Why Are Neo-banks the FinTech Stars?

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    The financial services market is looking ripe for disruption, following the Australian government’s release of open banking review. Two key principles of the review are creating new opportunities and encouraging competition altogether, making the prospects of Neo-banks looking bright. Users around the world are already used to convenience, speed, and reliability of services. Each innovation gets us one step closer, opening the scene for new, bold ideas. In the case of FinTech, the innovation of neo-banks or challenger banks has a chance to connect multiple vendors and business models and offer customers even more choice, high-quality services and convenience.

    According to The World Bank’s report, 1.7 billion adults worldwide don’t have a bank account. That’s a staggering number that is managed by new and fierce businesses. In 2014 there were 2 billion adults without access to financial services. While the amount of excluded is going down, the number of in-pocket-apps fighting for attention is growing. The goal – include the remaining unbanked and gain customers for life – from the first account you open, through a student loan, mortgage, investment accounts, credit cards to pension. That is a long-term play.

    How do neo-banks operate?

    They charge fully armed with the latest tech and a very focused mindset. FinTech software development is powering up these ideas. It is easier to explain when you consider that nearly 1/2 of all adults without a bank account live in seven economies:

    • China – 13%
    • India – 11%
    • Indonesia – 6%
    • Pakistan – 6%
    • Nigeria – 4%
    • Mexico – 3%
    • Bangladesh – 3%

    Most of those people are living ‚below the standard’. In fact, twice as many unbanked adults live in the poorest households in their economy as in the richest ones. That means this is a very conservative but potentially loyal market. Once people see the benefits of accessing their money in an easy way, the chances are they will stay with the brand that offered them a solution. That is a piece of a pie worth fighting for.

    1.7 billion people translate to 31% of a global adult population. The most common reason for staying unbanked is the lack of money, or to be precise, the lack of savings. The second most common reason is the lack of motives to have an account - the cost of having one is high, so people keep the money “under their mattress”. Furthermore, the availability of a local branch in remote locations is also a factor of nearly 22% who are saving the time to get to a bank, and the cost of traveling there is simply not worth it. Finally, the fear of global organizations and distrust towards a traditional financial system.

    The question is, what has changed? What benefits can the Neo-banks offer? In Asia, Africa and Latin America, the percentage of unbanked is greater than 60%. At the same time, people in this portion of the population are massive owners and users of smartphones – with China leading the way. You do not need to own a bank account (which might be expensive), you do not need to commute regularly to a bank (which is even more expensive), but with the technology boom and mass production anyone needs to be a proud owner of a smartphone – in fact, it is rare to see anyone in China with only one device. They are needed to keep in touch with your friends, family, business contracts; to gather information and keep up with the pace of the modern world. That is the entry point to penetrate the market with an innovative and bold financial service and literally… get to your pocket!

    Banks can be a financial spine for the financial world, but they tend to overlook the unbanked. FinTech start-ups are more agile; they react to the change quicker – picking up the fruit not when they are ripe, but when the trends are at. Big banks offer a wide variety of services, and in most cases, they are not swift enough to adjust to new and upcoming shifts on both global and local markets – the momentum is too great to change the course of the big financial machines. Neo-banks, sometimes called challenger banks, are not constrained by the stagnation – they thrive when things change, making one app after another and can gain millions of customers in a record time.


    What is the difference between a digital bank and a traditional bank with an online presence?

    Many banks appear to be digital banks since they don’t have branches and are focused on developing quality mobile banking apps for their customers. However, just because a bank doesn’t have branches and offers a range of digital products and platforms doesn’t mean it is a digital bank or a Neo-bank. Offering ApplePay, GooglePay, or SamsungPay doesn’t make you a Neo-bank either.

    Traditional banking system relies on physical institutions, infrastructure – Neo-banks do not. Not having the need to build and maintain infrastructure, cater to long-term lease contracts, high provisions, full banking licensing, branching, and lengthy approval processes to open a branch. Any employer having an office can appreciate the costs for the electrical bills and managing costs for the branch that would allow hosting your customers.

