, but rather in the technology that has helped it rise to
the occasion over the last decade.

Cloud-Based
Technology

One
thing that has helped set neobanks apart from traditional brick-and-mortar-like
banks is the use of cloud-based
technology and Application Programming Interfaces (APIs). By leveraging
cloud technology, neobanks can seamlessly connect to third-party providers
such as traditional banks and provide consumers with various financial
services all under one umbrella.

Yet,
cloud technology was only the beginning. Today, neobanks heavily rely on the
advancements of artificial
intelligence (AI) to help supercharge the customer experience and machine
learning, gather customer data, and provide all-in-one automated service
solutions.

White-Label
Digital Banking Solutions

Part
of the success of neobanks is their ability to provide white-label digital
banking solutions to larger and more established vendors. Instead of solely
targeting the everyday consumer, neobanks have instead gone to partner and
collaborate with larger financial institutions, helping to provide them with a
more advanced and efficient payment platform.

This allows major financial conglomerates to expand their digital
footprint, enter new markets, scale their services, and broaden their product range. In this case,
neobanks simply act as the provider of the platform, while traditional banks operate and trade under their own brand.

Embedded Banking
Services

As
with anything nowadays, consumers and businesses seek convenience, looking to
have a variety of personalized financial solutions all under one branch. That’s
where neobanks have stepped in, providing clients with the ability to transact,
lend, and manage their accounts within one ecosystem.

Solutions
including business-to-consumer,
business-to-business,
and banking-as-a-service
are all key elements that help make
neobanks stand apart from traditional financial options. Individuals and
businesses can now manage payment solutions, and other financial tasks, such as
accounting, payroll, lending, debit cards, credit cards, and investments under
one roof.

Profitability –
A Key Challenge for Neobanks

Neobanks
have managed to disrupt the industry in recent years, however, many of them are
still struggling to turn a profit. In one report by Simon-Kucher & Partners,
analysts found that despite there were more than 400 neobanks currently
scattered across the world, an estimated 5 percent of them break even.

Yet,
despite all of the success neobanks have accomplished, and seriously
challenging incumbent banks, there’s still a lot of growing uncertainty being faced within the digital financial ecosystem.

For
instance, a recent PYMNTS Intelligence report found that an estimated 9 percent
of consumers currently make use of fintechs as their primary bank. While it’s
possible to see this figure expand in the coming years, 47 percent of consumers
said that they remain hesitant to use digital-only banks and fintechs.

Some
of the neobanks (Chime, Monzo, Starling) operate with uneven profitability.
Chime for example generates the majority of its income from Visa, garnering
revenue from fees, and customers using cards at out-of-network ATMs.

Similarly,
Monzo generates roughly 75 percent of its income through interchange fees,
while Chime and Starling receive some portion of their income through these
fees. However, both Mastercard and Visa have said that they will reduce
interchange rates by about 0.05% over several years.

Neobanks
are evolving their offerings to capture more of the consumer market, including
providing new lines of credit and subordinated debt to improve their capital
structures. Subordinated debt, an unsecured type of debt used after obtaining
senior debt, offers neobanks a means to secure additional financing, albeit at
higher risk and interest rates.

While
these instruments could enhance profitability, other options like insured
deposits and subordinate equity play vital roles. Competition drives
neobanks to offer attractive features, but monetizing them demands long-term
investment, potentially impacting short-term profitability. To sustain growth,
neobanks must establish robust capital structures that secure funding for
innovative financial solutions without diluting ownership.

A Gateway of New
Problems

Neobanks are expanding their product offerings
to meet the needs of the financial consumer market, but face challenges
including scrutiny over lending practices and concerns about predatory lending,
particularly in developing regions where digital banking is on the rise.
Reports indicate abuse of digital banks’ lending services, prompting regulatory
transformations supported by governments.

However, incumbent banks question the
long-term impact on consumers and the financial ecosystem. Neobanks additionally grapple with liquidity access, potential solutions involving strategic
partnerships and diverse market segments. Regulatory compliance
and the implications of subordinated debt structures complicate their
evolution within the banking ecosystem.

Final Thoughts

Neobanks
help to connect consumers and businesses to a bigger, and more sophisticated
network, however, for many the challenges of profitability remain one of their
biggest barriers to scalability . Yet, as we begin to better understand
neobanks’ place within the broader financial ecosystem, and consider where it’s
heading, perhaps the challenges we’re facing could become the next
generation of solutions for the wider financial environment.

Neobanking
is taking off across the world, seeing faster and more transparent financial
solutions entering the market and proving successful among consumers. In 2024,
neobanking transaction values are projected to reach more than $6.37 trillion,
surpassing the GDP of Japan, the third largest economy globally.

With
more people than ever banking online, and consumers in developing regions
seeking affordable, reliable, and faster peer-to-peer and cross-border payment
solutions, neobanking is perhaps only at the cusp of completely revolutionizing
the global financial
landscape.

