A game-changer of the finance industry: all you need to know about neo banks
2023 05 30Exist less than a decade and has grown into a thriving fintech sector. Who? Neo banks!
The financial industry has witnessed a remarkable transformation in recent years, with the emergence of these innovative digital banks since the mid-2010s. And the neo banks are not planning to stop growing anytime soon. As the market size reached $79.1 billion in 2022, it is expected to grow to $556.66 billion by 2027.
In this blog post, we will explore the meaning of a neo bank and what makes them a game-changer in modern banking. So, get ready to uncover the exciting world of neo banks and discover why they are taking the finance industry by storm.
What are Neo Banks?
Neo banks, or digital banks, are financial companies that provide banking services solely through mobile applications and websites.
Experts from McKinsey agree that thanks to growing consumer demand and regulatory support for licensing frameworks, neo banks have disrupted the traditional banking industry by providing innovative products, competitive pricing, and better customer experience.
Neo banks do not have any physical branches, and all transactions are performed digitally. Customers can open an account, transfer money, and do other banking activities without ever visiting a physical branch.
The era of neo banks: how did it start?
The neo banking market did not kick off by itself. A few fintech companies – now one of the biggest players in neo banking worldwide – have introduced their digital-only banking services that gave a base for the neo banking market to expand. Here are some of the most well-known neo banks that have gained traction globally:
- Chime. A US-based neo bank that offers various mobile banking services. By providing early access to direct deposits, Chime allows customers to receive their paychecks up to 48 hours earlier than traditional banks, making it a convenient option for those who require quick access to their funds. Chime was founded in 2013.
- N26. It is a neo bank from Germany that provides a user-friendly mobile app with convenient features such as no-fee checking accounts, budgeting tools, and mobile payments. Its modern and intuitive design makes it stand out from other banks. N26’s global availability and mobile-first approach make it a unique option for frequent travellers or those moving between countries. N26 was established in 2013.
- Revolut. Based in the UK, Revolut offers various financial services across several countries worldwide, including current accounts, debit cards, foreign exchange, cryptocurrency exchange, savings accounts, and insurance. Its mobile app is user-friendly and provides real-time notifications and instant spending updates. Revolut has also introduced premium subscription plans that offer extra benefits like travel insurance, cashback rewards, and airport lounge access. Revolut was founded in 2015.
- Monese. An alternative bank based in the UK offering a peace-of-mind money app. With Monese, you get a multi-currency account that can be opened quickly and easily, allowing you to manage your money across borders. In addition, Monese neo bank offers instant account opening, ensuring you never lose access to the money you need when travelling. Founded in 2015, Monese provides customers with a reliable and secure platform to manage their finances without the hassle of dealing with traditional banks.
- Vivid. A German-based neo bank that offers a unique mobile banking app and an exclusive digital investing platform, all in one. Their platform provides a range of features, including payments, transfers, multi-currency accounts, spending reports, and the ability to split bills. Additionally, Vivid’s platform allows users to invest in international stocks, ETFs, and precious metals. Founded in 2020, Vivid is committed to providing users a seamless and efficient banking experience.
The neo banking landscape has experienced impressive growth in just a decade. According to Simon Kucher & Partners’ report on the future of neo banking, the world counts around 400 neo banks that cater to nearly one billion customers.
Yet, it took some time for even the leading neo banks to become profitable. For example, despite reporting a 57% increase in revenue in 2020, Revolut’s business model still shows operating losses due to high administrative expenses. Revolut’s focus on diversifying its revenue streams and improving profitability has paid off, with a 300% increase in gross profit in Q1 2021 compared to 2020. However, it took some time for the company to achieve this level of monetisation, as it previously struggled with profitability.
Moreover, the high emergence of neo banks created a spiking competition, leading to possible consolidation and acquisition deals. Wherefore, experts predict that neo banks may go through consolidation in the upcoming years.
Again, based on the data from the Statista report, the global users of neo banking services are expected to reach nearly 400 million in 2023. Therefore, we see that neo banks can expect quite a skyrocketing growth in the near future.
