THE GLOBAL NEOBANKS REPORT: How 26 upstarts are winning customers and pivoting from hyper-growth to profitability in a $27 billion market
This is a preview of The Global Neobanks 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.
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.
Increased consumer interest in neobanks is stimulating competition globally, creating an increasingly competitive landscape which has driven neobanks to roll out extravagant features, like overdraft protection and sign-up incentives. Beyond scaling rapidly by user count, neobanks are navigating the best route to profitability. Today, the average neobank loses $11 per user, per Accenture, and though neobanks' expenses are partially offset by not operating costly branch networks, they still need to find sustainable business models. Some major strategies are beginning to coalesce: Most neobanks operate under a "freemium" model, in which they offer their product for free, but charge for additional features, while others offer multitier subscriptions with varying levels of premium accounts. Additionally, other players are targeting niche segments, like small businesses or gig economy workers, in their pursuit of profitability. In The Global Neobanks report, Business Insider Intelligence explores how the neobank market has grown rapidly, and what's in store as the industry pivots from hyper-growth to sustainability. We discuss how 26 neobanks in key global markets are prioritizing scale versus profitability, identifying best practices to emulate and pitfalls to avoid. The companies mentioned in the report include: ABN Amro, Adyen, Ant financial, ANZ, Aspiration, Banco Inter, Bank Leumi, Banco Sabadell, Banco Votorantim, Bnext, bunq, Chime, Commonwealth Bank of Australia, Dave, Finleap, ING, Judo, Klar, Kuda, Mastercard, Monzo, Moven, MYbank, National Australia Bank, Neon, Nubank, N26, OakNorth, Open, Pepper, Penta, Revolut, Raising, Rabobank, Santander, Starling, Standard Chartered, Tandem, TD Bank, TransferWise, Tencent, Uala, Uber, Volt, Varo, WeBank, Westpac, Xinja, 86 400. Here are some key takeaways from the report:
With an estimated 39 million users globally, neobanks' valuations have skyrocketed thanks to their attractive value propositions which include personal finance management features, low rates, and superior user experiences. But the same features that have helped neobanks catch on have pushed profitability further out of reach. Neobanks have been forced to roll out flashy features to stand out to users, and marketing these features has driven up expenses. There's no universal path to profitability for neobanks — but a few major categories are emerging. Freemium pricing strategies, multitiered subscriptions, and targeting niche demographics are three strategies neobanks are employing in pursuit of profit. Individual neobank landscapes vary by market, but their inherent advantages are allowing neobanks to emerge in markets globally. Regional factors have made certain markets particularly ripe, such as fintech-friendly regulations, negative consumer perceptions of incumbents, and gaps in banking services for underbanked populations.
In full, the report:
Sizes the neobank market by value, number of users, and number of accounts to 2024. Explores the factors that will propel the neobank market to new heights over the next five years, and the challenge of reaching profitability underpinning this growth. Highlights key players in various global markets — including Europe, North America, Latin America, Asia Pacific, and the Middle East and Africa — that are representative of the general neobank landscape and that have excelled in global footprint, features, users, or total funding raised. Spotlights some of the smaller players that represent the emerging opportunity in a given market. Discusses how different neobanks in key global markets are prioritizing scale versus profitability, identifying best practices to emulate and pitfalls to avoid.
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Summary List PlacementThe Australian neobank, tech giant, and cloud-based technology provider will jointly develop a Banking...Summary List PlacementThe Australian neobank, tech giant, and cloud-based technology provider will jointly develop a Banking as a Service (BaaS) platform dubbed Volt 2.0. The Microsoft Azure-based platform will be scalable and offer clients white-labeled banking services with secure data storage and advanced analytics capabilities. Volt's consumer banking arm remains in beta mode, with only savings accounts available to participants, though its website indicates that spending accounts are in the works. Volt's digital savvy combined with the power and scale of Microsoft's Azure platform could yield a potent BaaS player and distinguish Volt from fellow Australian neobanks. Like other digitally native banks, Volt's banking offerings aren't dependent on legacy systems, making it well-suited to the digital nature of the BaaS business model. And in Microsoft, the neobank has a partner with the power and scale to offer Volt 2.0 unlimited scaling potential, making its future prospects rosy. A notable caveat, however, is Volt's youth and current beta status: It has yet to fully battle test its product. The neobank's ability to design an appealing user experience that it can white-label for BaaS clients could be the determining factor in Volt 2.0's early success. A successful BaaS play could grant Volt's bottom line a resilience that few neobanks enjoy. Profitability is almost universally elusive for neobanks, but BaaS services can be a revenue generator that isn't dependent on the transaction volume of Volt banking customers, fee revenue, or paid account subscriptions—some of the more popular ways neobanks make money. And if Volt 2.0 takes off, the neobank could even pivot away from consumer banking, a path that Green Dot is taking in the US: It offers its own banking services but has leaned more heavily on its role as a BaaS leader for revenue in recent years. It's now a critical BaaS backbone for several large-scale companies, including Apple, Intuit, Uber, and Walmart—likely putting it in a stable financial position, even as other financial institutions take heavy profit hits related to the coronavirus pandemic. Want to read more stories like this one? Here's how you can gain access: Join other Insider Intelligence clients who receive this Briefing, along with other Banking forecasts, briefings, charts, and research reports to their inboxes each day. >> Become a Client Explore related topics more in depth. >> Browse Our Coverage Are you a current Insider Intelligence client? Log in here.Join the conversation about this story »
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
Digital-only banks are booming in Europe. Now they are poised to change the way Australians save...Digital-only banks are booming in Europe. Now they are poised to change the way Australians save and spend Digital-only neobanks, offering no-fee accounts, high-speed sign-ups and intuitive user interfaces, are hoping to disrupt the way Australians save and spend their money – by making products people actually like.With names that sound like tech startups (or children’s toys), optimistic branding palettes of aqua, violet and millennial pink, and websites that promise banking experiences that are “easy as … and fun”, these financial upstarts have no interest in looking like their legacy peers, even when they’re owned by them. Continue reading...