Fintech Revolution | Disruption in Traditional Banking (Future of Neo-Banks and Challenger Banks)

FinTech (Financial Technology) revolution along with innovative emergence of neo-banks and challenger banks seems like disrupting traditional banking system by tapping hidden blue ocean financial services market space. Traditional banking giants can also respond back through Banking as a Platform (BaaP), Open Banking (APIs) and Banking-as-a-service (BaaS). In both cases, absolute winners would be end customers but such victory might occur at a cost of comprising cyber security until reach the stage of maturity.

Topics Covered:

1. Fintech Business Analytics ( CB Insights 2022, Top 250 Fintech Companies)
2. Digital Banking vs Open Banking vs BaaS vs BaaP
3. Rivalry, Traditional Banks | Neo-Banks | Challenger Banks

Fintech Saudi | ???? ???????? | Financial Sector Development Program (FSDP) One and Only Neo-Bank in Pakistan | SadaPay

Fintech Business Analytics (CB Insights 2022, Top 250 Fintech Companies)

Fintech business analytics is performed on top 250 fintech companies as per CB Insights 2022 to extract useful insights for better understanding of ongoing rivalry among traditional banking giants, licensed bank backed neo-banks and fully functional challenger banks with own banking license.

Salesforce Tableau is utilize for data analytics, although different business intelligence tool can also be utilise for data transformation and modelling such as Novedades BI and QlikView BI Solution .

Top 10 Fintech Companies as per Total Disclosed Funding

China is once again leading with?Ant Group ?having total disclosed funding of 19B $ in niche category of Mobile Wallets and Remittances.

3 Digital Banks also succeed to secured position in Top 10 Fintech Companies List

Chime ?- US - 2.6B $ C6 Bank - Brazil - 2.4B $ N26 - Germany - 1.7B $

Investor Participation Analysis in Top 250 Fintech Companies

Google for Startups alone invested in 47 (18.8%) out of top 250 fintech companies followed by 汇丰 in 43 (17.2%) and SGH in 28 (11.2%)

Region Wise Segmentation Analysis of Top 250 Fintech Companies

Only 14 (5.6%) of top 250 fintech companies falls under the category of digital banking. The one of the major reason of such low representation is Open Banking and Banking-as-a-service (BaaS) in which licensed bank enables other non-banking based financial business to integrate banking services into their existing products and services portfolio so that fintech companies can focus on area of core competencies without stressing on regulation compliance required for issuance of banking license.

lets further narrow down the scope and perform region wise analysis of 14 digital banking funding

Digital Companies Ranking of Top 250 Fintech Companies

United States (US) and United Kingdom (UK) are leading the graphs with emergence of top digital banks, its time to visualise the map with aggregate top digital banking presence. Moreover, Tonik Bank is the one and only Asian Bank in Philippines.

Visualisation of Top Digital Banking Presence

United States (US) leading the map with presence of 4 digital banks having aggregate funding of 4.5B $ followed by United Kingdom (UK) - 3 digital banks - 3.9B $ and Brazil - 2 digital banks - 2.4B $

Digital Banking vs Open Banking vs BaaS vs BaaP

Digital Banking is a boarder term that includes both neo-bank and challenger bank as well as digital services offering by existing traditional banks, these terms are often confused and used interchangeably. Lets first understand each term in detail

Neo-Bank

Neo-Banks are fintech startup companies that aims to provide innovative and customise financial product and services to clients, such companies mainly target niche especially unbanked audience with the sole purpose of growing customer base at all cost basis to capture market share as much as possible in initial phase instead of focusing on profitability, therefore more than 95% of the World’s 400 Neo-Banks remain unable to reach profitability stage yet. The characteristics of such banks are as follows

Unbanked: Audience not having bank account and access to the mainstream financial system

1. Neo-Banks are not required to acquire banking license from regulating authorities for operations.
2. Neo-Banks are entirely online without any physical presence to minimize cost that allows offering of services to customers at comparatively cheaper rates
3. Neo-Banks required assistance from traditional physical bank in form of Banking-as-a-service (BaaS) for offering of financial services.

Challenger Bank

Challenger banks are complete digital form of existing traditional banks with offering of fully functional banking services, such companies are targeting masses especially underbanked audience, therefore in direct competition with traditional banks. The characteristics of such banks are as follows

Underbanked : Audience having bank account and access to the mainstream financial system but still relying on alternative services like check cashers, money orders etc. due to traditional banking system drawbacks

1. Challenger banks are required to acquire banking license from regulating authorities thus should follow strict regulatory compliance
2. Challenger banks are mainly online but also have physical presence due to which having higher operation cost and associated higher rate of services as compare to neo-bank offering but with complete banking services
3. Challenger banks are in direct competition with traditional physical bank as such banks are not required any sort of assistance from traditional physical bank

Open Banking

Open banking refers to the process of sharing financial data of customers by bank to third party application through APIs (Application Programming Interfaces) examples include personal finance apps. This process involves the permission of customers either in term and conditions segment or in form of small check box so from now onwards be careful and double check before blindly agreeing to all term and conditions.

