Neobanks have led to tectonic shifts in every corner of the financial services market. The market embraces a new player almost every day with a prime intention to simplify financial services to meet the ever-evolving expectations of the digital-age customers.
According to recent reports, some of the most prominent players in the market see over 140% year-on-year growth in their customer base. However, growth does not necessarily translate into profits. Even after more than five years in business, a large number of neobanks are operating at a loss.
Globally, the neobank market continues to grow swiftly. But the real question is, how many of these banks will succeed and be sustainable?
We have our very own Devang Mehta, Vice President of Business Development spill the beans on what makes a neobank successful. Devang delves into the pros and cons of the current business model and offers insightful strategies on how to refine vision and value propositions that will help build a neobank that is both profitable and sustainable.
Being an avid neobanker and fintech enthusiast himself, he is certain that neobanks are here to stay and have a long way to go. He also shares his vision of a neobank that works like your relationship manager on the phone.
Here are key nuggets from Devang’s wisdom.
What are the wins?
First off, neobanks enable online transactions round-the-clock, 365-days. They offer easy, convenient, and on-the-go services. Users can transfer funds instantly at any time, from anywhere, without worrying about bank working hours/days. The business model is usually transparent and delivers real-time notifications detailing the reasons for the charges and penalties incurred by the customer.
They have low operational costs due to the absence of physical branches, minimal credit risks, and fewer regulations. Thereby, customers benefit from lower prices and higher interest rates. With its lean business models and superior technologies, neobanks greatly emphasize customer orientation by offering personalized services and products.
Where do neobanks fall short?
Generally, neobanks operate on an exceptionally low margin as they tend to offer competitive low-cost pricing, higher deposit rates, and incentives to increase their customer base. With no revenue-generating products such as credit cards and loans, neobanks fail to make a profitable and sustainable enterprise. Having no solid revenue model is one of the biggest downsides of a neobank business.
Building trust with the customers of the legacy bank is another key challenge for neobanks. The customers feel traditional banks are safe and reliable compared to the new-age banking technology. Although neobanks put forth quick, accessible, and round-the-clock services, a significant share of customers uses neobanks as their secondary account.
Aside from the above, lack of standard regulatory framework, superlative customer expectations, and cost involved in the technology and development are some of the challenges that neobanks face.
Quest for profitable and sustainable neobanking – The “why” and “what”
Devang believes the quest for a profitable and sustainable neobank starts with two questions:
- Why do you want to create a neobank?
- What do you want the neobank to be known for?
Today’s consumers are presented with a gamut of financial services to choose from. Potential customers are keen to know what problems you are solving for them. A compelling vision for your neobank will make the right customers see how your “why” aligns with their pain points, goals, and objectives. “What” your neobank is will help you tap into the right customer segment to fulfill your purpose.
For example, assume you are packing your bags and moving to another continent for a successful educational or career experience. It is one thing to assimilate the new environment but being tugged into a totally unfamiliar ecosystem for essential services and financial assistance like banking or debit card usage can knock you sideways.
Imagine, you receive a sim card, a bank account, a checkbook, a debit card, and perhaps even insurance as your onboarding kit. Wouldn’t that be the ultimate welcome kit?
That’s exactly how Devang envisages a neobank that caters to students, blue-collar job holders, and working professionals. Drawn from his experience as an expatriate, he aspires to build a neobank that offers quick and seamless financial services to immigrants arriving in a new country.
Understanding your “why” and “what” will form the fundamental principle of your neobank’s vision. Once you have a clear conception of your vision, you must support it with comprehensive planning based on:
- A defined target customer segment
- Regulatory compliance in the respective market
- Data protection/localization
- Application with customer-friendly UI/UX
Devang highlights that beta testing is paramount and the key to boosting the performance of a neobank application. Unfortunately, most players fail to include beta testing in their development life cycle in a rush to go to the market soon.
Though neobanking is the perfect example of how convenient banking can be for users, it is still in its nascent stage. Whether you are an incumbent or a new player, agility and responsiveness to market trends are critical to surviving in an increasingly crowded digital financial services ecosystem. Therefore, it’s extremely imperative to understand, analyze, and constantly refine your vision to carve out your place in the market. The key is to remember what you want to achieve and why.
Check out our blog on how to start a neobank for step-by-step guidance.
Curious to know how you can create a powerful vision and value proposition for your neobank? Write to us at business@m2pfintech.com.
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