Neobanks and the race against time

Imagine a bank with no physical branches, no long lines, and no paperwork. That’s what digital-first Neobanks offer: convenience, flexibility, and speed.

These fintech companies deliver all their services through online channels, apps, and websites. They offer fewer products and services than traditional banks, but they aim to disrupt the brick-and-mortar model.

The Challenge

However, digital-first banks face a major challenge: their?business model. Without in-person customer service, they’re unable to extend services like mortgages, auto loans, and banking charters to lend to companies and make a profit. Lending is the banking industry’s best business model and how they make most of their money. And for more affluent customers, traditional banks are still the go-to. Plus, money may not be?FDIC-insured, and regulation raises the bar for everyone.

The Opportunity

Despite these challenges, the disruption of digital-first banks also opened up a world of opportunities to save on the costs and other fees of traditional banking, provide personalized and sophisticated services to customers, expand and scale services to the underbanked populations, provide quick processing time with services fully online, and offer?24/7?banking without having to visit a physical branch while pushing innovative technologies, including Machine Learning, AI, blockchain, and sophisticated APIs.

One of the most successful digital-first banks out there is UK-based Starling Bank. Starling Bank is a fully licensed and regulated bank built to give people a fairer, smarter, and more human alternative to the banks of the past. It offers personal, business, joint, euro, and dollar current accounts alongside a children’s card. Starling also provides a Software-as-a-Service (SaaS) proposition through its subsidiary Engine, using the proprietary technology platform that it uses to power its own bank.

Key financial figures for Starling Bank’s growth from?2018?to?2022?can be found?here.

Lending is the banking industry’s best business model and how they make most of their money. And for more affluent customers, traditional banks are still the go-to.

Despite these challenges, digital-first banks and their financial backers believe there’s a path to long-term profitability.

Perspectives

From a?revenue perspective, there are multiple revenue channels. The first, and biggest one, is interchange fees from card usage. As they offer premium services like debit cards with loyalty programs and increase the depth of their product portfolios, we should start seeing more investment-related products and loans which will expand their revenue streams and increase profitability. For Neobanks without bank charters, offering referrals to larger financial institutions for fees is another option to explore. This can help them move into higher-value services and generate revenue. Last but not least, Neobanks can use customer data to offer personalized products and services, targeted advertising, and data analytics to other businesses.

From a?customer’s perspective, a digital-first bank might amount to nothing more than an app you use to manage your money and make decisions. If you’re comfortable with technology, digital-first bank accounts are easy to set up, without any physical paperwork. However, it’s important to note that, unlike traditional online banks, digital-first banks aren’t chartered or FDIC insured unless they have partnered with a chartered bank.

Neobanks can use customer data to offer personalized products and services, targeted advertising, and data analytics to other businesses

In conclusion, digital-first banks will continue to evolve. And although successful Neobanks like Starling Bank have proven to be successful, it is a race against time, and they have a long way to go. They might offer convenience and flexibility, but they need to overcome their business model challenges to be profitable. However, with Starling Bank’s success and proven track record, it’s also difficult to ignore the mindset shift from?traditional banking?to?digital banking.

Getting there will require them to maintain their agility and innovation velocity while aggressively going after new customers. They will be challenged to adapt to or endorse the regulatory framework of different international markets, which is fairly complex. As they continue to innovate and push the boundaries of banking, customers need to beware of their limitations and potential risks.