FinTech has transformed the way to fulfil the banking needs of people. Although there is an expansion of the customer base of traditional banks, neobanks have become the trendy solution. They have emerged as the new entities in the banking world. Challenger banks or neobanks are next-generation FinTechs operating businesses in digital platforms.
The cost-effective business models have started enjoying success, as they have no physical outlets. It allows neobanks to innovate and grow consistently. They also collaborate with some traditional banks for better customer service. This meteoric rise can be attributed to a myriad of influential factors that are propelling the relentless growth of neobanks. So let’s talk about the factors behind evolution and rise of neobanks.
Statistical data showing the growth of neobanks in the world
According to the latest data from Statista Market Insights, the total neobanking transaction value will cross $2.60 trillion by 2027. The report also claimed that NuBank, a neobank in Brazil, is it the largest neobank in Latin America. In fact, Brazil has the highest number of neobank accounts. Moreover, in India, Ireland, and several other countries, neobanks are developing very fast.
In the USA, the most prominent neobanks are Varo, Chime, and Aspiration. Similarly, the UK has neobanks like Monese, Starling, and Revolut.
The origin of neobanks and its continuous growth
The word ‘neo-banking’ was used first in 2017 to represent tech-based financial solutions providers. But the neo-banking concept emerged in the financial world in 2013-15. The open-banking idea became a craze in many developed countries, including China and Brazil. It is an innovative way of banking that never confines you to brick-and-mortar facilities.
The pandemic in 2020 fueled the significant development of digital-only bank accounts. The lockdowns resulting from the pandemic forced many customers to choose digital banks. Besides, neobanks tried to attract customers by providing incentives. So, in due course, the need for account openings standardizes the growth rates of neobanks.
However, after a certain period, there is a slight decline in the marketing budget. Still, the growth of neobanks in different countries is really noticeable.
From some perspectives, the long-established physical banks are responsible for the growth of neobanks. These traditional banks introduced their customers to online channels. Though mobile banking has already become a known trend, security concerns and functionality issues hamper app usage.
With the first appearance of neologisms in the finance and business worlds, you may assume it as homogenous concepts. However, every neobank is exclusive and provides customers with various services. Besides, not all neobanks have chosen the same path to reach their goals.
Which factors drive the growth of neobanks?
Many neobanks have the potential to work as full-service digital banks.
Sukhjot Basi, (the CEO and Co-Founder of Bank Yogi), stated that neobanks ensure minimal barrier access. So, even if you are not eligible to open your traditional bank account due to a bad credit history, neobanks are the best alternatives.
Find more reasons behind the rapid growth of these banks.
Technological developments
The increasing use of the internet and smartphones has led to the development of online banking platforms. Challenger banks leverage AI, cloud computing, and other modern technologies to provide convenience for customers.
Consumer preferences
Gen Z and millennials are digital natives preferring seamless online experiences. They think online banking is better than traditional offline methods. So, neobanks are developed to meet their needs with personalized services. Neobank customers also receive real-time notifications and use budgeting tools.
Affordability
Most neobanks experience lower overhead costs to run their businesses. They do not need to set up physical branches, unlike traditional banks. They also allow transactions with lower charges, which attract customers.
Partnerships
The collaboration of neobanks and fintech service providers is another reason behind the rapid development. They have developed a strong ecosystem of complementary services like investment and insurance.
Bottom line
As Banking-as-a-Service has become a trend, neobanks will find a scope for development and growth. Within a few years, they will evolve into full-service online banks. Still, many neobanks are yet to have sustainable profitability. By recognizing and understanding the factors driving remarkable growth of Neobanks, we can anticipate the monumental changes these disruptors will continue to wield within the financial sector.