Banking as a service (BaaS)

Banking as a service (BaaS)?is a model in which licensed banks integrate banking services into products and services offered by non-bank fintech companies. In the case of BaaS, licensed banks are selling services to non-banking based fintech companies including neo-banks

Banking as a Platform (BaaP)

Banking as a Platform (BaaP) is a model in which non-bank fintech companies integrate their innovative products and services into banking system of traditional licensed banks. In the case of BaaP, non-banking based fintech companies are selling services to traditional licensed banks

Rivalry, Traditional Banks | Neo-Banks | Challenger Banks

The ongoing thought cut competition among traditional banks, neo-banks and challenger banks on the mechanism of Banking as a Platform (BaaP), Open Banking (APIs) and Banking-as-a-service (BaaS) is increasing day by day, lets analyse strategies adopting by each segment one by one

Traditional Banks and Banking as a Platform (BaaP)

Traditional banks should have to adopt Banking as a Platform (BaaP) mechanism by purchasing the services of non-banking fintech companies to retain age old huge customers market share. Seems like as usual such traditional banks are lagging in race but its high time to lead the game and turn the tables as it is always better to strike while the iron is hot

Challenger Banks with Regulatory Compliance License

Challenger banks with regulatory compliance license are spreading wings for solo flight towards finishing line as such banks are not in need of any sort of assistance from traditional banks but the major bottleneck is capturing market share by acquiring existing customers (underbanked audience) of traditional banking system as well as attracting new customers (unbanked audience) through improve and innovative products and service. As operating cost of challenger banks is higher as compare to neo-bank therefore for business survival such banks should have following characteristics for rapid market share acquisition

1. Flawless Know Your Customer (KYC) / Customer Due Diligence?(CDD) process for smooth and agile account opening process
2. Offering Ubiquity to customers for global reach by applying interoperability so that customers of different Payment-Service Providers (PSPs) remain able to transact seamlessly
3. Focusing on open loop payment system?to attract new customers, can shift to close loop payment system gradually after capturing market share for customer retention
4. Good to support?multiple trade transaction includes domestic trade transaction, international?trade transaction and bulk trade transaction
5. Offering next level improve and innovative bundling features so that customers are willing to pay nominal fees as challenger banks have higher operating cost as compare to neo-banks due to physical presence and compliance with regulatory requirements

Ubiquity: The ability of a payer to reach any (or most) payees in their country, regardless of the provider affiliation of the receiving payee

Interoperability: Technical or legal compatibility that enables a system or mechanism to be used in conjunction with other systems or mechanisms.

Neo-Bank and Banking as a Service (BaaS)

Neo-Bank are not required to acquire banking license therefore need to adopt Banking as a Service (BaaS) mechanism by purchasing the banking services of traditional banks and remain focus on core competencies of discovering blue ocean market space by offering innovative financial services to make competition irrelevant by creating new demand in market

Fintech Saudi | Financial Sector Development Program (FSDP)

Covid-19 pandemic accelerates global wave of digitisation that directly impacting the banking and payment processing industries. In this regard, different countries promoting Fintech (Financial Technology) revolution by facilitating Startups, most prominent is Saudi fintech

95% of Saudi Arabia’s population used some form of digital banking (Source 益普索 )

The Saudi Vision 2030 has several programs under its umbrella, including the Financial Sector Development Program (FSDP)

In April 2018, Financial Sector Development Program (FSDP) launched Fintech Saudi in collaboration with Saudi Arabia Monetary Authority?(SAMA - Saudi Central Bank) and Capital Markets Authority (CMA) with the aim to promote fintech industry

Regulatory framework named as Sandbox was also established to facilitate local and international start-ups to test digital solutions in live and controlled environment before allowing to launch financial products in market

Currently, Saudi market have total 35 banks:

• 11 Local Traditional Banks
• 3 Local Digital Banks
• 21 Foreign Bank Branches

There are also 19 licensed Saudi fintech companies that provide payment services, consumer microfinance, and electronic insurance brokerage.

Local Saudi Digital Banks

Currently there are three local Saudi digital banks as follows

1. Saudi Telecom Company ( stc ) subsidiary named as stc pay that was initially launched as e-wallet business in 2018 further upgraded into a digital bank with paid-up capital of 666.7M $ on June 2021
2. Saudi Digital Bank Vision Bank (SDB) is the second local digital bank and holding of Abdulrahman Saad AlRashid & Sons Co. ARTAR with capital of 400M $
3. D360 Bank become third local digital bank on 15th Feb 2022 with capital of 440M $ backed by Derayah Financial and Public Investment Fund (PIF)

One and Only Neo-Bank in Pakistan

Fintech company SadaPay has awarded commercial license from State Bank of Pakistan (SBP) on April 2022 for delivering financing services as Electronic Money Institution (EMI)

Sadapay is founded by American serial entrepreneur Brandon Timinsky and currently operating as digital wallet in Pakistan paired with a MasterCard debit card with total funding of around 20M $

References

The Fintech 250: The most promising fintech companies of 2022

"https://www.cbinsights.com/research/report/top-fintech-startups-2022/"

FinTech Saudi Website

"https://fintechsaudi.com/resources/"

SadaPay Website

"https://sadapay.pk/"