For
nearly a decade, neobanking has been reshaping how businesses conduct transactions and
consumers can leverage financial technology
solutions. The term ‘neobanks’ was first coined back in 2017. However, by this
time the technology and financial software capabilities provided by these
startups had been around since 2013.

Fast-forward
past a pandemic, the supersonic rise of remote working, economic turbulence,
and neobanking is fast taking on a new form, proving to be more efficient and
reliable compared to traditional
banks.

Although
neobanks’ success isn’t solely embedded in the fast and reliable services these
companies can offer, but rather in the technology that has helped it rise to
the occasion over the last decade.

Cloud-Based
Technology

One
thing that has helped set neobanks apart from traditional brick-and-mortar-like
banks is the use of cloud-based
technology and Application Programming Interfaces (APIs). By leveraging
cloud technology, neobanks can seamlessly connect to third-party providers
such as traditional banks and provide consumers with various financial
services all under one umbrella.

Yet,
cloud technology was only the beginning. Today, neobanks heavily rely on the
advancements of artificial
intelligence (AI) to help supercharge the customer experience and machine
learning, gather customer data, and provide all-in-one automated service
solutions.

White-Label
Digital Banking Solutions

Part
of the success of neobanks is their ability to provide white-label digital
banking solutions to larger and more established vendors. Instead of solely
targeting the everyday consumer, neobanks have instead gone to partner and
collaborate with larger financial institutions, helping to provide them with a
more advanced and efficient payment platform.

This allows major financial conglomerates to expand their digital
footprint, enter new markets, scale their services, and broaden their product range. In this case,
neobanks simply act as the provider of the platform, while traditional banks operate and trade under their own brand.

Embedded Banking
Services

As
with anything nowadays, consumers and businesses seek convenience, looking to
have a variety of personalized financial solutions all under one branch. That’s
where neobanks have stepped in, providing clients with the ability to transact,
lend, and manage their accounts within one ecosystem.

Solutions
including business-to-consumer,
business-to-business,
and banking-as-a-service
are all key elements that help make
neobanks stand apart from traditional financial options. Individuals and
businesses can now manage payment solutions, and other financial tasks, such as
accounting, payroll, lending, debit cards, credit cards, and investments under
one roof.

Profitability –
A Key Challenge for Neobanks

Neobanks
have managed to disrupt the industry in recent years, however, many of them are
still struggling to turn a profit. In one report by Simon-Kucher & Partners,
analysts found that despite there were more than 400 neobanks currently
scattered across the world, an estimated 5 percent of them break even.

Yet,
despite all of the success neobanks have accomplished, and seriously
challenging incumbent banks, there’s still a lot of growing uncertainty being faced within the digital financial ecosystem.

For
instance, a recent PYMNTS Intelligence report found that an estimated 9 percent
of consumers currently make use of fintechs as their primary bank. While it’s
possible to see this figure expand in the coming years, 47 percent of consumers
said that they remain hesitant to use digital-only banks and fintechs.

Some
of the neobanks (Chime, Monzo, Starling) operate with uneven profitability.
Chime for example generates the majority of its income from Visa, garnering
revenue from fees, and customers using cards at out-of-network ATMs.

Similarly,
Monzo generates roughly 75 percent of its income through interchange fees,
while Chime and Starling receive some portion of their income through these
fees. However, both Mastercard and Visa have said that they will reduce
interchange rates by about 0.05% over several years.

Neobanks
are evolving their offerings to capture more of the consumer market, including
providing new lines of credit and subordinated debt to improve their capital
structures. Subordinated debt, an unsecured type of debt used after obtaining
senior debt, offers neobanks a means to secure additional financing, albeit at
higher risk and interest rates.

While
these instruments could enhance profitability, other options like insured
deposits and subordinate equity play vital roles. Competition drives
neobanks to offer attractive features, but monetizing them demands long-term
investment, potentially impacting short-term profitability. To sustain growth,
neobanks must establish robust capital structures that secure funding for
innovative financial solutions without diluting ownership.

A Gateway of New
Problems

Neobanks are expanding their product offerings
to meet the needs of the financial consumer market, but face challenges
including scrutiny over lending practices and concerns about predatory lending,
particularly in developing regions where digital banking is on the rise.
Reports indicate abuse of digital banks’ lending services, prompting regulatory
transformations supported by governments.

However, incumbent banks question the
long-term impact on consumers and the financial ecosystem. Neobanks additionally grapple with liquidity access, potential solutions involving strategic
partnerships and diverse market segments. Regulatory compliance
and the implications of subordinated debt structures complicate their
evolution within the banking ecosystem.

Final Thoughts

Neobanks
help to connect consumers and businesses to a bigger, and more sophisticated
network, however, for many the challenges of profitability remain one of their
biggest barriers to scalability . Yet, as we begin to better understand
neobanks’ place within the broader financial ecosystem, and consider where it’s
heading, perhaps the challenges we’re facing could become the next
generation of solutions for the wider financial environment.

Source