Neobanks are finding favor in a fast-growing financial services sector that attracted record investments in the last 5 years – so much so that at some stage, they could lose their challenger status and become the primary banks of choice in the future.
The pace of the transformation in the financial services industry over recent years has been facilitated by two dynamics: growing customer preferences for digital banking and personal finance solutions and a regulatory environment that has supported and opened the industry up to non-financial companies and entrepreneurs.
Many have been inspired by the success stories surrounding Nubank, Revolut, Chime, and other newcomers who want to replicate them. Nubank, for instance, managed to attract more users than Bank of America in less than a decade until the banking giant managed to catch up with it in early 2021. Revolut became the highest valued fintech in the UK in 2021, and Chime is proving exceptionally popular among the Millennials and, increasingly, the Gen Xers
At Velmie, we have been helping customers launch digital banking solutions, such as neobanks, payment apps, and wallets, for 7 years. In our experience, there are three steps you need to work through to ensure the success of your neobank in an increasingly competitive market. These are:
Neobanks are no different from any other successful business in that they have achieved that success by having a clear vision and value proposition and working towards these.
However, in the excitement of developing ground-breaking solutions, entrepreneurs can be tempted to focus too much on the features and technology rather than defining the specific problem they plan to solve for their customers and how they can go about doing that.
Replicating features is the easy part, but if you don’t define your purpose, you won’t be able to differentiate your proposition from others and develop the right go-to-market strategy. Neobanks that have achieved the most success to date have a clear vision of what their targeted customer base has needed and then developed the unique services that fulfilled these.
Looking at Revolut and Chime apps, you’ll find many similarities in their functionalities and products. But if you look deeper into their communications and strategy, you’ll see that they are very different players addressing the needs of different markets. Revolut made its mark offering fee-free foreign exchange services while Chime gives customers access to a fee-free overdraft product and a card that helps customers build a credit history.
Another example is Robinhood versus Webull, both companies seem to be targeting the same audience, but there are significant differences. Robinhood aims to provide a streamlined experience to inexperienced investors, while Webull is mainly focused on creating a more sophisticated investor community that ventures into decentralized finance.
Some consider super-app neobank solutions, with all the bells and whistles, to answer all the possible problems customers are experiencing. This is specifically the case in the emerging markets where the demand is high, but there’s no real segmentation between different customer bases and the financial solutions they need yet.
Super-apps do have a place in some market segments, but the companies that develop these run the risk of coming across as having a lack of vision and failing to understand the customer problems that most need solving.
The fintech companies that cater to specific niche client bases and offer unique services and a hyper-personalized customer experience that traditional banks do not provide have achieved the greatest success to date.
2. Partners and Vendors
Today, entrepreneurs building neobanks have the advantage of selecting from an increasingly wide array of partners and vendors. From partnering with a sponsor bank that has the banking license that enables you to offer credit facilities through to Know Your Client (KYC) vendors that you can plug into your core technology platform via an API, you have all the tools you need to develop a ground-breaking financial service offering that is flexible, scalable, and unique.
For many newly established fintech companies, partnering with a sponsor bank means you don’t have to deal with the stringent regulatory obligations that accompany any business operating in the financial services space. Otherwise, you would have to apply for a banking license if you intend to offer credit facilities, and that is a long and arduous process. Neobanks like Monzo, Chime, Robinhood, and soon Revolut have opted to partner with a bank so that they can remain focused on building the products and experiences that will differentiate them and rely on the sponsor bank to do what they do best.
An endless list of other vendors can bolster your go-to-market proposition, enhance your customer service, or streamline your operations. These include KYC/AML services, foreign exchange, and cross-border payments, card issuers and liquidity brokers, and many more.
The ever-evolving fintech landscape means that partners you have now may not be the partners you have in the future. New technologies may emerge that are needed at different stages of your product lifecycle. Thus, your software solution needs to be vendor-agnostic so that you can switch between different APIs as and when needed.
It is also essential for companies to build or acquire their own back-end technology and not to rely on a BaaS solution in full. With a modular, microservices-based core technology platform, you achieve the flexibility you will need to respond to shifts in customer preferences and needs over time.
3. Team & Technology
Neobanks are, in essence, software businesses, and if they can leave the “financial” tasks and regulatory requirements to the sponsor banks with whom they collaborate, they can put their focus on the “tech” driving the banking proposition.
Only a small percentage of fintech companies develop their products from scratch by building their own software technology because of the time to market and costs associated with this development model.
Such an approach would take a team of more than 20 people and three years to get to the market with the first version of a custom-built fintech product. The total cost to build would start at USD 10 million, excluding hiring and employee retention costs.
Banking as a Service (BaaS) and white label solution providers solve these problems because they require little capital expenditure, considerably reduce the time to market, and give you access to technical expertise without having to invest in a costly team.
Going this route means you get access to prebuilt software solutions, including a banking back-end system, APIs, and, if needed, a front-end solution. Thus, businesses don’t have to reinvent the wheel by building the system themselves and can instead rent it from companies that offer these services. Most of the popular neobanks began this way, choosing to focus on their unique mission and value proposition rather than struggling to build their own core banking technology.
However, there are various factors you need to consider when deciding whether a BaaS solution is the way to go. Many companies that sell BaaS solutions offer to launch your neobank in a matter of days or weeks, charging only a small upfront investment of, say, a couple of thousand dollars. However, ongoing transaction costs and software license fees are often higher than the alternatives, and you find you are stuck with a system that is not flexible or competitive, hampering your ability to come up with attractive offerings for your clients.
The alternative is to opt for a cost-effective modular system that gives you greater flexibility. You can customize and configure the modules to suit your own needs – and adapt and adjust this over time as your neobank grows and expands its functionalities.
Neobanks are low-margin businesses needing massive scale to become profitable. Effective customer acquisition strategies will require a lot of agility from you and your software vendor.
In summary, when choosing a tech solution for neobank, you should consider the following essentials before deciding.
Agile and modular. It’s not only the software that should be agile and modular, but your technology partner should also address challenges by remaining flexible and having access to the necessary resources to help you grow as a business.
Vendor agnostic. Being able to replace or connect more service providers to a product is crucial for growth and scale, and thus you should avoid becoming tied to a single vendor’s system.
Synergy. Both companies should share the same vision and roadmap for the business and work well together to combine their different strengths to create a fintech solution that is head and shoulders above the rest.