What is a Neobank?
Technology has seeped through every part of our lives, making much of our day to day business smarter and more efficient. Banking is no different. The term ‘neobank’ started being used in around 2017, referring to new banks emerging that aim challenge the way people traditionally bank. A neobank is a (financial technology) based bank that operates solely digitally or via a mobile app, that means accomplishing most things a conventional bank can, minus the physical branches.
The neobank product model tends to be aimed at a tech-savvy customer, who is typically after a simpler and more accessible way to manage money. Many offer free budgeting tools and financial education.
Due to most neobanks having fewer overheads like branches, staff to run these branches and a generally slimmer business model, users commonly can enjoy higher interest rates and fewer fees. Most neobanks do not offer credit, this helps keep their costs down and limits their risks. It is also to be noted that a vast majority of these banks offer a physical debit card too as to not dampen the user experience.
While on the topic of user experience, another key point to be highlighted is the event of opening a bank account. is Founder of Built for Mars, a company built to help businesses identify and solve new problems within UX, he was also a guest on an episode of the . Ramsey experimented , providing fascinating results on conventional and challenger banks (neobanks) alike. Below is a graph of his findings on how many working days it took to open a fully functioning bank account with each provider.
“As you’d expect, the challenger banks were considerably faster than the more traditional banks. And remember; these are working days, not calendar days.” Peter explains, “But when we talk about how easy something is, there’s another metric to consider: the effort required. Typically, products feel more intuitive—and easier—the less input they need. So I also logged every time I had to do something.”
As mentioned, he also recorded the number of clicks to create a bank account with these providers, and discovered that “it took five times as many clicks to open an account with First Direct, than it did with Revolut.” He also found the only traditional bank in the experiment able to open an account from its mobile app was Barclays.
Of course, this new style of banking won’t be attractive to all, and understandably. The drawback of no physical branches to go into is you cannot speak to someone from your bank face to face. Speaking to a member of staff in person builds a level of rapport and trust that would be difficult to achieve otherwise.
Neobanks are less regulated than traditional banks and are not considered actual banks in some legal terms. It is a customer’s responsibility to be sure they choose a bank that offers a form of deposit insurance such as the National Credit Union Share Insurance Fund or the Federal Deposit Insurance Corporation. Big neobank names such as Monzo, Starling Bank and Revolut are well regulated and reliable, hence their loyal customer bases, but always do your research.
Many neobanks have seen their customer numbers rocket over the past few years, according to , many of these banks in key global markets are “prioritising scale versus profitability”. On average, a neobank loses $11 per user, mostly from operating costs and offering accounts for free, although many have subscriptions available for premium accounts with more features.
The next stage for many neobanks will be to pivot from a hyper-growth model to a long term more sustainable and profitable one. Despite the Coronavirus pandemic, many neobanks have seen customer bases soar from the need for more flexible banking. Having an agile workforce and a product and services that can be upheld by staff working from home has been paramount for success through COVID-19. As cash is being discouraged in favour of contactless card payments to limit the virus spread, the concept of a cashless society in the future seems to be more prevalent.
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.