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Neobanks
Overview
Neobanks provide digital-only banking services via web portals and mobile apps
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.
Industry Updates
Market Sizing
The combined market for neobanks in the US could reach USD 5.8 - 9.0 billion by 2025
USD 5.8 Bn
USD 7.4 Bn
USD 9.0 Bn
COVID-19 IMPACT
Neobanks witnessed a temporary setback at the onset of the Covid-19 pandemic due to the contextual instability and uncertainty, as well as individuals choosing to retain their money with large, established banks.
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Monzo’s app downloads declined 36% month-over-month in March 2020 ( vs. +28% month-over-month in March 2019).
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Revolut’s app downloads declined 18% month-over-month in March 2020 ( vs. +13% month-over-month in March 2019), and the company reported a 40% revenue decline in the early days of the pandemic.
However, Neobanks rebounded strongly in the latter part of 2020 as consumers were more inclined to switch to digital and contactless transactions.
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Nubank’s customer base grew to reach around 36 million in 2020, which nearly doubled from 20 million in 2019. Over the same period, total deposits held by the company grew by 2.6 times, while its loan portfolio grew 49% YoY.
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Revolut achieved revenue growth of 50% YoY in 2020 while also breaking even for the first time in November 2020.
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Starling Bank claimed revenue growth of 400% YoY as of March 2021. The company also achieved profitability for the first time in October 2020.
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Chime’s customer base grew by 50% YoY to reach close to 12 million customers in 2020.
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N26 reported a growth of 40% YoY in customer numbers in 2020 to reach a total of 7 million.
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Monzo launched its business banking accounts in March 2020 and had amassed a total of 60,000 customers by December 2020. The company also launched its paid accounts for individual customers in July 2020, which reached a total customer base of 135,000 by March 2021.
Market Mapping
The neobank industry operates across four 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. Some of the older, 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, faster paychecks, and access to credit products, thus catering to a broad market. Newer neobanks that have emerged over the past two to three years have focused on carving a niche for themselves by focusing on specific consumer segments, such as teens or ethnic minorities. Similarly, players in the B2B segment have also increasingly focused on serving specific customers within the segment, such as freelancers.
Incumbents mostly comprise large, established banks that have entered the neobank space mainly through the in-house development of digital-only solutions. Unlike the disruptors, incumbents appear to be equally focused on the B2C and B2B segments rather than just the B2C segment.
Digital Banking - General (B2C)
?Digital Banking - Specialized (B2C)
?Digital Banking (B2B)
?Digital Lending (B2C)
?Digital Lending (B2B)
?The Disruptors
B2C neobanks dominate while large players establish a presence in the B2B market
Disruptors in the neobanks space mainly comprise players providing digital banking services to individuals (B2C). The highest-funded disruptors, including Nubank, Revolut, and Chime, also primarily center their services around individual checking or savings accounts. Additionally, there are some consumer-focused neobanks that focus specifically on providing credit-related products, including Avant and Upgrade. Although most neobanks are concentrating on the B2C space, some players, such as Nubank, Revolut, and Starling Bank, have recently placed their efforts on establishing a presence in the B2B segment as well.
Established pure players operating in the B2B segment include BlueVine, Tide Bank, Qonto, Grasshopper, and Rho. Similar to the B2C segment, most disruptors in this space focus on providing digital banking products, although a few players such as BlueVine and Grasshopper also provide credit-related products.
Almost all neobanks remain privately funded as of August 2021. A few neobanks have announced plans to go public, such as MoneyLion, which announced in February 2021 that it would go public via a SPAC. Nubank has also announced plans to go public via an IPO in the US, with the transaction expected to be finalized in late 2021 or early 2022.
Digital Banking - General (B2C)
?Disruptors
MoneyLion
BM Technologies
Douugh
Chime
C6 Bank
Nubank
N26
Revolut
Monzo
Varo
Starling Bank
Zopa
Atom Bank
Upgrade
Lunar
bunq
Lydia
Curve
Allica Bank
Dave
Monese
KOHO
Neo Financial
Vivid
Point
HMBradley
Northmill Bank
Oxygen
Watchlist
Cogni
FIBR
Digital Banking - Specialized (B2C)
?Disruptors
Avant
Greenlight
Current
Aspiration
Step
Tandem
One
Zolve
MAJORITY
Greenwood
Good Money
Pockit
Empower
First Boulevard
Fair
Copper
pockid
Watchlist
Monument Bank
Tomorrow
Ando
Daylight
Helios
Atmos Financial
Pennyworth
Digital Banking (B2B)
?Disruptors
C6 Bank
Nubank
N26
Revolut
Brex
Monzo
Starling Bank
BlueVine
Qonto
Atom Bank
Lunar
bunq
Tide Bank
Rho
Allica Bank
Monese
Mercury
Novo
Grasshopper
ANNA
Lili
Nearside
Juni
Kontist
Oxygen
NorthOne
Countingup
Relay
Finom
Digital Lending (B2C)
?Disruptors
MoneyLion
BM Technologies
Nubank
Revolut
Avant
Monzo
Varo
Zopa
Petal
Upgrade
Oportun
Aspiration
Dave
Tandem
Neo Financial
One
Zolve
HMBradley
Kikoff
Northmill Bank
Empower
TomoCredit
Koyo
Watchlist
Monument Bank
Keebo
Digital Lending (B2B)
?Disruptors
Nubank
Brex
Monzo
Starling Bank
BlueVine
Atom Bank
Rho
Grasshopper
Nearside
Juni
Banca AideXa
Kontist
Good Money
Watchlist
FIBR
MoneyLion
MoneyLion offers banking and investment products via a web portal and a mobile app. Within its banking segment, the company offers lending products, investment products, and deposit accounts, which include a debit card.
