THE GLOBAL SMB NEOBANKS REPORT: How 17 upstarts are tailoring solutions to tap the $850 billion annual opportunity in addressing the unmet needs of SMBs
This is a preview of The Global Small Business Neobanks research report from Business Insider Intelligence. Purchase this report. Business Insider Intelligence offers even more fintech coverage with Fintech Pro. Subscribe today to receive industry-changing finance news and analysis to your inbox.
Neobanks — digital-only banks with industry-leading capabilities that don't operate physical branches or rely on legacy back-ends — have exploded onto the global scene in recent years.
While neobanks focused on retail consumers tend to dominate headlines, these players' biggest impact could be in the $850 billion annual SMB banking segment, as incumbent banks have struggled to appropriately serve this industry. Because they're built on a modern technology stack and lack the costly network of physical branches, neobanks have been able to serve SMBs much more efficiently than legacy players. Key neobank offerings include quick account opening, multitiered — and often fee-free — accounts, and integrations with third-party tools like accounting and bookkeeping software to further streamline SMB business operations. In The Global SMB Neobanks Report, Business Insider Intelligence explores the key factors driving an explosion of neobank activity in the SMB segment and the strategies these upstarts are leveraging to capture shares of this lucrative banking vertical. First, we examine the conditions that created a fertile environment for neobanks to offer their services to SMBs, including the challenges incumbents have faced when it comes to serving these businesses profitably. We then outline the operational advantages that have enabled neobanks to overcome the challenges faced by their incumbent peers. Finally, we explore the key neobank markets around the world and the players at the forefront of the movement in each geography. The companies mentioned in the report include: Anna, Azlo, BBVA, BlueVine, bunq, Coconut, Judo Bank, Mercury, MYbank, N26, Nubank, OakNorth, Open, Penta, Qonto, Revolut, Starling, Tide. Here are some key takeaways from the report:
Almost all businesses globally fall within the SMB category — with 99% of all companies having fewer than 50 employees — and they play a huge role in their respective domestic economies. Banks have struggled to find the optimal balance between efficiently serving SMBs and delivering the customer experience that these companies require, leading many to neglect the segment — especially after the financial crisis, when banks reduced their exposure to risky credit portfolios. Europe is home to the most mature neobank ecosystem globally, driven by upstart-friendly regulations — like Open Banking and PSD2 — that have lowered the industry's traditionally high barriers to entry. The neobank ecosystem in the Americas has long lagged behind Europe's, due in part to an adverse regulatory landscape, but that's beginning to change. The Asia-Pacific region is characterized by hugely varied fortunes in each market when it comes to SMB neobank development.
In full, the report:
Evaluates the current banking space for SMBs. Explores why conventional banks have struggled to appropriately serve this segment, and explains why neobanks are changing the status quo. Highlights key players in various global markets — including Europe, North America, Latin America, and Asia Pacific — that are at the forefront of this global movement in terms of features, users, or total funding raised. Spotlights some of the smaller players that are beginning to make headway in specific markets. Discusses the different business models and strategies used by SMB-focused neobanks across the aforementioned geographies.
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Digital-only banks like Chime are seeing record signups amid the coronavirus pandemic. Here's how they drive revenue without lending or charging overdraft fees.
