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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
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COVID-19 IMPACT
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.
The Disruptors
Funding History
Competitive Analysis
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.
Notable Investors
