Big neobanks such as Chime, SoFi, and N26 are now well-established players among the financial services industry.
The growth of neobanking is massive, driven by demand for digitalisation in the industry. For instance, Monzo has over 8 million customers in the UK, while Revolut boasts more than 35 million users across Europe and the US. Nubank, based in Brazil, has over 70 million customers, making it one of the largest neobanks globally.
The market size of neobanks is projected to reach $836.11 billion in 2028 at a compound annual growth rate (CAGR) of 47.5 percent. Experts believe that the growth is supported by open banking initiatives, embedded finance, and diversification of offerings.
As neobanks continues to grow, traditional banks have responded by launching new subsidiaries. HSBC, for example, launched its retail bank division First Direct, while Scotia Bank released the online-only direct bank Tangerine.
The competition between both revolves around offering the best customer experiences. Let’s explore the differences in their offerings.
Service offerings
While traditional banks offer common financial products, neobanks often focus on niche markets. For example, traditional banking takes care of customers’ loans, mortgages, and investment. Meanwhile, neobanks tackle the need for budgeting tools, cross-border transfers, foreign currency exchanges, and other traditionally overlooked services.
In terms of accessibility, the extensive reach of traditional banks allows for both digital and physical services. ATMs and branch offices are available in physical locations for easy access.
However, some of their digital services may not be on par with neobank’s seamless services. Traditional banks like Bank of America, for example, have numerous branches and ATMs, but their mobile app ratings often fall short compared to neobanks like Chime or Varo.
Designed for digital natives, neobanks’ user experiences are fully online. While the lack of physical branches may be a drawback for those requiring complex assistance, their platforms are rich in features that make for a user-friendly experience.
Another significant difference lies in the cost and operational fee. Most traditional banks enforce higher fees and interest, partly driven by the costs associated with maintaining infrastructure. They also require customers to deposit minimum balances to open an account.
Neobanking revolution
Neobanks are typically less fussy about fees and requirements. As part of their promotion strategies, they often offer no-fee accounts with no minimum balance. The absence of physical branches also allows them to reduce costs and lower interest rates, which is attractive for SMEs and gig economy workers.
Under the pressure of the competition, more traditional banks are experimenting with digital technologies. However, their innovation pace can be slower due to inherited systems and regulatory issues.
JPMorgan Chase, for instance, has been investing in its digital platform, Chase Mobile, but the process is slower compared to the agile development cycles of neobanks like Starling Bank.
Compared to that, neobanks have more freedom in formulating their offerings. These banks often dabble in integrating technologies such as artificial intelligence, machine learning, and blockchain networks into their services. Neobanks like Oxygen and Upgrade provide personalised financial advice and credit-building tools with their AI tools.
Conclusion
While it seems like neobanks are winning in some aspects, many are lagging when it comes to profitability. Older, more established institutions have the edge in winning the hearts of customers at large. Neobanks like Monzo have struggled to turn a profit, whereas traditional banks continue to generate stable revenues.
According to American business intelligence company Morning Consult, 66 percent of users remain reliant on traditional banks, while only 47 percent trust neobanks. For neobanks to gain a competitive edge, they will need to capture a larger share of the market.
Still, the future is promising for both neobanks and traditional banks. As the demographic shifts, so do customer preferences towards different kinds of banking services. Staying competitive means reading into evolving market demands, such as the need for green and ethical financial products, and answering them.
Going forward, it will be important for banks to leverage emerging technologies such as LLMs and AI. Those who successfully adapt to these technological advancements will be able to offer products and services that the market needs.
- Neobanking
