The global neobank market was worth USD 18.6 billion in 2018 and has been growing at a compounded annual growth rate (CAGR) of 45.8% from 2017–2025. Convenience and lower interest rates as compared to traditional banks have been the biggest growth drivers. Other factors include transparency, faster and smaller ticket size loan approval and user-friendly interface. The vision is to transform the way banking is viewed by the public and market especially post the 2008 crisis which created fear and distrust in the financial system.

Neobanks, have developed well from the EU to Brazil and now Asia could be the tipping point that defines the future. The “challenger banks” in Asia are mostly backed by big tech companies but are almost non-existent in the Asian market: Asia still does not have a formal regulatory framework to deal with challenger banks which is why it is unsurprising to see that many of the challenger banks are an offshoot of a bank. Desptie this, things are deeply changing: Asia is seen as one of the major regions of the world exhibiting a prospective environment for neobanks and the development of the open banking paradigm. China, for instance, is expected to become one of the biggest markets for neobanks by 2025.

Europe is seen as a shining example for neobanks. The European regulation (Payment Services Directive Law) has allowed fintech firms to directly connect with customers data, which till now was a privilege only of traditional banks. The govt. has made easier to get a banking license stimulating the innovation of start-ups. According to AT Kearney research, European neobanks’ customers have grown more than 15 million since 2011.

Fig. 1 — Global Neo and Challenger Bank market size and forecast

On the other hand, retail banks’ clients decreased by 2 million. The forecast for 2023, predict that Europe’s neobanks will gain 85 million customers reaching over 20% of the population older than 14.

Fig. 2 — Neobanks client base growth rate. Source: A. T. Kearney 2019

How we see the future
The potential growth of neobanks is driven by their low-cost model for end consumers with no or very low monthly fees on banking services such as minimum balance maintenance, deposits and withdrawals. Adoption by millennials, micro, small and medium enterprises (MSMEs), are some of the catalysts for the success of neobanks. The high adoption rates and successful business models of neobanks has piqued the interest of investors, venture capitalists and corporates, who contributed USD 586.7 million of the total funding of USD 3.49 billion received by FinTechs globally in 2018.

Focusing on the Asian market a big opportunity is represented by demographics, which is considered as one of the major driving factors. In fact, neobanks mostly appeal to younger and the industry will find in Gen Y and Millennial customers a fertile ground to expand rapidly. These digital natives don’t typically find reassurance in having a physical branch bank nearby. The ASAN (Association of Southeast Asian Nations) skews extremely young: 8 out of 10 associated country have an average age of 30 or lower. For this reason, NeoBanking is expected to spread all over the region in a short time. In addition, in this area the population majority is currently unbanked, so it is possible that neobank’s draft will take place quicker here than in developed markets such the European one.

Fig. 3 — Neobanking: Region-wise breakup. Source: Medici Research

Companies we have analyzed
Focusing on the European landscape we have decided to take into consideration Revolut and N26.

N26, headquartered in Berlin (Germany), has redesigned banking to make it simple, fast and contemporary. It was founded in 2013 and launched the initial product in early 2015; thanks to its fully digital business model, it operates on a much lower cost base. Today N26 is one of the fastest growing banks in Europe and has more than 1 Million customers across 17 European markets and over 380 employees.

N26 offers a free basic account and then has two-tiered subscription options from there:

  • N26 Black — €9.90 per month which includes more benefits than Basic, such as free withdrawals abroad;
  • N26 Metal — €16.90 per month which includes the sleek card, discounts with certain partner brands, and a few additional benefits.

As a benchmark, approximately 30% of customers in the UK market signed up for the Metal account. N26 also makes usage fees depending on the account and usage; it also offers Business Accounts where they make additional revenue based on value-added services, and then offers other layers in their core product such as insurance in categories like Household, Automotive, etc.

Revolut, headquartered in London (Great Britain), was one of a wave of digital disruptors looking to shake up the personal finance industry by using technology to develop innovative, modernised banking products. It launched an app-based personal banking product aimed at making users’ financial life less complicated, helping regular travellers spend money in multiple regions, without being charged high exchange fees. Revolut grew quickly on a swell of enthusiasm for disruptive finance across Europe, and by 2018, just three years after its launch, it had achieved unicorn status, and became a member of an elite club of tech start-ups to reach a valuation of over $1bn.