Digital-only banks, or 'neobanks,' like Chime are seeing record signups for their online banking products amid...Digital-only banks, or 'neobanks,' like Chime are seeing record signups for their online banking products amid the coronavirus pandemic. In the traditional business model for banks, they take in deposits, then lend that money out and charge interest. They make money on the 'spread,' or, the difference between the deposit and loan rates, as well as non-interest income like overdraft fees. Instead of earning interest rate spreads, neobanks like Chime, Monzo, and N26 rely on interchange fees earned from debit card transactions. Amid the coronavirus pandemic, Chime piloted a way to get consumers' government stimulus checks early using its overdraft protection product, SpotMe. Click here for more BI Prime stories As brick and mortar banks close amid the coronavirus pandemic, neobanks like Chime are seeing record signups for their digital-only banking products. In February, Chime surpassed the 8 million customer milestone. And as more users sign up for the branchless bank, Chime has been experimenting with a way to for its customers to get part of government stimulus payments, which are part of the CARES Act, early. Chime began testing the stimulus payments with its SpotMe feature, a product that lets users overdraft their accounts for free, in early April. It found that its users wanted some, not all, of the stimulus checks early, so it doubled its SpotMe limit to $200 for select users. By the time most banks posted the stimulus checks last week, Chime had already distributed more than $1 billion in stimulus payments to over 600,000 users. And last Monday, Chime saw the highest number of account openings since it was founded in 2013, Business Insider has reported. But still, Chime and its fellow neobanks like Monzo, N26, and Varo, have not launched full blown lending products. Traditionally, banks make money on interest rate spreads, or, the difference between the rates they pay costumes for their deposits and rates they charge borrowers. But neobanks currently only play on the deposit side of the balance sheet, offering checking and savings accounts. And these neobanks are attracting waves of VC cash. In 2019, neobanks raised more than $3.7 billion in VC cash, a new record following 2018's $2.3 billion, according to CB Insights. In December last year, Chime's valuation quadrupled to $5.8 billion following its massive $500 million Series F. The round was the largest single equity investment in the neobanking space, a record previously held by Brazil's Nu Bank, according to CB Insights. Chime's investors include Dragoneer Investment Group (Compass, Klarna, Nubank), DST Global (Nubank, Robinhood, Root Insurance), and Menlo Ventures (Betterment, Carta, Roku). And Chime isn't profitable, but its CEO Chris Britt told Forbes in November last year that it could be if it reduced its marketing spend. Fees for card swipes and membership Since many digital-only banks are not lending in the US (some of them, like Monzo and N26, offer credit products in the UK and Europe), they need other sources of revenue. For example, every time a customer uses their debit card, the banks earn transaction processing fees — sometimes called interchange fees — from merchants. Beyond interchange, digital-only banks are also experimenting with membership models. Germany's N26, for one, offers tiered freemium membership to its European customers, and now it's thinking about rolling that model out in the US. N26 offers a free standard membership and tiered levels for a monthly subscription fee. Each tier comes with its own perks, like dedicated customer service, discounts at merchant partners, and insurance on car rentals and cell phones. The UK's Monzo, which had rolled out, then shut down its premium membership offering in September last year, just announced its plans relaunch the product in the first quarter this year. Both Monzo and N26 are also neobank unicorns. Monzo was last valued at $2 billion, following its $113 million Series F last June. N26 was last valued at $3.5 billion valuation after its $470 million Series D last July. Chasing customer stickiness To grow both membership and interchange fee revenue, neobanks are prioritizing customer acquisition, then customer stickiness. And in banking, stickiness is often pegged to establishing what's called a primary banking relationship. To be sure, the nature of a primary banking relationship has evolved. Over the past several years, fintechs have been riding a wave of unbundling — meaning they offer consumers pieces of the suite of products typically offered by a bank, like a high-yield savings account or passively managed investment accounts. But for digital-only banks, there's a key piece of a consumer's banking habits that could increase stickiness: payroll direct deposit. The neobanks have deployed products like access to wages two days early and no-fee overdrafts, specifically for customers who use the accounts for direct deposits. And their customer bases are growing. N26 just announced it has 5 million customers globally (including 250,000 in the US), and Monzo