Neo-banks, a financial system of the digital age, emerged almost 5 years ago with the proposition of establishing a bank without a physical branch; existing purely in the digital space. In a world where traditional banks are principally engaged in conducting large transactions, catering to big businesses and handling affluent individuals, the room for convenient banking solutions for smaller enterprises has been negligible. 

What are the differences between Neobanks, traditional banks and digital banks?

UK-based FinTech players such as Monzo and Atom Bank are the pioneers of neo-banking providing a majority of banking services through a simple and efficient mobile application. Without a branch or a personal representative, neo-banks are revolutionising the financial sector by existing entirely on mobile. 

Some of the basic features provided by neo-banks include opening & managing a bank account, issuing a credit card alongside receiving loans from the bank, all through a simple mobile application. 

Are neo-banks posing a threat to the traditional banking system? It is yet to be seen how these banks affect conventional banking however, the landscape of FinTech is progressing at the speed of light and thus, a paradigm shift in user behaviour is likely to happen sooner than speculated. Until the launch of neo-banks, the only digital space the world knew of were the digital extensions of traditional banking systems which provided an edge to the new consumer by retaining a majority of share in conventional banking setups. 

Variant market research predicts immense growth in the neo-banking sector with the category growth going up by 45% in 2025 from 2017. Venture capitalists and high-end investors are actively funding neo-banks; exponentially expanding the entire category and providing a promising picture for the future. As of 2017, Monzo neo-bank had raised over USD93 million in a Series D round of funding, hence doubling the valuation of the organization from USD113.6 million to USD366 million. 

A key factor to the shift in focus from traditional banking to digital banking solutions is the expansion of digital newcomers in developed countries where young people are not shy of conducting their banking transactions completely virtually. While traditional banks have enormous assets to fend off neo-banks, the growing interest of huge investors, the likes of which include Stripe and Goodwater Capital, Thrive Capital and more, are providing sustainability and growth to the sector. 

How is the state of neo-banks around the world?

With a digital penetration of over 65%, China is believed to witness highest growth in the neo-banking sector till 2025. The massive pool of underbanked customers and surge in mobile banking users in China will bring on the wave of neo-banking faster than expected. 

Another key factor which will boost growth in this market is the convenience offered to customers, higher interest rates than traditional banks and favourable government regulations. On the contrary, a few factors such as customer acquisition and profitability are challenges that neo-banks will have to overcome over a passage of time. The increasing digital population and immense expansion in the mobile phone economy will only fuel growth to the market and create vast opportunities for new players to launch and existing players to grow. 

While China may lead category growth in the upcoming years, United States will continue to maintain leadership in the neo-banking market with approximately fourth-fifths share of neo-bank customers in the world. Right after United States, U.K. follows suit in the neo-banking sector owing to a strong customer base in the market along with favourable government regulations and an upsurge of investment in the FinTech sector. The prominent factor that is favouring the neo-banking sector in U.K and major countries across the globe is the limited amount of investment required to setup a digital service as compared to traditional banks, who have to go through a rigorous process of regulations & documentations along with the need of huge capital to begin operations. 

Europe is not far away from the neo-bank bandwagon as the EU’s common standards are facilitating growth for the market. Neo-banks in EU can quickly expand its customer base provided the neo-bank is following regulatory standards. Neo-banks such as N26 have expanded to over 17 markets whereas Fidor Bank is catering to customers in almost 40 different markets. The expansion of a bank in the virtual world is proving to be much faster, easier and efficient as opposed to brick-and-mortar banks.

Neo-banks initiated as start-ups intending to disrupt the financial services market. However, this trend has been non-existent in Asia with the exception of Neat and PayTM. 

For example, WeBank, MYBank and KakaoBank are backed by Tencent, Alibaba and Kakao respectively. Similarly, K-Bank and SBI Sumishin are both backed by telecom companies as well. This trend proves that banks are eager to hop on the bandwagon as DBS launched Digibank in India and Indonesia. Many Asian banks are aggressively activating their FinTech services to compete with local banks and their extensive networks.  

Needless to say, half of the work for neo-banks has been done by traditional banks as they ventured into digital banking. Initiating the behavioural change of moving from branch banking to digital banking is a task undertaken by banks since the better half of this decade. Building on this infrastructure and creating a need for the digital consumers, neo-banks are paving way for a much more sophisticated and simpler mode of banking. Unfortunately, brick-and-mortar banks have seen severely challenging times lately with respect to their mobile banking solutions in terms of security as well as basic infrastructure problems and below-average functionality. Hence, giving neo-banks a clear chance to penetrate the market with its simplicity. 

