Neobanks (also challenger banks or online banks) have become new players in the industry that operate only in the digital ecosystem. Their target audience is retail customers and SMEs. As of February 2022, there are over 250 challenger banking systems worldwide, and the global neobanking market volume is expected to be $66.82 billion by the end of this year (according to Statista). Grand View Research study reveals that the neobanking sector will accelerate — at a compound annual growth rate of 53.4% from 2022 to 2030.
The online banking client base was steadily growing even before the global pandemic, but it has only facilitated accelerating this trend. And the neobank meaning has become suited to the times.
The emergence of digital-only banking has responded to the general discontent with the traditional services. It presents an innovative approach and makes the global financial system more affordable for clients. That is why neobanks aim to change the way to serve consumers, providing them with an all-in-one solution. But will this trend develop even faster in 2022?
What Is Wrong With Traditional Banks
The traditional banking system proved its reliability and safety. However, hundreds of thousands of people give up on it and start using neobanks. What does the "neo bank vs traditional bank" topic mean?
One of the drawbacks of traditional banking services is the cumbersome nature and excessive bureaucracy. Clients need to spend hours collecting documents and queuing in the bank's branch. Among other disadvantages, there are:
- The long decision-making process (vary by country);
- High service fees;
- A complicated process of opening an account;
- The high percentage of failures (due to small income, bad credit rating, unemployment, etc.).
And finally, even the most respected mainstream players are frequently remiss in offering value-added services to their clients and targeting socially vulnerable groups (like seniors, students, and young families).
Anyway, both retail and small business clients can't choose the perfect banking solution. Since traditional financial institutions are not always turning down outdated standards, digital banks are evolving to cover the increasing demand and satisfy customers with quality service. It is the reason why people started moving to neo banking platforms.
The Advantages of Neobanking
Neobanks are a response to traditional and cumbersome services. They offer convenient conditions and provide more accessibility to vital features and mobility to millions of customers worldwide.
The new flow of bank clients is interested in convenient banking solutions, and online banks are among them. But how do neobanks work? Some app-based solutions offer a personal touch, quick decision-making, and a quality user experience. And now, they appear to be more than capable of handling their work. According to the recent EY report, 27% of customers worldwide prefer to use neobanking services instead of traditional ones.
Online banks are trying to add missing features to the current financial system. And here are the most vital advantages of neobanks:
- Fast and straightforward account opening. All you need is your ID and a couple of minutes to become a customer of neobanking service;
- Minimum requirements. Often you do not need to pass income verification, so it is easy to access challenger banks;
- Low fees. Because the neobanking overhead expenses are much lower, it affects the pricing. Plus, some services are free for both retail and business clients;
- A high level of mobility. Online banks have developed to allow anyone to manage all the account features in real time;
- Worldwide reach. It is another essential characteristic of neobanking because openness to the worldwide market can extend the customer base;
- A set of particular features. Each digital bank has unique options for its clients (low transfer commissions, free accounts for business clients, cashback, fair lending rates, etc.). It separates the online service from other market players;
- Focus on freelancers and SMEs. Some online services offer special conditions to cater to the gig economy subjects;
- Appeal to personal values. Several neobanks target a specific audience. For instance, Cheese has developed as the bank for Asian American communities. Another example is Fair, the first Shariah-compliant challenger bank.
Neobanking is a vital part of the FinTech industry. They rely on automated basic banking processes that allow them to provide top-notch service. Read more about the hyperautomated approach here.
How the Pandemic Affected the Growth of Neobank Activity
Most businesses were forced to move online during the pandemic, and banking is no exception. Further, more and more people have started to join digital banks and manage their finances. According to Safeatlast, 65.3% of Americans will use neobanks and challenger banks in 2022. As for the European market, the overall number of clients is expected to be 85 million by 2023. The reason for a significant interest is simple: people are looking for a convenient banking service. Moreover, online banks grab the attention of investors by the following features.
- IBAN and ACH accounts;
- Instant transfers;
- Fast registration;
- Debit Card backed by a reliable payment system;
- Access to special offers by shops and marketplaces.
Challenger banks also do not have offices or a significant infrastructure similar to big banks, so they can claim fewer expenses and offer inexpensive or even free services to their consumers. However, such a rapid development of neo banking startups raises many questions. That is why potential customers want to ensure that the long-term prospects of such operators are good enough.
Where are the Opportunities for Neobank Solutions?
The first opportunity for neobanking apps is targeting specific markets that mainstream companies overlooked. Digital banks may cooperate with traditional financial institutions to address marginalized niches, such as young families, people with disabilities, sexual minority groups, etc. Another vital audience is companies that need the full scope of assistance with international operations, so there are also some neobanks for small businesses. This approach helps to improve the entire user experience, find new ways to reach new consumers, and maximize business opportunities.
If neobanks see value in serving particular niches, they will cement their client-oriented reputation. Moreover, challenger banking is popular among ethnic minorities and the LGBT+ community (based on a Curve survey).
The second opportunity for digital banks is the customizable app interface that differentiates them from mainstream services. The interface serves as the company image, so neobanks try to make them more recognizable. Identity is a crucial element for success for online banks that leverage unique approaches to show that neo banking solutions can be unique and provide quality service to particular audiences. By rethinking classical products (such as deposits, card payments, and loans), neobanks offer personalized service to all clients.
The third opportunity of the neobanks is looking for unfair advantages. These market players should find existing business examples, analyze their features and improve them to make a clear and convenient customer experience. Such innovations should be interesting for investors to encourage them to invest heavily in digital banking apps.
A Few Words About Challenges in 2022
Neobanking is certainly gaining popularity now. However, this industry faces some considerable and lasting challenges, so it is vital to know about the advantages and disadvantages of neo banking. First, there is no precise regulation of neobanks in all countries. Every jurisdiction provides unique rules resulting in serious obstacles for launching neobanks in specific markets.
Second, some jurisdictions like the United States or the UK have tough competition in the banking field, so it is complicated for the neobanks to get their pound of flesh.
The third challenge of neobanking is that mainstream players follow technology trends and create unique features in some countries. And the neo banking services have fewer opportunities to stand out due to functionality and customer orientation. It explains a lot of the success of Nubank in Brazil, where the overall service level is low, and why a German neobank N26 had to quit the American market.
Fourth, not every challenger bank can turn the growing popularity among clients into high profits. If venture investors do not think about how to take advantage of their neobank soon, they may withhold further funding for such projects.
Finally, the white-label platforms raise many questions. And this approach allows the fast and cheap development of the top-notch app, but this only increases the pressure on the market. Combined with the lack of trust, it will become a big problem for the neobanks in 2022.
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