Neobanks growth factors, why they are here to stay...

This article published on Linkedin is a shorter version of the white paper “Are Neobanks poised to stay in the financial landscape?” I published previously on Initio’s corporate blog. You can read the full version here.

Neobanks growth factors, why they are here to stay...

 1. Innovation will continue

Over the last 24 months, N26 announced a dozen of significant services upgrades, from the launch of new Bank (metallic) Card to the recent introduction of “Spaces”, a virtual money management service.

Revolut is claiming to release on average every 3 weeks an improved version of its mobile app, while Monzo is providing its clients with no less than 11 new features for the first quarter of 2018.

For Neobanks, the competition is not about how revolutionary will be their next service or how deeply they use innovation. But rather how they communicate about innovation and how they make it available for they clients. Communication is a core ingredient of their success and they use it as a strategy to fuel their customer acquisition engine.

2. Neobanks are Fintech.

Neobank are more than traditional banks, they are fintech providers. Fidor, for instance, has developed a white labeled digital banking platform, Fidor Operating System. Allowing for quick and easy portfolio management and giving customer access to open front-end service. Fidor is also providing its clients state of the art API layer and banking modules. The platform is proposed through a SaaS model and will be used by Telefonica for its mobile-only bank, O2.

Moven, a US service provider, is also proposing B2B solutions. In 2017, Moven has generated $7 million thanks to its white label contracts with TD Bank or to New Zealand’s Westpac, for instance. And its newly announced joint-venture with SBI Group will give access to the Asian market throughout a network of at least 60 regional banks.

If Neobanks may struggle to compete with pure B2C players, they are strong competitors to traditional offers when it comes to front end B2B banking platforms.

 3. Younger generations love them

According to Julien Jaillon, CEO of Carrefour Bank & Insurance; 30% of C-ZAM customers have less than 30 years old, and 75% are lower than 50.

For Revolut and N26 figures speak for themselves: 42% of Revolut’s users are between 25 and 35 years old; while N26 claims to have 59% of customers under 35 years old and even expect to peel away 5 to 10% of retail customers between 18 and 35 from established banks in Europe before 2020.

Even if we estimate that Neobanks do not own more than 5% of the retail market, they appeal up to 35% of new customers per year. Why these 35% are making a difference? Because these new customers were previously unbanked, meaning that Neobanks manage to enroll customers with high financial development potential.

4. The Service offer will upscale

The reputation of Neobanks is based on superior customer experience and reactive support, these two features require extensive investment in human resources. If customer support is an attitude it is nonetheless a major cost center which can’t be supported by the classical Freemium or low-cost business model adopted by most of Neobanks.

To balance the books, it is mandatory to increase the per-customer revenue by proposing premium services or more profitable products. N26 and Revolut have opted for a broaden offer with metallic bank cards, others like the French Nickel – historically focused on low cost and no-frills offers - is now proposing Chrome, an upscaled version of its basic offer. 

New comers don’t describe themselves as “low cost” alternatives to traditional banks. If they are able to propose transparent or a la carte price structures it is more a consequence of their cost structure than the result of marketing position.

In opposition to most online banks such as Hello Bank or ING Direct, winning market shares by claiming to be “online only because cheaper”, Neobanks can be described as “cheaper because online only”.

 5. More breadth and depth

It is too early to say whether Neobanks will try to position themselves as top-of-mind banks and compete with “digital bank” like Boursorama or Keytrade to occupy the first place in household. But initiatives to enlarge service offers are showing deep commitment from Neobanks to find their way to sustainability.

 Loans and Mortgages are already available in the ATOM’s offer, while N26 is proposing travel and online insurances (backed by Allianz, one of its major investors). In some countries, the German fintech is even proposing consumers loans in partnership with local partners like Younited Credit (Fr) or AuxMoney (De). And depending on your country of residence you can also have access to extended services as insurance dashboards (virtual broker) or investment solutions.

 Revolut is proposing non-life insurances (smartphone and travel) and starts to deploy a usage-based reward system (which could be compared with Amex rewards). But the English native fintech makes the difference by being one of the very few to allow to buy and exchange cryptocurrencies (Ether, Bitcoins etc.) directly through the app.

6. PSD II and Open Banking will sustain the growth

Possibilities offered by PSD II in terms of payment initiation and account aggregation are a remarkable opportunity for Neobanks. With their online / mobile user experience they are well positioned to attract clients interested by account aggregation.

 Thanks to their digital mindset and business models, Neobanks are flexible enough to provide their clients with enhanced experience using ecosystems built from scratch. They are thus able to offer movie tickets, mobility services or miscellaneous online services directly in the banking app.

 The Second part, “Neobanks may face tough time…” will be soon published on Linkedin, meanwhile, you can read white paper “Are Neobanks poised to stay in the financial landscape?” immediately on Initio’s corporate blog.