What’s happening in GCC?

As the world dives into the realm of neo-banks, the GCC region is catching on the fever at par with the rest of the regions. With a booming millennial population which makes one-third to one-half of the total population in the GCC region, the popularity of neo-banking solutions is highly anticipated. 

Traditional banks all over UAE are actively seeking digital solutions to cater to the expanding customer base of young people in the region. With the likes of Emirates NBD launching LIV, a millennial digital banking solution to Abu Dhabi Islamic Bank (ABID) partnering with Fidor Bank (of EU) to launch the regions first community-based digital bank, the entire GCC region is aggressively rising up to opportunities in the FinTech sector. CBD NOW, another FinTech initiative is also targeting the millennial and digitally connected customers with its high-end mobile proposition. 

During the last decade in the Middle East, an astounding amount of over USD100 million has been invested in FinTech and with the rise in demand, major investors and venture capitalists are likely to explore funding opportunities in the region. The digitisation of brick-and-mortar banks has been underway in the region as Mashreq Bank also launches Neo, the first digital bank in GCC providing access to international markets and investment opportunities in terms of foreign equities, gold trading and foreign currency accounts. This change is massive for the economy as more players enter the market to inject investment and expand growth; making neo-banking a sustainable banking model in the GCC region; solely focused on the millennial population for the future. 

Other players such as Bank ABC, a Bahrain based international bank, is opening its gates to the world of neo-banking through the launch of its neo-bank, independent from Bank ABC. However, the market is currently being fuelled by traditional banking institutions in the region, creating room for independent players to penetrate in the market. CLEARLY is a home-grown neo-bank based out of Dubai which ensures easy account opening from anywhere in the world and keeps customers’ experience a priority. With CLEARLY, customers are empowered to manage all their money through all digital devices (mobile, tablet, desktop etc.). This neo-bank aims to keep customers at the core of their ethos and engage users in a one-stop shop model where all banking processes can be conducted through a digital device and no brick and mortar interference. CLEARLY plans to expand into saving, investments and borrowing in regards to the services it offers; providing a well-defined, integrated digital ecosystem to its customers. 

As players increase in the market, the growth will be exponential and as global neo-bank markets rise, it will have a directly proportional affect to the GCC region as well. 

How do neo-banks stand in front of conventional banks?

To say the least, neo-banks are posing a potential threat to conventional banks largely owing to the customer convenience factor which is being built into the DNA of a neo-banking ecosystem. Furthermore, lower capital requirements, flexible government regulations, user-friendly interfaces and continuous focus on innovation has become a differentiating factor between neo-banks and conventional banks. As brick-and-mortar banks march towards perfecting their digital banking solutions, neo-banks offer similar experience sans the hassle of physically visiting a place and getting confused in the complexities of the banking industry. 

With neo-banks opening their APIs to third parties, they are empowering cross-category growth as insurance companies and loan providers find their ways to integrate with this digital technology. This very feature will enable neo-banks to grown exponentially as small & medium sized enterprises will begin to expand their footprint through neo-banks. 

Data Driven, Actionable Measures Towards Customisation and Segmentation 

Driven by real-time data, neo-banks have the potential to understand the digital behaviour of each of its user hence being able to identify how users interact with the different features of the application. In return, this consumer tracking helps neo-banks create relevant cohorts for a better user experience. Personalizing is a huge factor when it comes to the success of neo-banks. Unlike traditional banking where a diverse group is studied to understand banking behaviour, neo-banks have empowered corporations to understand their consumers individually and hence, be able to provide tailored experiences based on needs to the customers.

Autonomy in Decision Making

The leniency in government regulations in the neo-banking world has enabled this industry to evolve at the pace of its consumer without having to go through stringent processes like conventional banks. Thus, since changes are happening in real-time, neo-banks are able to stay ahead of time and provide experiences which are lesser known to a conventional banking customer. 

To wrap it up

The future of the world is digital. Only a few years ago, cashless economy became the financial buzz of the world but with the advent of digital transformation, the financial industry is bound to innovate in many ways. However, it is unlikely that neo-banks will sweep away the conventional banking system which has been around for generations. Traditional banks will continue to digitise their current practices to remain up-to-speed with the development in the FinTech sector and neo-banks will continue to build a promising future for the market and the younger generation of the world. 

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