Many players in the financial industry are witnessing strategic repositionings as neobanks, traditional banks and smart banks battle for market dominance. Each institution is leveraging technology to redefine the banking experience, focusing on efficiency, security and innovation.
Neobanks, with their digital-only platforms, have emerged as agile competitors, offering user-friendly, round-the-clock services with lower operational costs. Traditional banks, however, are not sitting idle; they are investing heavily in digital transformation, integrating advanced technologies to enhance their established trust and comprehensive service offerings. Meanwhile, smart banks are combining digital-first strategies with a physical presence to cater to diverse customer needs.
This technological arms race is reshaping financial services. Neobanks employ cutting-edge technologies like AI and machine learning to personalise customer experiences and optimise financial management. Traditional banks are upgrading their systems to offer seamless online services and robust cybersecurity measures, ensuring they remain relevant and competitive. Smart banks are innovating by adopting blockchain, IoT, and advanced analytics to offer sophisticated, integrated financial solutions.
Laurent Descout, Founder and CEO of Neo, says: “Neobanks provide a faster, easier and more secure service that banks cannot compete with. The pain points and inefficiencies that business customers endure with banks are well-known. From paying suppliers, limited and incomplete payment information to the high level of fees, businesses have been underserved by banks for a long time.”
Competition and Collaboration
Phillip O'Neill, Financial Services Director for Kin + Carta Europe, anticipates a more competitive and collaborative future: “There will be a reckoning between competition, partnership and acquisition.”
He expects digital banks like Monzo and neobanks like Revolut to continue expanding their product offerings to compete with traditional banks.
“We’ve seen a lot of legacy banks offer transaction categorisation and saving goals spaces, ideas that we have seen before from fintechs. It will also be interesting to see who starts offering fraud call checkers – like Monzo has – in the new year.
“Open Banking makes it easier for legacy banks to offer these specific features without building them into their existing infrastructures, allowing them to innovate and eventually leapfrog those that they are chasing.
“It’s too early to say whether neobanks will be able to scale enough to seriously threaten the stability of legacy banks – but it’s not out of the question.
“On the flip side, I believe we’ll see more partnerships between niche fintechs and legacy banks - think the Natwest and Cogo partnership - which will enable legacy banks to offer more innovative products and services to their customers.”
Consolidation and Market Dynamics
Shuvo G. Roy, VP & Head of Banking Solutions, EMEA at Mphasis, predicts a wave of consolidation among traditional banks and their digital offshoots, as well as among neobanks themselves. He notes: "The larger neobanks will scale up and push for additional market share, sometimes rebalancing the equation between themselves too, as opposed to against traditional banks alone."
This suggests a shift in strategy where neobanks are not just competing with traditional banks but also among themselves to solidify their market presence.
“The need for efficiency has increased as the pressure on operational costs operations has grown significantly. Per-person productivity pressures have increased and so has the continuous focus on the reduction of costly errors. The need to keep margins intact in a high-rate market has caused additional focus on keeping costs low.”
Core Banking Systems and Technology Stacks
Neobanks leverage advanced technology stacks to provide efficient banking services.
Lucian Daia, CTO at Zitec, explains that neobanks choose either a cloud-based Banking-as-a-Service (BaaS) platform, such as Mambu or Engine by Starting, or build in-house systems for non-standard products or higher control.
“Cloud-based BaaS platforms are more common when neobanks want to launch quickly and with reduced risks, but it often comes at the expense of product customisation,” he says.
“We usually recommend this solution as ideal for neobanks looking to offer relatively standardised products, such as current and savings accounts, cards and BNPL.“
Wei You Pan, Director of Financial Industry Solutions at MongoDB, says: “The core banking system is the most mission-critical system for a neobank, so the decision needs to be considered carefully. Scalability, resilience and reliability, development efficiency, cost efficiency, and vendor and community support are all typical factors of consideration.
“In terms of the use of cloud computing, neobanks are typically cloud native and deployed on public cloud hyperscalers like AWS, GCP, and Azure to leverage the scalability and reliability of the cloud. However, regulators typically have requirements for banks to also manage their cloud risk concentration that may also drive neobanks to have a multi-cloud strategy.
“Due to past major outages of cloud providers and a recent accidental deletion of customer data, it also heightened the need of banks on public cloud - neobanks or not - to think further about a multi-cloud strategy.
“Having a data platform that can help with this strategy by running not only on multiple hyperscalers but also as a SaaS platform can help minimise overall TCO and human efforts plus further improve the reliability of the data. Combining all of this should be a top priority for the regulators, neobanks and their customers.”
Cybersecurity Measures
Neobanks must balance agility with robust, stringent security measures. Lucian Daia comments: “To balance velocity and security/compliance requirements, some neobanks choose to use cloud-based security services (such as managed SIEMs) for analysing high volumes of traffic with limited upfront investments, as well as to use specialised third-party services for areas like KYC, AML or transaction-level fraud prevention.
“In the long run, some of them end up developing their own cybersecurity products to reduce operating costs and there are a few instances where neobanks successfully packaged them as technology products that can be used by competitors.”
It is important to note that a comprehensive security framework that prioritises people, processes and technology, is paramount. This includes rigorous employee screening and training, cross-functional incident response plans and technical controls such as encryption and real-time monitoring.
