Neobanks’ considerable growth potential is primarily fueled by its low-cost model for end consumers, who benefit from no or very minimal monthly fees for banking services such as maintaining minimum balances, making deposits and executing withdrawals.
Although the primary growth factors associated with Neobanks (which include regulatory frameworks, customer preferences and competition) will undeniably persist in the coming decades, this evolution in banking continues to prompt questions.
What are Neobanks and how they are transforming financial services:
Neobanks are digital-only banks that mostly conduct business online and through mobile applications and are not restrained to a brick and mortar setting like traditional banks. However, just like traditional banks they also provide financial services like loans, checking and savings accounts, and payment and money transfer services.
Neobanks raise money for specific financial projects or their intangible alternatives that are closely tied to the project by offering crowd-funding platforms, cryptocurrency exchanges, automated financial advisors, and peer-to-peer payments. These businesses offer both conventional and cutting-edge online banking services.
Among the most important FinTech products and services that are now on the market are peer-to-peer (P2P) lending platforms, crowdsourcing, blockchain technology, distributed ledger technology, big data, smart contracts, robot advisors, e-aggregators, and so on. With or without the assistance of a nodal intermediation agency, these FinTech solutions are currently being utilised in international finance to connect information searchers and borrowers, as well as providers and lenders.
Opportunities for Neo-Banking in 2024
Market Expansion:
Neo banking is expected to grow its customer base as smartphone and internet usage continue to increase, especially among younger consumers who are more open to using digital banking services. In developing markets, they are also well-positioned to reach more unbanked and underbanked individuals.
Technological Innovation:
With the beginning of advanced and recent technologies, efficiency has taken a leap across all industries. The Banking Industry is no longer primarily reliant on human labour now that they can self-operate a significant portion of their processes, which increases productivity and lowers costs. Today, banks use artificial intelligence (AI) for a myriad tasks, including automating customer care and detecting fraudulent financial patterns.
Therefore, Neobanks are in a strong position to continue establishing the benchmark for the application of cutting-edge technologies such as blockchain, biometrics, and artificial intelligence to provide safer and more efficient banking services. For instance, AI can be utilised to offer more precise risk evaluations and personalised financial guidance.
Partnerships and Ecosystem Development:
Neobanks typically rely on collaborations and partnerships with other financial service providers to deliver their services for a number of reasons. One primary reason for this is that these organisations usually need more governmental clearances, licenses, and infrastructure required to offer services like credit cards and loans directly. They are able to provide these services without having to independently get regulatory clearances and licenses or invest in infrastructure since they collaborate with reputable financial institutions.
They intend to create a broad ecosystem through partnerships with fintech firms, traditional banks, and nonfinancial enterprises, which will allow them to offer a greater range of services, including lending and insurance.
Innovative Models for Revenue Generation:
Neobanks use a range of monetisation and revenue-generating strategies. A very common business strategy is charging for services such as foreign exchange, ATM withdrawals, and overdraft protection. Other neobanks charge fees for specific types of transactions, such as wire transfers.
Many neobanks offer high-interest savings accounts where customers can earn interest on their money. Many neobanks allow their customers to invest their money using mutual funds and exchange-traded funds (ETFs). Some collaborate with merchants to offer cashback incentives to consumers who make purchases using their debit cards. Fintech businesses might collaborate with other companies to provide supplementary services like insurance.
Challenges for NeoBanking:
Neobanks have several advantages over traditional banks, but they also face several challenges. Because using neobanks and digital banks is a new concept that has emerged in recent years, there might be challenges.
The 'Know your customer' (KYC) regulations and laws pertaining to the general banking sector, with a focus on anti-money laundering and terrorism financing, are being examined to reflect better the dangers and issues related to the emergence of Neobanks.
Security Problems and Cyberthreats:
The banking industry and other internet businesses may be vulnerable to security problems or threats such as hacking and cybercrimes. Because the banking sector handles a lot of sensitive financial data, which might have major consequences if disclosed without authorization, it is particularly vulnerable to cyberattacks.
