Neobanks have been the market’s darlings over the last several years. The number of these institutions around the world is approaching 300. According to the Exton Country Neobanking Index, Europe leads the innovation trend, being a home for three of the ve most developed markets: the UK as a neobanking center, followed by Sweden and France. In Europe alone, more than 50 million users have opened a non-banking account, i.e. joined some ntech startup service.
In the meantime, other countries are quickly catching up. Regions worth noting here are South Korea and Brazil, and surprisingly far away from the top stands the United States. China, given its unique development, is difficult to compare with other markets: stand-alone solutions are not too popular there with the majority of users ow going into financial super applications.
But the main problem of all neobanks as a group is the lack of portability. This is typical for startups yet in this particular industry profitability and capital sufficiency play a key role in terms of business sustainability. Many neo players rely heavily on exchange fees and are vulnerable to rising credit defaults, and that is why more than 30 neobanks have been liquidated since 2015, not only as a result of being wiped out by their competition but some failed to maintain operation. And this number is likely to grow further. The pandemic will take its toll: generally, it increases the demand for all online services, however, implication can be different.
In their quest to monetize customer relationships, neobanks seem to have learned the first lesson: fees for payment transactions, fees for signing up for a premium account, or open bank fees from third-party brokerage companies will in most cases be insufficient to generate profits or go beyond operating breakeven. This is similar to any new business that is actively acquiring a new client base expecting to monetize on bolt-on product sales later.
Just like in any other sector, neobanks need to offer new products that will help them achieve significant portability. The first option is the transition to digital lending (or, in the case of P2P lending services, adding complementary transaction services). The second is transforming the product beyond financial services by developing a super application that often comes costly. The third possible path to the profitability of neobanks is to provide investment services in a wealthy mass market.
In fact, it is not so important which path the neobanks take. The main thing is to achieve profitability in the shortest possible time. Alternatively, these businesses can keep on rising venture funding and expanding globally, as we have seen dozens of cases like that in social networks, housing, messaging, and many other industries.