Laurent Descout comments: “Any system needs to incorporate the latest security and encryption protocols, this can include multi-channel two-factor authentication, four-eyes checks, a complete audit trail of all activity, continuous backups and much more.
“In most neobanks, all actions are logged and stored, providing a complete audit trail of everything in the platform with continuous backups. At Neo, we offer RSA-2048 standard encryption.”
APIs for Enhanced Functionality
APIs play a crucial role in enhancing functionality and integrating with third-party services. Neobanks use Open Banking APIs to extend their products and integrate with complementary software like accounting applications. Third-party APIs facilitate the distribution and cross-selling of new products such as insurance or stock trading.
“Because Neobanks usually start with a small number of products and focus on making sure they get all the details right, some of them try to transform their product into a technology platform that can be extended via Open Banking APIs or integrated with complementary software, such as accounting applications,” says Lucian Daia.
“When it comes to integrating third-party APIs to enhance functionality, these are used to distribute and cross-sell new products, such as insurance or stock trading.”
Luke Schofield, Senior Frontend Developer at Brandwidth, adds: “Open Banking standards, like PSD2, allow secure and standardised access to financial data, enabling third-party developers to create innovative services.
“They secure APIs with technologies like OAuth 2.0 and JSON Web Tokens, and use API gateways for managing performance, rate limiting to limit network traffic and monitoring. This ensures seamless integration with various services, such as payment gateways and financial management tools.”
APIs can follow RESTful best practices and undergo rigorous vulnerability assessments. RESTful best practices refer to guidelines for designing and implementing web services using the REST (Representational State Transfer) architectural style. Key practices include: ensuring safety through rate-limiting, comprehensive logging and exposure of capabilities to developers.
Data Analytics for Customer Insights
Data analytics is a powerful tool for neobanks to enhance customer insights and drive business decisions. Lucian Daia explains that neobanks use data analytics and machine learning services to efficiently analyse and store data, quickly reacting to new data points to ensure service relevance. Neobanks analyse transaction data to offer personalised financial advice and products, using predictive analytics to optimise operations and marketing strategies.
Neobanks use data analytics to understand customer priorities, leading to tailored features like savings boosts and spending insights. This data-driven approach allows neobanks to offer highly personalised services that meet the specific needs and preferences of their customers.
Laurent says: “Many of our customers are SMEs who don’t have the resources of larger organisations and can find tasks such as maintaining a positive cash flow challenging.
“By offering customers a full view of their treasury, SMEs can make better-informed decisions with a more in-depth understanding of their business.
“Through tailored data and analytics from trading history, payments and cash flow, finance teams can make smarter decisions, review specific corporate behaviour and personalise hedging and risk management strategies.”
Technology Underpinning Payments Processing
Payment processing is a critical function for neobanks, requiring speed and reliability. Lucian Daia explains that neobanks use different technologies for various payment channels, integrating high-throughput communication technologies and reducing processing steps to ensure speed and integrity.
“The technology used to initiate and process payments depends on the payment channel - account to account (such as SEPA IcT) or card-based,” he says.
“While the protocols are different, both channels should ideally be integrated using technologies that allow high-throughput low-level communication. In addition to this, reducing the number of processing steps and systems involved in authorising a transaction (while preserving security and data integrity) is essential to avoid long processing times.
“Two essential aspects we always prioritise while implementing FinTech projects are transaction completion (through multiple attempts, channels and techniques) and transaction integrity. While speed is important, making sure a payment transaction correctly and successfully goes through is essential.”
Luke Schofield adds that payment networks like Visa, Mastercard and Automated Clearing Houses ensure speed and reliability. Instant payment solutions like Faster Payments in the UK, SEPA Instant Credit Transfer in the EU and RTP in the US are commonly used to facilitate quick transactions.
Regulatory Compliance
Regulatory compliance is a critical aspect for neobanks. Neobanks must navigate a complex regulatory landscape, complying with GDPR, PSD2, CCPA and KYC/AML standards. As neobanks expand globally, they face diverse regulatory requirements, particularly in the US, where additional regulations like FAPI and FDX 5.3 may apply.
Future of Neobanks
The future of neobanks looks promising, characterised by continued growth and innovation. Lucian Daia predicts future growth driven by tech-savvy customers, AI, machine learning, blockchain and advanced data analytics. Global expansion and personalised financial products will be key strategies for neobanks to maintain their competitive edge.
Scalable cloud infrastructure will drive global expansion for neobanks, helping them reach new markets and demographics. The products will diversify to include wealth management, insurance and small business banking. Additionally, neobanks will be able to put greater emphasis on sustainability and financial inclusion, adopting eco-friendly practices and serving underbanked populations.
Laurent Descout says:
“Customers have had enough of poor service from banks and are moving towards newer, modern partners, particularly those that offer multiple services on a single platform.
“Neobanks have also benefited from the recent banking crisis. This shook confidence in traditional banks which were historically viewed as ‘safe’, presenting a huge opportunity for fintech providers with transparent safeguarding policies. Since the banking crisis, we have had an increase in interest from businesses looking to open an account with us to diversify their risk.”
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