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Are Neobanks Poised to Stay in Financial Landscape?

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Are Neobanks Poised to Stay in Financial Landscape? ARE NEOBANKS POISED TO STAY IN FINANCIAL LANDSCAPE? Geoffrey Laloux. Initio Brussels 1 2 Contents Are Neobanks poised to stay in financial landscape? ............................................................................................. 3 A word about definitions .................................................................................................................................... 3 Neobanks growth factors, why they are here to stay... ..................................................................................... 4 Innovation will continue ................................................................................................................................. 4 Neobanks are Fintech. .................................................................................................................................... 4 Younger generations love them ..................................................................................................................... 4 The Service offer will upscale ......................................................................................................................... 5 Professionals will be enlisted ......................................................................................................................... 5 More breadth and depth ................................................................................................................................ 6 PSD II and Open Banking will sustain the growth........................................................................................... 6 Neobanks may face tough time because… ......................................................................................................... 7 Disappearances and consolidations cannot be avoided ................................................................................ 7 Innovation is limited ....................................................................................................................................... 7 The Brexit could stop the European expansion.............................................................................................. 8 Good Customer experience is hard to build and harder to maintain ............................................................ 8 Reputation is a double-edged asset. .............................................................................................................. 8 Being Online only may be insufficient to maintain strong customer relationship ......................................... 9 Transparency has its limits ........................................................................................................................... 10 Incumbents are not dead ............................................................................................................................. 10 In concluding ......................................................................................................................................................... 11 Author ................................................................................................................................................................... 12 About Initio ........................................................................................................................................................... 13 Contact .................................................................................................................................................................. 14 www.Initio.eu 3 Are Neobanks poised to stay in financial landscape? Neobanks have raised the concerns of the public everywhere in Europe. Revolut, N26, Nickel, Starling, Monzo etc. are already known as key players in the industry. Most of them have succeeded massive fundraisings and are quite close to announce new capital injections in the press or the launch of new products and services. Despite impressive customer acquisition (more than 1 million customers for N26, twice much for Revolut…) none of these mobile-only neobanks have reached sustainable profitability1. Neobanks are still cash-burner companies and even if many of them are generously funded by venture capitalist or established commercial companies, they need to evolve if they expect to stay alive and last as key players on the banking scene. In this article we will check if Neobanks are equipped to stay or not. A word about definitions A Neobank could be defined as a financial institution with license, proposing at least a payment account and exclusively available online. Most were created from scratch well after the 2008 financial crisis, without the support of traditional banks and without using any traditional branch network (at least at the origination). Most famous examples are N26, Revolut, but also Fidor, Nickel, Atom or Starling. Their main distinctive characteristics are: - Mobile first (or even Mobile only) approach. - Open and transparent communication - Adaptive tariff structure (mostly based on Freemium model) - Customer centric approach illustrated by fast onboarding and leaned service offer. We can distinguish Digital banks born in the 90’s and Neobanks. If Digital banks (also known as Digital challengers) are also online only, they differ by: - A digital-only approach built before the rise of smartphone era. - A service offer based on savings in the objective of future investments. They extended their offer since to propose personal loans, mortgage, regulated saving account or insurances. - A market position built on purpose around lower costs and therefore cheaper service offers. Most renowned digital banks are Keytrade (Be), Boursorama (Fr). This definition also excludes payments services providers or account aggregators who operates without license; as well as Spin Off banks like Hello, BforBank, Fortuneo, ING Direct, EKO etc. that share almost all characteristics of Neobanks with the difference of being backed by a traditional bank. 1 In December 2017, Revolut was the first digital challenger bank to claims to have reached the break-even despite a yearly loss of 16 million €. Since then and despite an impressive client base growth of more than 8.000 units per days, balance go back in the red again. www.Initio.eu 4 Neobanks growth factors, why they are here to stay... Innovation will continue Over the last 24 months, N26 announced a dozen of significant services upgrades, from the launch of new Bank (metallic) Card to the recent introduction of “Spaces”, a virtual money management service. Revolut is claiming to release on average every 3 weeks an improved version of its mobile app, while Monzo is providing its clients with no less than 11 new features for the first quarter of 2018. For Neobanks, the competition is not about how revolutionary will be their next service or how deeply they use innovation. But rather how they communicate about innovation and how they make it available for they clients. Communication is a core ingredient of their success and they use it as a strategy to fuel their customer acquisition engine. In the absence of large budgets dedicated to mass media communication, Neobanks will continue to rely on word of mouth - punctuated by innovation announcements - to stay in customer’s mind. Neobanks are Fintech. Neobank are more than traditional banks, they are fintech providers. Fidor, for instance, has developed a white labeled digital banking platform, Fidor Operating System. Allowing for quick and easy portfolio management and giving customer access to open front-end service. Fidor is also providing its clients state of the art API layer and banking modules. The platform is proposed through a SaaS model and will be used by Telefonica for its mobile- only bank, O2. Moven, a US service provider, is also proposing B2B solutions. In 2017, Moven has generated $7 million thanks to its white label contracts with TD Bank or to New Zealand’s Westpac, for instance. And its newly announced joint-venture with SBI Group will give access to the Asian market throughout a network of at least 60 regional banks. If Neobanks may struggle to compete with pure B2C players, they are strong competitors to traditional offers when it comes to front end B2B banking platforms. Younger generations love them According to Julien Jaillon, CEO of Carrefour Bank & Insurance; 30% of C-ZAM customers have less than 30 years old, and 75% are lower than 50. For Revolut and N26 figures speak for themselves: 42% of Revolut’s users are between 25 and 35 years old; while N26 claims to have 59% of customers under 35 years old and even expect to peel away 5 to 10% of retail customers between 18 and 35 from established banks in Europe before 2020. Even if we estimate that Neobanks do not own more than 5% of the retail market, they appeal up to 35% of new customers per year. Why these 35% are making a difference? Because these new customers were previously unbanked, meaning that Neobanks manage to enroll customers with high financial development potential. www.Initio.eu 5 The Service offer will upscale The reputation of Neobanks is based on superior customer experience and reactive support, these two features require extensive investment in human resources. If customer support is an attitude it is nonetheless a major cost center which can’t be supported by the classical Freemium or low-cost business model adopted by most of Neobanks. To balance the books, it is mandatory to increase the per-customer revenue by proposing premium services
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