In recent years, neobanks, also known as digital banks or online banks, have taken the financial industry by storm. These modern financial institutions are entirely digital, providing banking services and products to customers exclusively through mobile apps or websites.
In comparison to traditional banks, neobanks are known for their user-friendly interfaces, quick and easy account opening processes, lower fees, and higher interest rates.
As the use of technology grows, neobanks are becoming more popular among younger generations, tech-savvy individuals, and those who prefer to conduct all of their banking activities online. According to Juniper Research, neobanks will have 87 million users worldwide by 2025, which is up from 19 million in 2019.
In this article, we will delve deeper into neobanks' business models, growth strategies, and challenges.
Business Plan
Neobanks have a lean and agile business model that allows them to provide their customers with personalized, cost-effective, and innovative banking services.
They use digital technology, data analytics, and artificial intelligence to streamline operations, reduce overhead costs, and provide customers with a seamless banking experience.
Unlike traditional banks, neobanks do not have physical branches or ATMs, which reduces their overhead costs significantly.
They also don't have to maintain legacy systems or out-of-date technologies, allowing them to offer modern banking solutions at a fraction of the cost.
Neobanks provide a variety of banking services and products, such as checking and savings accounts, debit and credit cards, loans, and investments.
They also collaborate with other fintech firms to provide additional services like insurance, wealth management, and cryptocurrency trading.
The Most Common Neobank Business Models
Neobanks’ business models can widely vary. We’ve highlighted 4 of the most common business strategies which have very different revenue drivers at their core.
Interchange as the main revenue driver: When a customer uses a card issued by the neobank to make a payment, the neobank collects an interchange fee. Obviously, this won’t be the sole source of the neobank’s income as it will also take advantage of interest earned on ATM fees and on cash. The most well-known example of a company pursuing this business strategy is Chime.
Credit-led strategies: Neobanks can leverage credit-first business models. Usually, a credit card is on offer and that offer quickly turns into a bank account offering. This is the case of Nubank, a Brazilian neobank whose primary stream of revenue is its credit card operations and BNPL features. The way it works is simple as it adds up interchange fees, interest rates, and carried cc balances.
Ecosystem based strategies: APIs are the bread and butter of Neobanks. As such, it comes as no surprise that thoroughly building an ecosystem with a core product at its heart is a legitimate strategy. Revolut takes the lead in exemplifying this strategy in action as it grants access to investment opportunities in the stock market, crypto, commodities, insurance, and so forth.
Product extension strategies: some challenger banks’ business models are designed with product extensions at their core.
Strategies for Expansion
Neobanks have used a variety of growth strategies to increase their customer base, market share, and revenue. Among these strategies are:
Targeting underserved segments
Neobanks target underserved segments that are dissatisfied with the traditional banking system, such as millennials, freelancers, and small business owners. Neobanks can attract and retain customers by providing tailored solutions that address the specific needs of these segments.
Partnerships and collaborations
Neobanks collaborate with other fintech firms to provide complementary services and to broaden their product offerings. A neobank, for example, may collaborate with an insurance company to provide insurance products to its customers.
Geographical expansion
Neobanks are broadening their geographic reach in order to enter new markets and expand their customer base. Some neobanks have begun operations in multiple countries, while others are gradually expanding into new markets.
Product differentiation and innovation
Neobanks distinguish themselves from traditional banks by providing innovative and personalized products and services. To stay ahead of the competition and meet customer demands, they constantly innovate and improve their offerings.
Challenges
Despite their rapid growth and popularity, neobanks face a number of obstacles that could jeopardize their success. Among these difficulties are:
Regulatory compliance
Neobanks must adhere to regulations such as anti-money laundering (AML) and know-your-customer (KYC). Noncompliance may result in significant fines and reputational harm.
Customer acquisition and retention
In order to generate revenue and sustain growth, neobanks must attract and retain customers. To stand out in a crowded market, they must differentiate themselves from traditional banks and other neobanks.
Funding and profitability
To begin operations, develop products, and expand their customer base, neobanks require significant funding. However, most neobanks have yet to become profitable, and some have had difficulty obtaining additional funding.
Cybersecurity risks
Because of neobanks store sensitive customer data, they are prime targets for cyberattacks. To protect their systems and customers' data, they must invest heavily in cybersecurity measures.
Conclusion
With their innovative business models, customer-centric approaches, and cost-effective solutions, neobanks are upending the traditional banking industry. Neobanks, with their lean and agile operations, are well-positioned to provide personalized banking services and products that address the specific needs of underserved segments.
To increase their market share and revenue, neobanks have used a variety of growth strategies, including partnerships, geographical expansion, innovation, and product differentiation. However, they do face a number of challenges, including regulatory compliance, customer acquisition and retention, funding, and cybersecurity risks.
Neobanks are expected to grow in popularity and become a major force in the financial industry as the use of technology continues to expand. Neobanks must continue to innovate, differentiate themselves from competitors, and address the challenges that come with their disruptive business model in order to succeed.
Finally, neobanks are a game changer in the banking industry, providing a new customer-centric, cost-effective, and innovative way of banking. Despite the challenges they face, neobanks are well-positioned to disrupt the traditional banking model and provide consumers with a seamless banking experience.
