Neobanks grow in 2020

Some good news to come out of 2020 is the growth in neobanks. According to Finextra, Exton Consulting has produced data showing that there are currently 256 neobanks globally, and several more waiting to launch.

The data indicates that a new banking business opened every five days over the last three years, and that Europe is still the main location of innovation, with three of the five most advanced markets being in the region. They are the UK, which is recognised as a neobanking powerhouse, followed by France and Sweden. It also reports that 50 million people in Europe have opened a neobanking account.

Europe leads in neobank innovation

Other markets are catching up with Europe, most notably South Korea and Brazil, but there is also substantial movement in the USA. China is somewhat unique in its challenger bank development, but it is unrivalled in terms of its numbers of clients using the “financial super apps” available there.

On the downside, not all challenger banks have been able to stay the course. A significant number of players relied on payment interchange fees as a revenue stream, and there has also been vulnerability due to rising number of defaults on loans. As a result, more than 30 neobanks have been wound down since 2015, with Australia’s Xinja being and an example.

New routes to profitability

Exton says: “On their quest for monetizing customer relationships neobanks have learned a first lesson: payment transaction fees, premium account subscription fees, or open banking commissions from brokering 3rd party services will in most cases not be sufficient to generate profits or breach beyond operational break-even.” It added, “Our expectation much rather is that Neobanks will need to offer additional products to jump the gap to sizable profitability.”

Digital lending may be one opportunity where the neobanks can thrive. Another option is, “the morphing of the product outside of financial services via the development of a super app, ” and a third possible route to profitability “lies in providing investment services to the mass affluent market.”

Exton concludes, “Irrespective of which path neobanks will take, we remain convinced that they will need to shift into profitability mode quickly as investor patience will not be unlimited. But for those that select the paths right for them, stay focused on it and grow up as an organization, the future remains bright and full of opportunities.”

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