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.
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.
Monzo’s app downloads declined 36% month-over-month in March 2020 ( vs. +28% month-over-month in March 2019).
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.
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.
Revolut achieved revenue growth of 50% YoY in 2020 while also breaking even for the first time in November 2020.
Starling Bank claimed revenue growth of 400% YoY as of March 2021. The company also achieved profitability for the first time in October 2020.
Chime’s customer base grew by 50% YoY to reach close to 12 million customers in 2020.
N26 reported a growth of 40% YoY in customer numbers in 2020 to reach a total of 7 million.
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.
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.
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.
Brazil-based Nubank offers banking products and services via a web portal and a mobile app, with the application process being done entirely online. It also offers in-app shopping at retailers such as AliExpress, Dafiti, and Magalu. The company serves both B2C and B2B segments and operates in Brazil, Mexico, Colombia, and Argentina. The company initially entered the neobanking space in 2014 by offering credit cards and focused on providing it at low interest rates, compared to established banks. Since then, the company has grown to offer the full spectrum of banking services, which includes checking accounts, debit cards (with ATM access), credit cards (with credit limits as low as USD 10 per month), and loans, following the receipt of its own banking license in Brazil in 2017. Checking accounts and debit cards are offered free of charge, and the company therefore solely generates income from these accounts from ATM and interchange fees.
In addition to its banking products, the company also offers life and mobile insurance products and Peer to Peer (P2P) payment options via Pix (a payment platform introduced by Brazil’s Central Bank). The company also offers a rewards program that enables customers to earn and redeem points at selected merchants.
Nubank also provides a trading app–NuInvest–through which its Brazilian customers can trade stocks and cryptocurrency, with the company charging ~0.02% per transaction. Additionally, the company plans to launch its own cryptocurrency –Nucoin–as part of its new rewards program in the first half of 2023. The token will be distributed free of charge to customers and is built on the layer-2 scaling network Polygon .
The company has expanded its presence to Colombia and Mexico, although products offered in these two markets remained limited to credit cards as of April 2022. In July 2022, Nubank applied to the Colombian regulator for a license to form a financial company as part of its strategic plan to become a leading digital financial service provider in the country.
Key customers and partnerships
In September 2021, the company further expanded its loan offering by partnering with Creditas, a lending platform in Brazil, through which Creditas would offer loans to Nubank customers. As of September 2022, the company had around 70.4 million customers, of which 57.4 million (or 81.5%) were monthly active customers.
Funding and financials
In January 2021, Nubank raised USD 400 million in Series G funding led by GIC, Whale Rock, and Invesco. In June 2021, the company announced an extension of USD 750 million to its Series G round led by Berkshire Hathaway, bringing the total raised in this round to USD 1.15 billion and valuing the company at USD 30 billion. Nubank has planned to use the funding to expand its product offering in Brazil while growing its operational presence in its overseas markets.
In December 2021, Nubank was listed on the New York Stock Exchange (NYSE) under the trading symbol NJ, raising nearly USD 2.6 billion, at a valuation of USD 41.5 billion, making it the most valuable listed financial institution in South America. The fresh funds were expected to be funneled into Nubank’s expansion into Mexico and Colombia.
For the full year 2021, the company generated a total revenue of USD 1.7 billion, more than doubling from FY2020, and incurred an operating loss of USD 165.3 million.
Digital Banking - General (B2C):
Digital Banking - Specialized (B2C):
Digital Banking (B2B):
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.
No investor data is available