says it has 3.8 million customers. That said, the number of open accounts is not necessarily the same as the number of active deposit customers, so pinning down exact customer numbers is tricky. In some cases, one customer who opens both a checking and savings account could be counted with two open FDIC-insured accounts. Since the neobanks are private companies, they are not subject to the same disclosures as public retail banks. Ten-year-old Ally, one of the US's largest digital-only banks which went public in 2014, reported 1.97 million retail deposit customers in fourth-quarter earnings last year. Chime makes the majority of revenue via interchange Chime earns the vast majority of its revenue from interchange paid to Chime by Visa, a Chime spokesperson told Business Insider in emailed comments in December last year. Every time one of Chime's customers makes a purchase with their debit card, the bank earns a fee. Chime also earns a "modest percent of revenue" from referring customers to other fintechs like SoftBank-backed renters insurance startup Lemonade and fellow DST Global portfolio company Root Insurance, the spokesperson said. In February, Chime announced it would offer a high-yield savings account with rates starting at 1.6%, well above the national average savings rate of 0.07%, according to the FDIC. Other digital-only banks unburdened by the cost of brick-and-mortar footprints, like Goldman Sachs' Marcus and Ally Financial, also both offer high-yield savings. While Chime doesn't currently offer direct lending products, it's been vocal about its ambitions to enter the credit side of the balance sheet. But the timelines are unclear. In March of 2018, Chime's CEO Chris Britt told Bankrate that it would launch lending products within the year. "Our initial efforts in the area have been focused on the short term lending segment, and more specifically, the overdraft fee epidemic facing our country," the Chime spokesperson said. Chime launched SpotMe in September last year. Customers who direct deposit at least $500 per month are typically able to overdraft their accounts up to $100. There is no interest applied to the overdrafts, which are repaid to Chime from the next payroll direct deposit. Users are offered the option to leave a tip to "pay it forward." "While we've publicly announced our intention to launch other credit and lending products, we'll focus next on helping our members improve their credit scores and will announce a new service in this area in the first half of 2020," the Chime spokesperson said. Neobanks are challenging legacy players' fee structures In addition to free overdrafts and getting your paycheck a couple days early, there are other features of these digital-only neobanks attracting customers. Across the board, they have leaned into fee transparency, and largely moved toward eliminating things like minimum balance and account maintenance fees. Incumbent retail players like JPMorgan and Bank of America both charge $35 for every overdraft, and $12 in monthly maintenance fees. According to Chime's website, the only fee it charges is $2.50 for out-of-network ATM withdrawals. N26 doesn't charge overdraft, maintenance, nor foreign transaction fees.Join the conversation about this story » NOW WATCH: Why Pikes Peak is the most dangerous racetrack in America
This story was delivered to Business Insider Intelligence Banking Briefing subscribers earlier this morning. To get...This story was delivered to Business Insider Intelligence Banking Briefing subscribers earlier this morning. To get this story plus others to your inbox each day, hours before they're published on Business Insider, click here. UK-based neobank Monzo announced the launch of two business bank accounts that it trialed for the last 12 months and extended early access to for 2,500 business customers, per TechCrunch. Geared toward sole traders and small- and medium-sized businesses (SMBs), the accounts mark previously consumer-focused Monzo's entrance into the business banking space. The neobank's new businesses accounts will be offered via a tiered model: Business Lite is free to use, and offers both mobile and web access — the latter of which Monzo CEO Tom Blomfield told TechCrunch was a more in-demand feature than they had anticipated. Business Pro is a premium account which comes with a £5 ($6) monthly subscription fee. The account comes with features like "Tax Pots," which allow businesses to allocate a percentage of inbound payments in preparation for a future tax bill, integration with third-party accounting software like Xero, multi-user accounts, and in-app invoicing. The slower pace at which the accounts have been rolled out is seemingly a departure from Monzo's previous strategy of going for quantity over quality. In the early days of its 2015 launch, the neobank was more focused on the speed with which it got products to market: "We spread ourselves too thin and launched too early," Blomfield told TechCrunch. But having tested these business accounts with actual businesses and for the course of a year, the neobank seems well-positioned for success. Taking the time to ensure a quality offering