The rise of the neobanks Part 2

Payment transactions have certainly been a winner for the neobanks, thanks to their speed and lower fees, as I mentioned in my previous article. One of the other ways in which these challenger banks are stealing a march on the traditional banks is in the area of lending and credit products. For starters, the neobanks are able to provide their credit products with lower charges and interest rates, and in the Medici report “Neobanks: A global deep dive,” the authors use Brazil’s Nubank as an example of this advantage.

Nubank does not charge fees for using its credit card. It allows its customers to lock and unlock the card, ask for an increase in their credit limit, as well as change the due date for repayments, and all this can be done from the Nubank app. That makes the customer’s life a lot easier. You may wonder how Nubank makes money. The report says that it does this in two ways: first through customer transactions, and second, through financing a part of, or the total amount of, consumer invoices. It relies on a public database for all its customer data and groups customers into hundreds of different profiles. This is its way of screening out unqualified customers. Furthermore, unlike many other credit card providers in Brazil, it does not charge any fees as long as the customer makes their payments on time. And now it has added a current account and a rewards programme to its product offering.

What’s happening with neobanks worldwide?

Another of the things that the Medici report highlights is the geographical location of neobank startups. Where would you guess that most of these challenger banks start their journey? Perhaps you think it might be Silicon Valley, or Seoul.

Actually the highest concentration of neobanks is in Europe, and within Europe, the United Kingdom is home to the greatest number of them. Why and how has this happened, especially since neobanks have shown the most rapid growth since 2016, and the UK has been in political turmoil since that year over the vote to leave the European Union, which it is due to leave at the end of October. Medici explains the situation: “the UK has a high concentration of challenger and neobanks owing to two factors, chiefly.

One: compared to the US, which has very high numbers of large banks, the UK has far fewer. Two: when it comes to digital banking, the UK can be considered an early adopter, going back to the dotcom boom between the late ’90s and early ’00s. This provided it a ‘prime-mover’ advantage, through which the UK came to be at the forefront of challenger/neobanks and alternative models. Another factor providing the

UK with an edge in this space is the EU’s common standards being introduced, which has aided neobanks rapidly expand their customer base while remaining in compliance with regulations.”

The last reason will seem ironic to those in the UK who are against leaving the EU, and if the country is to retain its advantages for neobanks, it will need to retain those EU regulations.

The banks that have led the European ‘Charge of the Neobank Brigade’ are Atom Bank, Tandem Bank, Monzo, Starling Bank, Revolut, and N26.

For full details of all the neobanks worldwide and an overview of their services, I recommend you read Medici report for a fuller understanding of how neobanks are changing the banking sector, especially for the retail customer.

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