Neobanks, commonly known as challenger banks, virtual banks, or digital banks, are financial institutions (or providers of one or more banking services) that operate exclusively in the digital space, without any form of physical presence. These banks are similar to traditional banks but differentiate themselves by offering their services through websites and mobile apps, allowing them to operate without a brick-and-mortar presence. Neobanks also take the banking process a step further by providing additional services, such as access to investment platforms, personal finance management (PFM) tools, and financial education tools.
The emergence of neobanks has been fuelled by various technological advancements, such as high smartphone penetration and the development of banking-as-a-service (BaaS) and lending-as-a-service (LaaS). Additionally, regulatory developments in open banking have also forced financial institutions to adopt more transparent policies concerning customer data. Neobanks and other fintechs can then leverage this data to offer customers holistic and personalized services. Concerning demand, neobanks have lured customers with their lower fee structures, higher convenience, and improved user interfaces. They have also proven successful in carving out niches and attracting demographics that have been underserved by traditional banks, such as low-income groups, Gen Z, immigrants, and people of color.
The neobank industry operates across five segments, with the key differentiating factors reduced to the type of product offered and the target market. Accordingly, the two main product types are digital banking and digital lending, provided either to individual customers (B2C) or businesses (B2B).
Neobanks that provide digital banking services and target the B2C segment account for the majority of companies in the industry hub. Within the B2C segment, disruptors can be classified further based on the type of individuals targeted. The more established growth-stage neobanks, such as Nubank, Revolut, and Chime, focused on differentiating themselves by offering attractive product features such as high-yielding savings accounts with no fees, faster paychecks, access to credit products without the need for credit score checks, as well as investing platforms. While newer neobanks have focused on carving a niche for themselves by focusing on specific consumer segments, such as teens or ethnic minorities such as Alpian. Similarly, players in the B2B segment have increasingly focused on serving specific customers within the segment, such as SMEs and freelancers.
Incumbents mostly comprise large, established banks, as well as other financial services companies that have entered the neobank space primarily through in-house development of digital-only solutions. Additionally, some incumbents have acquired startups to broaden and enhance their product offerings.
Incumbents in the neobank space primarily comprise traditional banks and other financial institutions such as payment service providers, which are increasingly emphasizing the development of digital-only services to attract new market segments. While most disruptors have concentrated on addressing the unmet needs of individual customers, incumbents seem equally committed to serving both individuals and businesses.
Many traditional banks, including HSBC and Liberty Bank, have concentrated on entering the neobank space by developing their own digital-only service offerings. Simultaneously, partnerships and acquisitions by incumbents to enter into this space have also gained prominence over the years with companies like Societe Generale, Caxton, and Ageras leveraging these strategies to quickly enhance existing products and expand their market shares.
Additionally, incumbents also comprise wealth management platforms such as Acorns and SoFi, which have ventured into the space by incorporating banking products such as checking and savings accounts into their wealth management offering.