At PayRetailers there are a lot of partnerships with banks that help support our big portfolio of payment service options. While our partners are deeply rooted in their fields and help us to offer an outstanding product suite, we don’t see the urge to change this setup. But there is a development currently going on, that could affect the future – the rise of neo banks.
What is a neo bank?
With everybody owning a smartphone or computer, nearly everybody also has access to the internet as well. This is the basis for the operations of a neo bank and there are two types of it.
On the one hand a digital bank that operates solely via online presence, no brick-and-mortar branches or huge staff required. This type of bank is often a separate entity within a traditional bank because the traditional institution holds all licenses and has regulatory approval. It can be seen as a playground to test new services for setting up the traditional bank more efficiently. The focus of this type is to offer mobile apps or a website for easy money management. That being said, the vast service portfolio of a traditional bank is not yet being matched. These neo banks focus on the niche aspects of a users’ money needs, e.g. foreign exchange, credit card services and international transfers.
On the other hand there are challenger banks. Regarded as a type of neo bank as well, they rely on their own full bank license and regulatory approval. With that in mind, they may offer a bigger product suite, like loan granting, investments and long-tail-services. So these banks can be used as a substitution of a traditional bank account.
Could traditional banks be disrupted by neo banks?
Europe is at the forefront of the climb of neo banks. The Business Insider Neobank Report shows that end of 2019 there have been 39 million users, with the Covid-19-pandemic accelerating the number of account openings dramatically. In the EU it is estimated that 25% of people aged under 40 use neo bank services. But most of these users still rely on a traditional bank for many of their day-to-day banking activities. The global market of neo banking amounted to 19 billion USD in 2018 and is expected to accelerate exponentially at 47% CAGR from 2019 to 2026, arriving at 395 billion USD, according to Zion Market Research.
A different situation can be observed in developing resp. emerging countries. Latin America boasts impressive numbers when it comes to the rise of neo banks due to the high smartphone penetration rate. While in Europe a neo bank must offer better service than a traditional bank, in LATAM a neo bank often is the only and very welcome solution for the big portion of the unbanked population.
Neo banks also target micro and small-sized companies – a sector traditional banks not like to touch. Especially in LATAM or the Asian countries many such business are run in areas located far from cities. The owners can manage their banking on the go and don’t need to drive to the next city and wait for their turn at a bank branch. Additionally, the software-driven approach of neo banks help the business owners fill their taxes or manage their balance sheets, which traditional banks just are not able to offer.
Another advantage of neo banks over traditional banks is their ability to rapidly react to changes in the market due to their modern software architectures and lean company setup. Implementing new APIs, regulation processes or whole new products is possible without the big overhead – time, people and capital expenditure – produced by a traditional bank. In fact traditional banks are very balance-sheet and regulation-focused while their software-team is just another flanking department. Whereas at a neo bank the software-team is the core focus and all other departments need to follow it.
With all these positive changes that is being brought by neo banks, we shouldn’t forget that traditional banks are not sleeping as well. Many of them recently have been busy to broaden their product portfolio, offer more digital services and implement collaborations. Additionally, some services just can’t be made fully digital, e.g. intricate advisory.
The security is another important point. Traditional banks are grounded and could prove to endure complicated economic situations. Many neo banks are still start-ups with all their execution risk and higher cybersecurity exposure.
Overall there is a balance and the co-existence of traditional and neo banks currently makes sense. Although it is widely accepted that in a couple of years the start-up banks will supersede some traditional giants, for now that remains to be seen and currently neo banks are regarded as a useful supplement to traditional bank services.