What are the routes to success for neobanks in 2021 and beyond? This topic was explored during a panel discussion at this year’s AltFi Digital Banking Forum which featured Symmie Swil, Head of SME Banking at Starling Bank, Richard Davies, CEO at Allica Bank, and our own CBO, Rivo Uibo, during which they discussed past successes and failures in the industry as well as the most viable business strategies going forward.
Since appearing on the scene approximately a decade ago, the neobanking industry has enjoyed a meteoric rise in population and customer base which does not appear to show any signs of slowing down. Despite this successful growth, the vast majority of neobanks still find themselves in a precarious economic position, one which has come under further scrutiny as a result of the global pandemic. As investors become increasingly eager to see a return on their capital, neobanks face greater pressure to convert their market gains into revenue.
It has been the norm for neobanks to follow a “scale first” strategy and they have been undoubtedly successful in doing so, with many now operating across multiple markets (Revolut and N26 being two notable examples). Whilst having operations in multiple countries can look impressive, if these gains cannot be translated into tangible profits then they do not represent a sustainable business model. Failure to monetise can have devastating effects: Zuno, a digital bank launched in 2010, was forced to shutter after losing €130 million despite being successful in customer acquisition. As Zuno’s former CEO states: “The only mistake we made was not building our credit product portfolio from the get-go”.
Many prominent neobanks are now approaching their 5 year mark, generally the milestone at which digital companies are expected to have reached their target scale and investors begin expecting a certain degree of monetisation, though how many can actually achieve this remains to be seen.
At present, very few neobanks are operating in the black, though there are some exceptions which can provide key insights on how to successfully transition to profitability. A notable example of a profitable neobank is UK-based Starling Bank, who have managed to successfully navigate the crisis caused by the global pandemic largely unscathed. Starling Bank boast a broad portfolio of products, but have enjoyed particular gains in the business banking sector over the past year, more specifically within SME banking, thanks to their business loans. At a time when many incumbent banks were closing their lines of credit, Starling Bank pursued these SME customers and were able to quickly roll out new lending products thanks to their digital platform. Crucially, Starling Bank recognised very early on that simply relying on the likes of account fees or transaction fees will never be sufficient if the aim is to turn a profit.
As Symmie Swil noted, Starling Bank owe a lot of their success to their ability to quickly adapt to changing circumstances and roll out new products, evidenced by their leveraging of digital banking over the past year to double their number of business banking clients. Certainly, this agility is something all neobanks should aspire to if they wish to successfully turn a profit and the key to this is a flexible banking platform.
Freemium banking is a business model which has been adopted by many neobanks and, indeed, has been successful in capturing a large share of the market. However, is this model alone sustainable if neobanks wish to turn a profit? Data would suggest that the answer is a resounding no.
Neobanks have been successful in building a highly engaged customer base, enthusiastic about services such as high interest savings, no ATM fees, etc. However, this has also meant that some neobanks have felt their customers’ wrath when they have altered their pricing or introduced new fees. This presents a difficult dilemma for many neobanks seeking to turn a profit who have so far relied on attracting customers with freemium services: can they pivot to premium without losing their customer base? The best way neobanks can make this transition is to really focus on their value propositions, delivering best-in-class financial products and services to their customers. To ensure they are positioned to do this, neobanks must avoid falling into the trap of becoming slaves to their technology, that is to say, their core banking system must remain agile enough for neobanks to be able to quickly innovate and roll out new products to remain competitive.
Embedded finance, that is the ability to integrate a financial service with a traditionally non-financial service, product, or technology, is shaping the future of banking and stands to be a lucrative development for neobanks, provided they position themselves to capitalise upon it. Neobanks are poised to play an important role from behind the scenes, providing banking infrastructure to third party platforms, such as online marketplaces, games, etc., thus allowing consumers to access finance at the point of purchase. Using this approach, neobanks can tap into a new consumer base and service millions of transactions all while reducing the cost of customer acquisition and retaining their retail infrastructure.
The ability to provide customers with a seamless route to the best and most relevant financial services should be a core focus for every neobank.
Many neobanks now find themselves at a crossroads as they approach maturity and to maintain a competitive edge, they need to implement concrete strategies for profitability. Relying on customer acquisition strategies, such as freemium banking, is not sufficient if neobanks wish to operate sustainably. Fortunately, there are a number of opportunities for neobanks to capitalise on, driven by advances in technology. The most successful neobanks are the ones who will go beyond simply offering a slick banking experience to really solve consumer problems.
This strategy of developing more targeted offerings also extends to banking technology providers who, traditionally, would give access to their products and services via perpetual licenses. Now, as subscription based SaaS models have become dominant, technology providers are incentivised to continuously adapt and improve their service offerings, creating rich and varied value propositions.
As we have seen, neobanks which have been able to rapidly develop and roll out innovative new value propositions which address their customers’ needs have enjoyed the most success and there is no reason to believe this will continue to be anything but a winning strategy. To remain competitive, neobanks need to have a core banking system in place that can facilitate agile product development whilst maintaining their autonomy from third party tech providers. In this case, Tuum’s core banking platform is unique as it allows for complete control, thus reducing the risks associated with relying on a third party provider. By ensuring they have access to a powerful tech stack, neobanks can develop value creations that are not offered by any other financial institution and, with that, create a valuable business.