Failure to Gain Brand Recognition:
Another problem is the lack of familiarity with the brand. Many people don't know what neobanks are because they are a novel concept. As a result, neobanks can have trouble attracting new customers. Additionally, relying too heavily on a partner carries a variety of concerns, including possible conflicts of interest, losing control over the customer experience, and a complete lack of brand awareness.
Absence of customer loyalty:
As the number of neobanks and digital banking platforms increases, one of the biggest challenges these modern banks face is the need for consistent customer loyalty. The fact that there are many players in the game with similar products to offer makes it very difficult to differentiate and retain customers.
Issues with Scalability and Profitability:
Most neobanks are still in the growth stage and still need to be profitable. The strict cost structure makes scalability one of the most challenging problems. Neobanks often provide services at a cheaper cost, which can create a problem for them to generate and retain revenue. Moreover, their operating strategy requires massive technical investments that increase the costs.
Competition in the Industry:
There is tremendous competitiveness in a crowded market. Neobanks have to come up with innovative and unique differentiation factors, as well as methods for attracting new customers and maintaining existing ones. Digital banking services that are nearly identical to those provided by neobanks are now being supplied by traditional banks. Neobanks may find it challenging to differentiate themselves from other fintech firms as they enter the market.
Regulatory Challenges:
Neobanks face additional challenges in adhering to various rules. They are legally bound by the same regulations as their traditional counterparts, which can be time-consuming and resource-intensive. Strong security measures must also be their top focus if they want to safeguard their clients' data. Neobanks also have difficulty enacting laws and rules that are necessary for their smooth functioning.
Strategies for Overcoming Neobank Challenges:
Neobanking can take a number of actions to reduce or eliminate the security risks and challenges that the neo-banking sector faces. Below, a few are discussed-
Developing robust risk management and compliance systems:
Neobanks need to always adhere to all applicable rules and regulations and implement robust security measures to protect their customers' information. They should also identify risks and develop strategies to effectively manage them.
Building strong customer ties and engagement:
Banks should build relationships with their customers so that they gain their customers' confidence. This is possible by offering good service to the customers, being transparent and truthful to them about costs and charges, and coming up with innovative and unique goods and services.
New revenue streams and partnerships:
Neobanks should find new business partnerships and enterprises. They can do this by developing new products specifically tailored to their customers or collaborating with other companies to offer more services.
Improving methods of customer acquisitions and retainment:
The banks are considered to develop useful tactics to gain more customers and keep present ones. They may have, among others, opening rewards, offering quality services, and being loyal.
Investing in improved cybersecurity and data protection:
Neobanks must prioritise cybersecurity initiatives to protect their customers' data. As the banking sector shifts, like all other industries, new tactics are being created to protect against the ongoing threat of cyberattacks. These measures include third-party risk management, data encryption, multi-factor authentication, incident response planning, improved staff awareness of cyber security, and suitable training.
Conclusion
The potential level of disruption caused by the neobanking industry is still unknown. The mainstream market has yet to adopt neobanks in substantial numbers despite the fact that several have expanded rapidly so far. Therefore, a significant market disruption has yet to occur despite the fact that they exhibit disruptive innovation. Gaining clients' trust is the first step. Due to their recent entry into the market, many customers are reluctant to entrust their life savings, mortgage, or other services to neobanks.
When choosing a bank, many clients consider reputation and experience to be important factors. As a result, it is hard to convince customers to use Neobank as their main bank. They will need to increase their customer base if they want their business models to last in the long run. They make little revenue and are currently losing money annually despite the fact that they can grow even more with capital investments.
Moreover, many traditional banks are beginning to respond. They can start their own digital banks or invest in Fintechs to improve the customer's experience. Neobanks should aim to effectively compete with long-standing incumbents and take advantage of newly presented opportunities.