by Meriç Özgen, Ayşen Nergiz
The 2008 financial crisis was a turning point for the finance industry. Resulting in the loss of trillions of dollars worth of financial capital, the crisis led to a loss of trust in traditional banks and financial institutions, especially in developed markets.
This dynamic accelerated the shift towards alternative financial services providers, such as neobanks, challenger banks, and digital banks. In fact, global neobank users are expected to reach 350 million by 2026.
Digital-only neobanks first emerged in the UK and then gained global popularity after 2011. Around 50% were founded in 2016 and 2017. Nowadays, there are a lot of neobanks around the world that need to find ways to turn this popularity into profit.
Through this blog, we will take a closer look at the needs and challenges of neobanks and explain how they can create value for their banking services and customers through collaborating with a financial solutions partner.
A Broad Look at the Current Neobanking Landscape
Neobanks are technology-driven financial institutions that operate primarily through the internet, rather than a physical branch. They generally offer the same range of services as traditional banks or specialize in particular digital banking products and services. Typically, the financial services offered by neobanks include:
- High-yield saving accounts
- Financial education tools
- Overdraft protection
- Checking accounts
- Early access to paychecks
- Free peer-to-peer money transfers
- Alternative ways to build credit, debit and prepaid cards
These banks differ from traditional banks in terms of providing customers with a more user-friendly, customer-centric, and convenient online banking experience through mobile apps.
Also, in contrast to traditional banks, they create value for their customers by offering innovative banking services or products packed with improved UX experience. These offerings include mobile wallets, mobile debit cards, instant payments, cryptocurrencies, P2P payments, fast account opening, budgeting tools, and online saving accounts.
The global neobank market has gathered big momentum in such a short time and it is expected to continue to grow. In 2018, its market value was around $18.6 million, and it is expected to reach $4 million by 2026 with a CAGR of 46% in the coming years.
When compared region-wise, Europe is holding a big part of the market with the UK occupying the maximum market share. Moreover, Europe is the most promising market for neobanking players like Lunar, Hype, Soldo, Knab, Bunq, mBank, and Nest Bank. Because in the next five years, it is expected that up to 85 million Europeans will use neobanks and many of them will be digital native Gen Z customers.
The neobanking concept is promising and has revolutionized the banking sector in a disruptive way for almost a decade. Still, for a couple of years, many neobanks have been facing low retention rates, low average deposits, poor unit economics, and consequently, lower profits. In fact, only less than 5% of all neobanks achieve profitability.
Some elements are making it hard for these banks to turn a profit. First, most account holders are not using them as their primary accounts. In 2020, only 11% of US adults held their primary checking account at a neobank.
Second, a big portion of neobanks relies on the “Zero Fee” model, which blocks their primary source of revenue.
And, third, most neobanks focus on geographic expansion instead of investing their capacity into expanding their product and service portfolio according to emerging trends and changing customer demand.
All these factors show that to get the best out of the industry, neobanks need to focus on long-term monetization and profitability strategies based on widening products and services with valuable solutions beyond core product offerings.
3 Reasons Behind the Need for Partnership
The neobanking system includes a natural pairing as most neobanks don’t have a banking license and cannot operate without partnering with a licensed bank to provide financial services. Expanding this collaboration with a financial solutions partner enables these banks to expand their product offerings, increase their efficiency, enhance the customer experience, and allow them access to expertise.
Here is a closer look at the reasons why neo banks need to partner up with a financial solutions provider.
1. Utilizing Card Management Systems
A card management system allows neobanks to use and manage their credit and debit card systems and issuing operations. It enables them to create innovative and profitable offerings for their existing or potential customers.
Therefore, these banks need innovative and holistic card management solutions that can be integrated with their mobile apps and offer customizable solutions according to their customers’ needs and goals.
For example, PayCore’s Ocean 2.0 holistic card management system includes end-to-end digital card and payment acceptance solutions, with which you can provide state-of-the-art mobile payment methods for your account or card holders.
Together with Ocean 2.0, you can manage all your issuing operations seamlessly, value your offering with smart solutions like mobile wallets, contactless payment, and QR code payments, and ensure the security of your banking services. PayCore provides innovative, end-to-end payment technology solutions to neobanks either as a license or as a service.
Let’s team up to help you thrive in the constantly changing financial landscape!
| Mobile Wallet | Digital Prepaid |
| Digital Card Solutions | Digital Payment Acceptance Services |
2. Creating Value with Open Banking
Open banking solutions enable financial solutions providers to access financial data through APIs and provide neobanks with a whole new slate of digital payment services to help them value their customers.
Through integrating open banking solutions, these banks can provide their customers with more seamless, secure, and fast payment services. Also, they can use open banking solutions to leverage customers’ financial data, offer personalized money management and payment services, and reach expertise on data-driven alternative risk modeling techniques.
3. Minimizing Risks
Customers use neobanks’ mobile apps for essential activities and transactions, including making payments, opening an account, accessing their money, making transfers, and shopping. Holding all of that transaction data and processes, these mobile apps present a huge target for fraudsters.
Therefore, these banks need experienced and trustable financial solutions partners to monitor and protect their channels and the customer data within them. So they can maintain their reputation, provide robust security for customers, and deliver a flawless experience each time.
Let’s Partner Up to Help You Meet Future-Proof Digital Payment Solutions!
Clearly, the neobank market represents a huge expansion opportunity only if these banks can accomplish creating value for their customers by innovating their channels, products, and services.
As a proud winner of more than 30 local and international awards in the fields of card management, digital payments, and processing services, we’re here with our expertise to support your journey with our mobile app development solutions and digital payment and card acceptance infrastructures and services.
With over 21 years of experience in the financial technologies industry, we are more than ready to empower your organization with innovative solutions. Feel free to contact us to discover how we can help you stay one step ahead of the competition!