Under its lending segment, the company offers cash advances dubbed as ‘Instacash’ of up to USD 250, with no interest, monthly fees, or credit checks. The company also offers a ‘Credit Builder Plus’; a credit building facility, which allows customers to apply for loans and improve their credit scores. Under this facility, customers would be allowed to apply for loans of up to USD 1,000 and set up automatic payments over 12 months. On-time payments would then be directly sent to credit bureaus, and the company claims that over half of its members have been able to raise their score by over 42 points within 60 days. The credit builder facility is offered at USD 19.99 per month.
The company also provides access to investment products such as stocks and bond ETFs, under which customers are able to set up automated investments and create personalized investment portfolios and is offered free of charge. The company also intends to include access to cryptocurrencies under its investment portfolio.
The company’s deposit accounts are offered under its brand; ‘RoarMoney’, which it most recently launched in July 2020, under the license of MetaBank with Mastercard acting as the exclusive card network for its debit cards. Features offered under RoarMoney include the receipt of paychecks up to two days in advance, the usage of debit cards with no ATM or other fees, price protection - which offers refunds for the difference if customers find a purchased product at a lower price within 90 days, cashback rewards, and Personal Finance Management (PFM) tools. The company also aims to offer a Buy Now Pay Later (BNPL) facility under its RoarMoney account dubbed as ‘Overtime’. Customers have the choice of using RoarMoney as a standalone bank account, or using it together with the company’s lending and investment products and is priced at USD 1 dollar per month.
In 2020, the company’s total revenue amounted to USD 79.4 million, which grew by 31.5% YoY. The company’s contribution profit amounted to USD 38.6 million in 2020, which increased by around 24x from 2019. As of September 2021, the company had over 2.7 million customers.
In February 2021, the company announced a merger with a Special Purpose Acquisition Company (SPAC), Fusion Acquisition Corp, through which it would go public. The transaction was expected to raise USD 500 million in gross cash proceeds, at a post-money valuation of USD 2.4 billion. The transaction was completed in September 2021.
In November 2021, MoneyLion acquired the content studio MALKA Media Group (MALKA) in a combined cash and equity deal of approximately USD 75 million. Through the acquisition, MoneyLion plans to leverage MALKA’s creator network to improve its customer engagement across digital channels by creating customized content that informs consumers’ financial decision-making, and drive customer growth by providing access to potential new customer segments. Further, MoneyLion also MoneyLion announced plans to acquire Even Financial (Even), an embedded finance marketplace, for up to USD 440 million in December 2021. Through the acquisition, MoneyLion is expected to leverage Even’s user base and partner network to expand its addressable market, distribution capabilities, and range of products. Even is expected to achieve USD 90 million in revenue and a positive EBITDA in 2022.
- Segment:
- Digital Banking - General (B2C)
- Total funding:
- USD 477.5 million
- Competitors:
- Chime, Varo, Aspiration, Current
Disruptor Funding History
Digital Banking - General (B2C):
MoneyLion
Douugh
Chime
C6 Bank
Nubank
N26
Revolut
Monzo
Varo
Starling Bank
Zopa
Atom Bank
Upgrade
Lunar
bunq
Lydia
Curve
Allica Bank
Dave
Monese
KOHO
Neo Financial
Vivid
Point
HMBradley
Northmill Bank
Oxygen
CogniDigital Banking - Specialized (B2C):
Avant
Greenlight
Current
Aspiration
Step
Tandem
One
Zolve
MAJORITY
Greenwood
Good Money
Pockit
Empower
First Boulevard
Fair
Copper
pockid
Monument Bank
Tomorrow
Ando
Daylight
HeliosDigital Banking (B2B):
The Incumbents
Traditional banks are developing in-house products to offer digital-only services
Incumbents in the neobank space mainly consist of traditional banks and other financial institutions such as investment banks, which are increasingly focused on creating digital-only services to attract new market segments. While most disruptors have focused on serving the unmet needs of individual customers, incumbents appear to be equally invested in serving both individuals and businesses.
Many traditional banks, such as HSBC and Natwest, have focused on entering the neobank space by developing their own digital-only service offerings. Acquisitions and partnerships are a less common strategy among incumbents, although a few players such as Société Générale and American Express have entered the neobank space via acquisitions.
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.
In-house development
Acquisition
Investment
HSBC
NatWest (Mettle)
BBVA
Société Générale (Shine)
Standard Chartered
UniCredit (BuddyBank)
CaixaBank (ImaginBank)
American Express (Kabbage)
Goldman Sachs (Marcus)
JPMorgan
PayPal
Remitly (Passbook)
Orange (Orange Bank, Anytime)
Acorns
SoFi
M1 Finance
Virgin Money
H&R Block (Spruce)HSBC is a UK-based multinational bank and one of the largest banking and financial service corporations globally. As of July 2021, the company served more than 40 million customers spanning Europe, Asia, the Middle East, Africa, North America, and Latin America.
In March 2021, the UK subsidiary of HSBC launched “HSBC Kinetic,” a mobile-only platform that provides banking services to small businesses in the UK. The platform enables customers to open and operate savings accounts, debit cards, credit cards, same-day overdrafts, and savings accounts. The app also allows customers to manage their business payments by setting up direct debits, standing orders, and any other future payments. Furthermore, the platform also offers spend categorization, which permits customers to easily track different types of expenditures while providing insights on spending patterns and cash flow. In addition to banking products, the app also facilitates the integration of accounting software such as Xero, QuickBooks, and Sage. HSBC Kinetic offers its products at a monthly fee of GBP 6.50 (approximately USD 8.90), and as of March 2021, it had 5,000 customers.
