The above rather provocative illustration by John Holcroft probably best describes what most customers think of their banks today. Sloth, opaque, non-customer centric, low on trust, not digitally savvy are some of the feelings that immediately come to mind. There has been a rising expectation among the consumers for better products, services and consumer experience from traditional banks who have been rather slow to respond to the preferences of their smartphone wielding generation of customers. Am sure each of you will have your own story to tell about the lethargy displayed by your bank, I have many. And therefore, a slew of digital challenger banks, also known as Neobanks are transforming the way banking is viewed by the consumers and the marketplace.
Neobank is a commonly used name for a company that provides services similar to traditional banking, but without the physical branches. They work only online and are also called as challenger, branch-less, virtual, mobile or digital banks. It’s a service that competes with ordinary banks in the field of opening accounts, payment for services and money transfers. The idea of Neobanking is to be able to create a bank on a mobile phone, escape the high cost structures associated with traditional banks and pass on the savings to their customers. At the same time dramatically improve user experience through hyper personalisation using AI and Data Analytics.
N26 video promoting 100% mobile banking on smartphones
Neobanks offer innovative features, process simplifications and offerings that are different from traditional banks, including fast account opening, free debit cards, instant payments, cryptocurrencies, lower costs, mobile deposits, P2P payments, mobile budgeting tools, user-friendly interfaces, and more. Here are some of the top innovations happening in the Neobanking space:
Digital On-boarding/Account Opening: Neobanks offer simple and fast online account opening processes compared to traditional banks.
International Payments/ Remittances: Neobanks offer the usage of their debit card in foreign countries for no fees and at live exchange rates.
Money Tracking/Account Aggregation: Neobanks can simplify money tracking and account aggregation.
Lending/Credit Products: Neobanks can provide credit products at lower charges and interest rates than traditional banks.
Unlike other sectors such as retail, food and travel, banking hasn’t faced the onslaught of start-up led tech disruption. Until now. Neobanks are swiftly emerging as a huge threat to traditional banks. McKinsey estimates that by 2025 up to 40% of banks’ collective revenue could be at risk from new digital competition. Just in the last 4 years alone more than a 100 Neobanks have been established across the world. Global Neobanks like NuBank, Monzo, Revolut, N26 and Chime are catering to multiple target segments and have successfully validated their business model by providing outstanding customer service and transparency. They’re adding customers at an unprecedented rate and are being rewarded with multi billion dollar valuations. While it can take years and millions in legal and other costs to launch a real bank, new plug-and-play applications enable a start-up to hook up to products supplied by traditional banks and launch with as little as $500,000 in capital.
Credit: the companies, CB Insights, PitchBook, Forbes
The Neobanks have registered record-breaking investments of $4.3 billion in 2019. Since 2018, a total of $5.6 billion has been pumped into Neobanks. However, due to the current ongoing COVID19 pandemic, the VC/PE funding in this segment has taken a hit. Yet in Q1 2020, the total funding amounted to $1.3 billion over 24 VC/PE deals. The above numbers clearly suggest that Neobanks have clearly emerged as one of the hottest investment categories in recent times.
So, who are these new financial consumers who are driving Neobanks and what do they look like? A Global Distribution & Marketing Consumer Study conducted by Accenture identified three groups of consumers, each with its own different set of behaviors and preferences for engaging with financial providers.
New Financial Consumers - Accenture Global Distribution & Marketing Consumer Study
The Nomads - This digitally active group is ready for new delivery models. They are willing to share their data in exchange for personalized services. Nomads are comfortable with computer-generated support and with receiving services from non-traditional providers
The Hunters - These consumers search for the best price. They want to buy financial services from traditional providers and, while they operate well in a digital environment, they also place value on one-on-one engagement.
The Quality Seekers - These loyal customers value brand integrity and service excellence, and will work with providers who put customers' interests first. Price is less important than elements such as data protection and responsive service.
