The emergence of neobanks: Reshaping the banking and financial services landscape

Neobanks are making a mark in the region with their market presence expected to continue to grow. George Hojeige, CEO at Virtugroup points out that as neobanks expand into providing corporate services, by partnering with traditional banks they can begin a new age of financial access and security

By 2028, the global neobanking market size is estimated to reach USD 722.6 billion, a seemingly ambitious forecast, but indicative of current trends shaping the banking sector today.

With around 39 million users around the world, it is evident that neobanks are on track to exponential growth, revolutionising age-old banking processes and financial services along the way.

Having introduced a completely new operational model, one that is purely digital and without a physical presence, neobanks are fast filling the increasing demand for financial solutions specifically designed for mobile use.

Their unconventional framework is largely hinged on changing consumer behaviour, which is increasingly leaning towards digital solutions. In 2020, market analysts noted that there were up to 1.9 billion online banking users worldwide, a figure expected to hit 2.5 billion by 2024.

However, an all-digital banking experience is not just what neobanks aim to deliver. In addition to a customer-centric approach that promises exceptional quality and user convenience, in comparison to that of traditional banking, neobanks offer a host of competitive advantages that put them on par with established financial institutions.

 The future of banking

Neobanks allow end-users to deviate from traditional paperwork and time-consuming processes, and transition to faster, digital and more accessible financial services, including a simplified and faster account opening process, more affordable costs and service fees, higher interest rates, unobstructed international payments and more seamless money transfers.

Going beyond standard banking services, neobanks add an array of financial solutions that provide users with a more comprehensive view of their financial activities and greater control over their finances through innovative reporting, budgeting, investment and cash management tools, among others.

Furthermore, neobanks leverage AI technology to better understand customer behaviour and match it with financial solutions that fit the user’s lifestyle.

The neobank industry amidst the pandemic

While experts predict robust growth for the global neobank sector, like with many industries, it has faced both unprecedented challenges and opportunities during the pandemic. Monzo, a United Kingdom-based online bank and one of the country’s pioneer challenger banks, saw its valuation plunge from USD 2.6 billion in 2019 to USD 1.6 billion in 2020.

On the other hand, for certain neobanks, the pandemic ushered in milestones of growth. One of the United States’ leading challenger banks, Current, grew its users from 1 million to 3 million. Its latest funding round of USD 220 million has also increased the company’s valuation to USD 2.2 billion.

Another UK neobank, Revolut, experienced a 40% reduction in revenues when the pandemic started. However, by the end of 2020, the fintech company has significantly recovered from its losses and registered a 50% revenue growth compared to their pre-COVID performance.

As of April 2021, experts forecast Revolut’s valuation to hit USD 10 billion, following another imminent funding round.

In the Middle East, neobanking is emerging as a strong alternative to traditional sources of banking and financial services. Although still in its nascent stage, the Middle East’s neobanking sector has seen a number of neobanks successfully launch and capture significant market share.

Among the countries leading the neobanking revolution in the region is the UAE, where 90% of the people use digital banking.

Early this year, the country’s first independent digital banking platform, YAP, was launched. With over 40,000 pre-registered users, YAP integrates a range of fintech solutions, including remittances, peer-to-peer payments, bill payments, and spend and budgeting analytics.

Another new contender that entered the UAE’s competitive neobanking sector is Zand, lauded to be the world’s first digital bank to offer both corporate and retail banking services. Mohamed Alabbar, Emaar Properties founder and former chairman, will reportedly be at the helm of Zand.

In recent years, the UAE has seen other digital banks emerge in the market, including Liv, a mobile-only lifestyle banking application released by Emirates NBD, and Mashreq Neo, a full-service digital bank launched by Mashreq in 2017 to cater to more tech-savvy customers.

Targeted support for startups, SMEs and niche markets

The undisputable advantage of neobanks is that they allow users to open an account without the traditional face-to-face interactions, physical document processing and the need to personally visit a branch. However, the pandemic has pushed traditional banks to introduce a similar wholly digital process. Does this mean neobanks have lost their edge over conventional banks?

Although incumbent banks have shifted their processes digitally, opening a business bank account can still be a stumbling block for startups and small businesses, who often find it challenging to fulfil the stricter requirements and higher minimum balances mandated by traditional banks.

A study by Wamda, an accelerator of entrepreneurship in the Middle East and North African region, showed that 56% of startups said they were able to open a bank account within two to five months, 29% took less than a month, another 13% spent over five months to complete the process and 2% opted to open an account overseas.

As traditional banks are still largely focused on transactions involving bigger companies and multinationals, neobanks can step in and speed up the process for smaller players, allowing them to have the same access to corporate banking services, at even lower costs.

Another gap that neobanks are aiming to fill is the lack of accessible financing for startups and SMEs – the ones that traditional banks might consider risky or less profitable.

Neobanks that offer financing and credit facilities for SMEs implement faster and simpler loan application processes, accelerated creditworthiness assessments, higher approval rates and more lenient collateral requirements.

The impact of neobanks on the traditional banking sector

Partnering with neobanks gives traditional banks the opportunity to access new customer segments, such as freelancers and digital nomads, startup entrepreneurs and other underserved niche markets. On the other hand, such partnerships allow neobanks to benefit from the “trust factor” and security that consumers have long associated with incumbent banks.

In addition, by making the banking industry more competitive, neobanks are spurring traditional banks to rethink and redesign their conventional bureaucratic processes, which ultimately benefit end consumers – the small business struggling to secure a bank account, the freelancer who is looking for banking solutions tailored to their industry, and the more digitally savvy generation of users.