Will Neobanks Reward Investors?

Venture capital firms have been flocking to invest in neobanks, and they must be hoping that they will see big rewards. Expectations are high, but it appears that some questions are being asked about whether or not the hype around fintech will yield the financial returns that everyone hopes for.

It is true that the neobanks are attracting plenty of customers; N26 and Revolut being two good examples of customer growth. According to Accenture, UK-based digital banks could add 35 million customers over the next year, and they have around 13 million at present. Its data also shows that in the first six months of 2019, the UK neobanks added five million customers, indicating that the sector is picking up momentum this year.

However, there are some challenges remaining. First, the traditional banks still occupy the biggest slice of the market, and then there are the financial regulators like the FCA, which are extremely averse to any finance related institution cutting corners. Plus, as John Detrixhe points out, we have seen that companies in other ‘disrupting’ sectors, Uber and WeWork, have demonstrated that big valuations and intense customer growth are not sure signs of success. He also says that the fintechs need to ask themselves if they will continue to be seen as a niche product, or will customers eventually see them as a one-stop financial service.

Hence, there seems to be some changes happening in fintech investment, with investors looking at fintech tools beyond neobanks that will prove to provide bigger gains. This move is based on the idea that digital banks will never really disrupt the traditional banks.

So, they are looking at fintech software, such as cloud-hosted software and systems that make it easier to sign up for a new account. In other words, there is a belief circulating that the incumbent banks can fend off the newcomers by adopting new technology that allows them to offer the same benefits as their digital competitors.

These fintech tools are not as sexy an investment as Revolut say, but they could perform better in the long term, because if the incumbent banks can provide the same service as Revolut, then why would customers switch?

The situation in Europe is different to that in other regions where there are millions of people who are unbanked. Europeans have fewer problems with banking access, but perhaps don’t always have a great customer experience. So there is still plenty of investor enthusiasm in the West. Detrixhe says, “Eighteen of Europe’s biggest fintechs are now valued at more than $1 billion, according to Richard Diffenthal, a partner at Hogan Lovells. Investors are lining up to give them even more money.”

The one advantage that neobanks have over the traditional banks is that the incumbents can’t just rip up their legacy and start afresh. They are having to implement change one small step at a time, and that will take time. The neobanks need to use this opportunity, i.e. the incumbent banks slow-moving change, to accelerate their position as a trustworthy alternative to the banks that have been trading for hundreds of years. Then they will provide the returns that make investors happy.

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