Why are neo banks game changing for the finance industry?
Neo banks have become a crucial part of the fintech industry for fundamental reasons, leading to their rapid and consistent growth.
Firstly, they are instrumental in promoting financial inclusion. Traditional banks have high fees and strict criteria, making it difficult for specific population segments to access financial services. However, neo banks have lower fees, simpler application processes, and do not require physical presence. This makes accessing financial services easier for individuals excluded from traditional banking.
Secondly, neo banks are vital in driving innovation in the banking sector. The banking industry has traditionally been slow to adopt new technology. Still, neo banks have pushed the boundaries of what is possible in the sector. For example, they have introduced budgeting tools, round-up savings, and real-time notifications. These features have made banking more convenient and given customers greater control over their finances.
Thirdly, neo banks have disrupted traditional banking by offering better customer experiences. With their user-friendly mobile applications and 24/7 customer support, neo banks have set new standards for customer service in the banking sector. This is why traditional banks have been forced to improve their customer experience to keep up with the competition.
Last but not least, neo banks are essential in promoting financial literacy. With their budgeting tools and real-time notifications, neo banks have made it easier for customers to manage their finances. This has increased financial literacy as customers are more aware of their spending habits and financial goals.
Exploring the gains and pains of neo banks
As with every business or market, neo banking shares the bright side and some drawbacks that should be considered wisely. A clear understanding of neo banking is useful for individual customers or business companies, helping to set the right choice for their financial needs. Discover a few advantages and disadvantages of neo banks below.
- Modern customer experience. Neo banks offer a modernised and improved banking experience. One of the ways they achieve this is by creating user-friendly mobile apps that allow customers to easily manage their finances on the go. By using these cutting-edge technologies, neo banks can provide their customers with a seamless banking experience. This gives customers greater control over their finances and access to banking services anywhere and anytime – setting them apart from traditional banks.
- Wider product offerings. Traditional banks typically offer basic banking services such as savings accounts, checking accounts, and loans. However, neo banks have expanded their product offerings to include various financial services beyond traditional banking, such as investment opportunities, digital wallets, and virtual debit cards. These additional services provide customers greater flexibility and convenience, as they can access their financial needs through a single platform. Moreover, being driven by innovations – neo banks can offer these services at a lower cost than traditional banks.
- Convenient service packages. Neo banks often offer bundled products that combine various services into one package, such as a current account, credit card, and savings account. This bundling allows customers to easily manage their finances in one place, providing convenience and flexibility. For instance, a neo bank might offer a travel bundle that includes travel insurance, currency exchange, and low foreign transaction fees. In addition, by providing bundled products, neo banks can offer a more tailored and personalised approach to banking, catering to the unique needs of their customers.
Wherefore, it is essential to explore the possible threats for neo banks:
- Cybersecurity risks. As with any online service, neo banks are vulnerable to cyber-attacks, including hacking, phishing, and malware attacks. Cybersecurity breaches can lead to the loss of sensitive customer data and financial loss.
- Regulatory challenges. Neo banks must comply with the same regulations as traditional banks, including anti-money laundering (AML) and know-your-customer (KYC) requirements. Compliance with these regulations can be time-consuming and expensive, and failure to comply can result in fines and legal action.
- Customer retention. Neo banks may struggle to retain customers as traditional banks begin to offer similar digital services. However, many customers still value the personal touch and in-person interactions traditional banks offer. In addition, the number of people using two and more digital wallets is increasing. Therefore, neo banking service providers need a more extensive customer base, or a super unique value offer to generate enough revenue.
- Profitability pressure for smaller neo banks. Neo banks typically have lower operating costs than traditional banks, but they also have limited opportunities to generate sufficient revenue to cover their costs. This makes it difficult for smaller neo banks to compete with more prominent players or traditional banks that can spread their costs over a larger customer base.
Neo banks continue gaining popularity due to their advantages over traditional banks, such as low fees, high-interest rates, simple sign-up processes, round-the-clock customer support, and comprehensive digital banking services. Their fully digital offering makes them attractive to modern customers and SMEs, a major growth area for neo banks.
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