is integral to building a sustainable business, as rushing to launch a suboptimal product could result in a costly retraction and relaunch, not to mention diminished customer trust. This happened with Monzo's premium consumer accounts, which it shuttered just five months after launching due to customer backlash, and relaunched several months later. Expanding its product line also invites more competition for Monzo — but its multitiered approach could position it for sustainable growth. The UK SMB neobank space is highly competitive, with players like OakNorth, Tide, and Starling, the last of which has grown its SMB marketplace to 24 integrations from other providers, for example. But Monzo's multitiered subscription model could help it gain ground in the space by appealing to the widest possible swath of prospective clients, from individual freelancers who may opt for the free account, to more established SMBs that can benefit from the more advanced integrations of the paid account. Additionally, offering a paid account can give Monzo the ability to generate consistent revenue through the subscription fee. Want to read more stories like this one? Here's how to get access: Business Insider Intelligence analyzes the banking industry and provides in-depth analyst reports, proprietary forecasts, customizable charts, and more. >> Check if your company has BII Enterprise membership access. Sign up for the Banking Briefing, Business Insider Intelligence's expert email newsletter tailored for today's (and tomorrow's) decision-makers in the financial services industry, delivered to your inbox 6x a week. >> Get Started Explore related topics in more depth. >> Visit Our Report Store Current subscribers can log in to read the briefing here. Join the conversation about this story »
THE RISE OF BANKING-AS-A-SERVICE: The most innovative banks are taking advantage of disruption by inventing a new revenue stream — here's how incumbents can follow suit
This is a preview of The Rise of Banking-as-a-Service research report from Business Insider Intelligence. Purchase...This is a preview of The Rise of Banking-as-a-Service research report from Business Insider Intelligence. Purchase this report. Business Insider Intelligence offers even more insights like this with our brand new Banking coverage. Subscribe today to receive industry-changing banking news and analysis to your inbox. Fintechs are encroaching on incumbents' share in the banking game, forcing them to explore new business models — but tech-savvy legacy banks can treat this as an opportunity rather than a threat by moving into the Banking-as-a-Service (BaaS) space. BaaS platforms enable fintechs and other third parties to connect with banks' systems via APIs to build banking offerings on top of the providers' regulated infrastructure. This means banks that launch BaaS platforms can actually benefit from fintechs entering the finance space, as it turns fintechs into customers rather than just competitors. Other benefits from launching a BaaS platform include being able to monetize such platforms, establishing strong relationships with fintechs, getting ahead of the curve in terms of open banking, and accumulating additional data from third parties. In The Rise of Banking-as-a-Service, Business Insider Intelligence looks at the benefits banks stand to gain by offering BaaS platforms, discusses key players in the industry that have already successfully launched BaaS platforms, and recommends strategies for FIs looking to move into BaaS. The companies mentioned in this report are: BBVA, Clearbank, 11:FS Foundry, Starling. Here are some key takeaways from the report: Offering BaaS also allows banks to unlock the opportunity presented by open banking, which is becoming a vital part of the financial services industry. There are two key types of players — BaaS-focused fintechs and BaaS providers with a retail banking arm — that banks will need to learn from and compete against in the BaaS space. Banks that have embraced digital will have an easier time ensuring that their infrastructure and systems are suitable for third parties. It's vital for incumbents to accurately assess third-party needs to create an in-demand portfolio of white-label BaaS products. In full, the report: Outlines what BaaS is and how it relates to open banking. Highlights the benefits of launching a BaaS platform, including two different monetization strategies. Explains what BaaS players are currently doing in the space, and outlines the services they offer. Discusses what incumbent players can do in order to launch their own successful BaaS platform. Interested in getting the full report? Here are four ways to access it: Purchase & download the full report from our research store. >> Purchase & Download Now Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to this report and more than 250 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now Join thousands of top companies worldwide who trust Business Insider Intelligence for their competitive research needs. >> Inquire About Our Corporate Memberships Current subscribers can read the report here. Join the conversation about this story »