    FinTech neo-banks operate entirely different. They don’t own buildings to host their clients; they do not build or use any existing banking systems or infrastructure. They launch apps, offer flexible contracts, transparent fee lists. The service is quick and seamless, offering straight-through-processing for standard operations allowing for significantly reduced running costs. Furthermore, they are targeting only a few products, which means that they can operate under none, partial, or full banking licenses. Customers can go on with their businesses via online banking solutions (by visiting a website) or use of a mobile app. Easy. That’s a good argument for 1,7 billion people with no personal transportation, poor housing conditions, and problems with running and clear water.

    Challenger banks don’t stop there. They are built around simplicity. Easy application to set up an account, easy sign-up forms, easy checking of identity, credit history, and procedures to get a loan or lift on an overdraft.

    Companies like N26, Revolut, WeBank, Up, or Brubank raised the bar when it comes to customer care. They can use API to connect different suppliers of financial products and services, effectively increasing the portfolio of services and reaching potential clients at the same time.

    How will traditional banks respond?

    There are a few ways traditional banks are responding to the new competition.

    The simplest one is an acquisition. The BPCE, a large French bank, in 2018 bought the online Fidor Bank, which had more than 120,000 clients in Germany and the UK.

    When ‚new kid on the block’ becomes too greedy, the diversification of operations seems like a natural choice. With that way of thinking, big banks offer new digital services while maintaining the core business. Commonwealth Bank of Australia, for example offers its customers an insight into the spending habits of its customers. Bank’s Daily IQ tool offers much more – from spending analytics, through displaying cash flow trends, comparing industry performance to meta trends about demographics and spending habits over time. That’s a powerful option for any potential business partner.

    And since we’re talking about partnerships – that’s the third option. Asian Standard Chartered Bank joined forces with China’s Alipay for the launch of a digital remittance service, with blockchain technology under the hood. The application allows customers across-border money transfers that are easy and cheap. The next step was cooperation between the mentioned companies and GCash, a company of a Philippian Globe Telecoms. The deal enables people to send money between Hong Kong and the Philippines via mobile devices – no hassle.

    Another approach is a copy-paste strategy. If you can’t beat them, join them. The idea is to mimic the behavior and cash the results. It pays out, as France’s BNP Paribas acquired 3 million customers with its Hello Bank initiative - a FinTech solution for five European markets.

    The last way is heavy investment in challenger banks. A great example we can see in India, with a huge market for spectacular investments. PayZello is funded by Axilor Accelerator, Niyo Solutions is backed by Tencent, Open acquired funds from Tiger Global Management. The list is long; institutional investors are coming left, front, and center.


    A chance or a threat?

    It depends. Neo-banks offer a large variety of services, like a salary account, a foreign exchange card with a savings account, a virtual debit card and more exotic ones like travel loans at an unmatched cost.

    It’s not for 1,7 billion people, though. They don’t treat banking lightly and for the right reason. The Unbanked are a promising, undeveloped market, and ultimately, the demand hasn’t overcome the obstacles to acquiring a bank account – the neo-banks have the chance to offer an even simpler service but are more focused on simplicity.

    Neo-banks challenge traditional banking, but they also can greatly inspire and improve their offer and operations. The market is rapidly shifting. According to the Mozo, 25% of polled Australians have already canceled credit cards and believe they will not use them anymore. They use Buy Now Pay Later (BNPL) services. This tells us a lot about the market and its demands.

    Everything is about FinTech software development. The software makes or breaks the product, especially that important – we are talking about people’s hard earnings, family fortunes, and investments. If the new app doesn’t meet the standards and quality (software product development) it will antagonize this delicate yet precious market.

    The unbanked are not the only target. FinTech in Scotland is a good example when it comes to modern tools that help those living from one pay-check to another pay-check. The Royal Bank of Scotland now runs its own challenger bank – NatWest. They are planning to service those with minimal savings.

    Finally, behind every new Neo-bank and app, there is a team of highly skilled and passionate technologists, managers, and business analysts - none of that would have happened without software developers. They allow such bold innovations to propel the market further.

    Maciej Rohleder CSHARK
    Maciej Rohleder
    Co-founder of CSHARK and Managing Director of CSHARK SINGAPORE PTE. LTD. Maciej has a strong tech background, having worked as Senior Solution Architect for Irish FinTech unicorn - Fenergo. Overall, he has over 17 years of experience in R&D, product development as well as professional services and management, 10 years in FinTech and RegTech, wanting to spread his knowledge to help companies scale.