Neobanks are transforming the financial sector as digital-only institutions that offer a comprehensive range of banking services through mobile apps and online platforms. These services encompass current and savings accounts, payments, loans, and investments — all managed seamlessly through digital channels.
With cutting-edge financial technology, neobanks provide faster, more affordable, and more convenient solutions for both customers and businesses. The surge in mobile phone use, cloud computing, and artificial intelligence has fuelled rapid growth.
The neobanking market is even expanding rapidly, with a projected market volume of $10.44 trillion by 2028, according to Statista. This represents a 13.15 percent growth rate from 2024 to 2028.
Innovative Business Models
To offer a broader range of services and better customer experiences, neobanks leverage application programming interfaces (APIs). This model involves integrating various financial applications and services using APIs. It will allow them to manage Know Your Customer (KYC) verifications, do instant refunds, and arrange collections efficiently.
Then, the significant source for neobanks is interchange fees. This model involves charging transaction fees for every transaction and earning a portion of the fees from payment networks like Visa.
Furthermore, credit card business models use credit as a foundation, generating revenue from transaction fees and interest on carried balances to drive growth and profitability. This model starts with credit card services and later offers a bank account.
Other models allow neobanks to offer high-yield savings accounts and certificates of deposits (CDs). Revenue will come from earning interest on the assets and charging fees for services related to these accounts, such as maintenance fees.
Technology Integration
Neobanks have redefined the banking landscape through a digital-first approach, prioritising customer experience, and leveraging technology to deliver innovative financial services. This combination sets them apart from traditional banks and allows them to offer unique and competitive financial services.
A core characteristic of neobanks is their digital-only operations. By eliminating physical branches, they significantly reduce overhead costs. These savings translate into lower fees for customers and increased competitiveness.
Furthermore, neobanks harness the power of cloud computing, data analytics, and artificial intelligence to deliver personalised financial solutions. These technologies enable them to gain valuable insights into customer behaviour, allowing for tailored product offerings and improved operational efficiency.
Neobanks have also pioneered innovative revenue streams. Unlike traditional banks heavily reliant on interest income, they generate revenue through various channels, including interchange fees and partnerships.
Finally, many neobanks embrace open banking principles. This collaborative approach allows third-party developers to create new financial products and services that complement the neobank’s offerings. By collaborating with third-party developers, neobanks create additional value and broaden their reach.
The Global Neobanking Innovators
Advapay expected the total number of neobanks users to increase to 3.6 billion worldwide by 2024. Moreover, they spread relatively evenly across the main regions. For example, neobanks in North America, LATAM, APAC, and the UK each now accumulate a total price tag of 50 billion dollars or more per region.
Revolut, a UK-based neobank, stands as a leading example of digital banking innovation. Expanding its services to over 30 countries, Revolut offers multi-currency accounts, currency exchange, stock trading, and insurance.
The neobank employs various innovative business models including API integration, transaction fees, credit card services, high-yield savings, and certificates of deposit. Revolut’s software as a service (SaaS) approach enhances flexibility, scalability, and rapid product development.
Beyond Revolut, Nubank from Latin America showcases innovation through robust security features, diverse financial products, and blockchain-based loyalty programs. Meanwhile, WeBank in China excels in digital lending, mobile payments, and alternative credit scoring.
Future Prospects
The neobanking industry is rapidly evolving, with 278 neobanks operating globally as of March 2023. This intense competition forces neobanks to continuously innovate to differentiate themselves.
As a result, traditional banks face increased pressure to adapt to these new market dynamics. Neobanks have the potential to drive financial inclusion, foster creativity, prioritise customer needs, and expand globally.
Looking ahead, neobanks can expect a surge in competitors. This will force incumbent banks to either adapt their strategies to defend their market share or become digital attackers themselves to stay competitive in the evolving market.
With competition growing and attention spans shrinking, innovative product launches aren’t something neobanks should do once. Instead, creating agile solutions that are in tune with current consumer needs must be an essential part of their growth strategy.
- Neobanking