While an India specific study isn’t available, the average of similar markets like Brazil, Indonesia and Thailand put Nomads at 50%, Hunters at 10% and Quality Seekers at 40%. Nomads and Hunters add upto 60% of the consumers and also form the bulk of the Gig economy, which is a primary driver of Neobanks globally.
Presently, Neobanking start-ups in India are partnering with traditional banks to offer their services as RBI doesn't allow them to operate on their own. Private sector lenders like HDFC Bank and ICICI Bank still dominate the banking sector and are seeking to increase their share in net banking too. Kotak Bank, already operates a digital banking product called Kotak 811 that is popular with customers. Ironically, the State Bank of India (SBI), the country's largest public sector bank, might be the original Neobank mover in the country. It launched a fully digital offering, Yono in November 2017, and by the end of 2019 had ~17M registered users and ~6M digital savings accounts. 63% of all SBI savings accounts are now opened through Yono. Over the next five years, India is set to experience the biggest boom in digital banking adoption, with a 21% YoY increase in the number of adults with online-only bank accounts. This means that by 2025, an estimated 400 million Indians will hold Neobank accounts or transact online only.
While Neobanks have captured everybody's imagination, we should also be aware that everything that glitters is not always gold. With all the advantages and features compared to traditional banking, Neobanks face a fair share of difficulties. Inspite of a large consumer base, these banks are still facing a challenge in terms of long-term profitability, which has been a huge concern. The first bump in the road for Neobanks came in May 2020 when Monzo was hit by a 40% valuation drop in its latest fund raise. While the pandemic could be one of the reasons, the expected 40% decline in Monzo's valuation compares with a 40% drop in FTSE 350 Banks Index since the start of 2020. However startups like Monzo face very different challenges to their publicly listed peers. Monzo only recently started building its loan book, so it faces relatively less risk from customer defaults. However lock-downs, a notable decline in international travel and disruptions to the Gig economy have hit revenues and its corresponding fees.
Also dislodging the well entrenched traditional banking which is a difficult business, with complex regulatory issues and consumers who are relatively inert is not going to be easy. There is also the argument that having physical retail branches is still important for building long-term relationships with customers. In the end what will differentiate Neobanking from traditional banking is not features, functionality or better app design, but tangible outcomes to customers. These platforms can be run at ultra-low-cost which allows them to give more back to consumers and still be profitable.
Finin is a soon to be launched digital bank and will be India's first consumer focused Neobank that aims to bring a new approach to banking and help customers manage, save and invest money in a smarter and simpler way. Finin's beta offer includes:
Instant savings account - in just a few clicks and with the highest deposit rate
Internationally accepted metal debit card
2% cash back on all purchases
Forex at live exchange rates
Cheaper and faster international remittances
Holistic viewing and aggregation of all bank accounts in one place
AI-driven insights on spends and recommends budgets so customers know what they spend on and how
Automate savings behavior - Set goals, fix an amount, let automation do the rest
Data-driven and personalised investment plans - no hidden charges
Additional benefits including airport lounge access, mobile protection plans, shopping discounts and affinity offers etc.
Bank-level security to protect sensitive information and prevent unauthorized use
24/7 customer support
Finin is led by its Co-founder and CEO Suman Gandham who has over 15 years of experience with Fin-techs in Europe and has a deep understanding of the Neobanking space having seen them first evolve in that continent. Three Neobank startups have already raised mega funding rounds in India but none of them have their products out in the market as yet. This makes it an open playground where what will eventually decide the winner is a strong product and effective distribution. Finin is creating a product focused specifically on the urban millennial base, is moving fast on launch and is poised to gain a first movers advantage. I'm delighted with my investment in Finin and look forward to it emerge as a Neobanking star and play its part in revolutionizing the Indian banking sector in the times to come. Years ago, I started my career handling the Citibank account at J Walter Thompson, and it makes me nostalgic to circle back and get involved with the banking industry again through Finin.