The digital retail banking revolution is here. The last five years have seen explosive and global growth in the customer numbers of neobanks. These neobanks, which only offer full-digital financial services and extremely low fees, attract mostly people from the millennial generation. In addition, they are backed by a tremendous amount of venture capital funding (N26: €450M, Revolut: €300M, Monzo: €235M) and breaking customer adoption records in the financial services industry. While Revolut wants to break through the ten-million customer ceiling in 2020, Monzo is taking over the forerunning British market and N26 is gaining traction in the strong European economies, now just hitting 3.5 million customers worldwide. With this aggressive take on the financial establishment, do banks still stand a chance?
At present, traditional banks are outgunned by neobanks on a number of fronts. Firstly, banks’ internal cost structures are a major problem. Neobanks have significantly lower operational costs. Experts believe that traditional banks have to make four times (others claim six times) more revenue per customer per year to maintain a checking account in comparison to neobanks. Expert estimations indicate these costs are between €200 and €350 for branch-forced banks, whereas the amount for digital neobanks is around €50. These low marginal costs also inhibit the possibility for neobanks to be more flexible in testing new in-app features.
Aside from the cost issue, the fact remains that the seamless customer experience offered by neobanks is appealing to their target group: studying and working millennials. For this group, they offer a personal financial management (PFM) application with easy-to-use and actionable features that assist when travelling or saving money for leisure activities. It is also the integration of these banks with popular top FinTechs, such as Transferwise (international transfers), Moneybox (investing), and Flux Systems (digital receipts), that appeals to the millennial generation.
However, the flip side for neobanks lies in their hunger for growth and expansion. Because of the anonymity of digital banking, neobanks are fertile ground for money launderers struggling with the development of accurate anti-money laundering systems. Moreover, for example Revolut is currently known for a take-no-prisoners culture resulting in tales of high staff turnover, incident silencing, and burn outs.
Conventional banks apply an imitation strategy by creating their own digital PFM applications through internal (R&D) or external (M&A – investing) strategies. This reaction to these neobanking offerings could work, but will never be enough. To fully compete with these digital-savvy organizations, banks should hire the same tech-minded talent, increase the rate of branch-closure and offer a seamless digital customer experience that can compete with FinTechs.
The large neobanks aren’t restricted to a local perspective. While they continue to expand their services into the European continent, all neobanks are also preparing to capture the American market. And obviously, these three aren’t the only neobanks active in the field. Starling Bank, Tandem, and Monese also challenge financial parties in the UK, while Lunar Way (Sweden), Tinkoff (Russia), and NuBank (Brazil) are other neobanking initiatives across the globe. Aside the danger of conventional banks, established FinTechs and even BigTechs, the neobanks are on the rise, and banks should watch out for them.
PSD2 (Open Banking) Market Observatory, the Netherlands
Capgemini’s Open Banking (PSD2) Market Observatory Research Team in the Netherlands is conducting monthly analyses on topics such as:
- Tracking FinTech activity (AIS/PIS authorization)
- Actions of (non-traditional) competitors
- New business opportunities emerging
- API developments
If you have any additional questions, please feel free to contact Alexander Eerdmans (Principal Consultant – Financial Services; email@example.com), Joost van Putten (Managing Consultant – Financial Services); firstname.lastname@example.org or me (Consultant – Financial Services; email@example.com).
OVERVIEW TOP THREE NEOBANKS
London-based neobank with the largest customer base, now in 31 countries. Offers standard banking services, but also a pre-paid debit card, currency exchange, cryptocurrency exchange, and P2P payments. Now also extending to the youngest generation with Revolut Youth (8–18 years).
German application that offers budgeting tools, spending insights, easy payments as part of its basic current account but positions itself as the go-to bank for frequent travelers by offering insurances and beside that also flexible workspace, hotels, and language-learning apps.
Fastest growing neobank in the UK. Standard features for budgeting, expense tracking, and international payments. Currently extending to business banking (SME loans, accounting, and administration add-in) and insurance (emergency cash for holidays, mobile phone insurance).
 Company website
 The Economist