In Europe the neobank sector is looking very healthy. It has been boosted by the implementation of PSD2 (Second Payment Services Directive)
This September, otherwise called Open Banking. This effectively means that all the incumbent retail banks have to “release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online,” as WIRED reports. Open Banking has been happening in stages since 2017, but now we have reached peak Open Banking.
This new legal framework, along with the creation of EMIs (Electronic Money Institutions) supported by PSD1, is about to revolutionise user interaction, and it will also make a major contribution to the rise of the neobanks. It basically gives them an even greater opportunity to increase their market share in the retail banking sector.
However, there are some issues. The neobanks can’t yet offer all the services that the traditional retail bank does. That is not because of regulatory issues, or an inability to deliver a service, but because they don’t have enough funds. While neobanks may raise capital during funding rounds, and even though it may look like quite a significant amount, the big retail banks already have much more capital than any of the neobanks in their coffers.
Customer trust is another issue, especially for those consumers who are used to having a bank branch to visit. The concept of a ‘virtual’ bank with no branches makes them nervous. This has not been helped by some of the neobanks experiencing security issues. For example, Monzo asked a large proprtion of its customers to change their PIN when an unexpected level of fraud was discovered. Hacking is a security concern, as is data privacy. The latter is a problem for all banks, but neobanks are especially vulnerable.
We are also seeing the incumbent banks step up their digital activities through acquisitions, which they can easily afford. Neobanks cannot compete at this level, not can they become more exposed to risk at any cost just. There is a very real opportunity for neobanks, because they are more agile and can offer a better consumer experience, but what they need to work on now is building up consumer confidence — the neobank that nails this one, will be a winner.