Revolut offers:

  • Free Basic bank accounts;
  • Premium accounts that cost £6.99 per month;
  • Revolut Metal accounts that cost £12.99 per month;

It also charge customers 0.5–1.5% exchange-rate fee between currencies on weekends only. Similarly, it allows customers to draw out money free from ATMs, but only up to certain limits depending on the account; therefore, while Revolut is free/low-fee sometimes, customers are time-limited and rate-limited for certain services. It also offers value-added services, for Business Accounts like traditional banks but at cheaper rates. In addition, it allows users to trade cryptocurrency (for a 1.5% upfront fee) and offer P2P loans at 9.9% APR.

Analyzing the Asian market we have taken into consideration PayTm and WeBank.

PayTm, headquartered in Noida (India), was founded in August 2010 with an initial investment of $2 million by its founder. It is India’s largest leading payment gateway that offers comprehensive payment services for customers and merchants. Among the main investors they have Softbank, SAIF Partners, Alibaba Group and Ant Financial.

Through the years, the company has subsequently changed its business model to a marketplace and a virtual bank model. The company has transformed itself many times and it became one of the Indian giants dealing in mobile payments, banking services, marketplace, gold, recharge and bill payments, etc.

We can divide PayTm business model in seven categories:

  • PayTm Mall: with over 120 million buyers and 2 million daily transactions, revenue from this subcategory is generated as fees and commissions from the sellers.
  • Recharge Services: online recharge services for mobile subscriptions, TV channels subscriptions, data-card, etc. The company, just like other recharge services providers, charge commissions from these operators.
  • Bill Payments: It has also partnered with several education and financial organizations and act as a portal to accept education fees and insurance instalments. Revenue is generated by charging commissions from these providers.
  • Payment Solutions: it offers smart payment solutions for online businesses. The payment solutions allow them to accept online payments through Paytm. The payment option comes with no setup fee and maintenance charges. However, the company charges a commission of 1.99% on every transaction.
  • PayTm Wallet: Paytm wallet is a semi-closed wallet used to store currency in digital form which can be used to buy goods and services at identified merchant locations.
  • Digital Gold: the company wants its users to have something which they call a Gold Bank account, which will allow users not only to buy gold, and store it in digital form, but also to use the gold to buy other services.
  • PayTm Bank: the company has revamped itself as a payments bank which can accept deposits and give out interests on the deposits but can’t offer loans to its customers. It also issues debit cards with QR codes which can be scanned at various points. The bank lets you open zero deposit digital current and savings bank accounts and offers a 4% interest on saving bank accounts: Interest Arbitrage is the way Paytm bank makes money by depositing the money with some other bank and/or government deposits which provides interest rates greater than the one it provide.

WeBank, headquartered in Shenzhen (China), is a private Chinese NeoBank, founded by Tencent, Baiyeyuan, Life Group, and other companies. It became China’s first digital bank in December 2014 upon receiving its banking licenses and since that day it is devoted to offering underbanked individuals and SMEs with a variety of convenient and high-quality financial services. The company also offers small loans and investment products operating through an online platform. It grants loans through face recognition technology and big data credit ratings, with an estimated valuation of $21 billions, WeBank is building the first ever distributed banking system based on cloud computing technologies and blockchain.

Differently from traditional bank practices, WeBank has no branches or direct sales force, and BOTs handle 98 % of customer service inquires; Robots collect applicant data, run credit checks, nudge customers to make payments, and ensure KYC compliance. Customer identities are certified via facial recognition over mobile phones. Through the use of AI into the loan application process they can reduce fraud by 60 percent.

The core product is “Weilidai”: consumer micro loans, which average around 1,200 USD. Customers must apply through proprietary apps. They receive a response within five seconds and funding within a minute. Additionally, given that micro-lending is low margin, WeBank is a volume business. According to the company, its per account IT operating cost is 3.6 RMB, approximately 1/10 of Chinese banks and a fraction of international competitors. The most lucrative opportunities, however, may exist outside financial services Through the cloud, it provides solutions for the businesses: thanks to their proprietary platform called “WePower”, they can package up software development tools, allowing their partner banks to embed capabilities in their own apps.

Authors:

https://www.linkedin.com/in/kashish-bhatia/

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