Neobanks: What is fuelling their rise?
20th July 2021

There is a new type of bank emerging in the financial industry, the Neobank or "challenger bank" as some are referring to them as. Read on to see how what impact they are having in the industry...

As the traditional banks fail to adapt and keep up with the technological advancements occurring in the banking industry, a new type of bank has been allowed to emerge and, for the first time, challenge the once-impenetrable banking industry. Incumbent banks now face a threat from the newly formed Neobanks, or “challenger banks” as they have also been named to reflect the competition they now provide. 

The term Neobank was coined around 2016 when the Revised Payment Services Directive (PSD2) was introduced by the European commission. PSD2 was introduced to increase competition in the banking industry which it has successfully accomplished and is reflected by the emergence and growth of these establishments. In 2020 alone, the leading UK Neobanks raised more than $3.5 billion in funding, whilst in the US they raised $5.3 billion.

One reason that these banks can raise such funds is due to their ability to innovate. They are making banking easier than ever before by capitalizing on the weaknesses of the incumbent banks, such as the complexities involved with creating accounts. Neobanks’ digital platforms allow customers to open bank accounts in minutes, considerably quicker than going into a physical bank, signing papers, then waiting for the paperwork to be processed. With the absence of physical branches the costs of Neobanks are also considerably lower, which leads them to be more desirable in the eyes of both customers and investors. Simply put, these banks are more favourable as they are cheaper. 

The benefits do not stop there, with many providing simple solutions for international transactions. For example, Revolut’s app allows customers to create accounts in different currencies allowing them to transfer money from account to account at current exchange rates charge-free and make payments in the local currency. In other words, their ability to be fully digital is what makes them attractive, as it allows constant innovation and improvement.

However, the service these Neobanks provide are not the only aspect that have made them attractive to investors. They have been nothing short of impressive with their customer acquisition strategies. A report by AT Kearney stated the European based “challenger banks” acquired more than 15 million customers between 2011 and 2019. The same study also projected that the UK Neobank customer base would reach 85 million by 2023. This aggressive customer acquisition strategy is allowing them to gain millions of customers every year. Through their use of social media, they can target an already technology-familiar audience that are comfortable using online platforms. Many also opt to add incentives for customers, such as Chime who have implemented referral codes into their platform and offer $50 for anyone who signs up with a code and $50 for the user that provided them with the code. 

Nevertheless, although there are numerous benefits of Neobanks, it is worth noting that they are slowly introducing fees and increased overheads as they look to make a profit. Despite this, the question of how profitable they can be remains. This is an important time, not only for the challenger banks, but also the traditional ones as they will have to become more digital to be able to provide similar services to their younger challengers and compete for their customers. If they do not adapt and compete with the technological prowess of their new competitors, they could begin to struggle.

To summarize NeoBanks are providing the first alternative to the incumbent banks and are providing solutions to some of the inconveniences that the established banks create. By being fully digital they can implement new features, cut costs, and attract a customer base who are already comfortable with technology. All of which makes them attractive to potential investors.

For DNA payments these advancements in the banking industry can only be seen as positives. No matter who reigns king in the banking industry, both will become more and more digitized. This will make collaborating and integrating with banks easier and faster, opening up multiple different possibilities for us at DNA Payments in the future.