It's Time for Neobanks to Expand Beyond Deposit Products

Neobanks have seen an explosive demand for their products in the last several years. The growth has been nothing short of exceptional, and the numbers say it all.

Venture capital and private equity investments in neobanks have reached $10 billion since 2018. There are now 188 million users worldwide (and counting), and a global total addressable market of $67 billion that is estimated to expand at a 53% compound annual growth rate through 2030. 

The positives have been extraordinary for consumers. Account fees and overdraft fees have been all but wiped out. There has been a substantial decrease in the number of people who are unbanked, and financial management apps work around the clock 24/7. But there’s one area that needs some work: credit.

Incumbent banks are still the dominant force in the banking industry, managing more than $10 trillion in assets at the start of 2022, according to Insider Intelligence. Many digital-only financial services providers have chosen to focus on a narrow product base for a specialized niche. For some, this is where work needs to be done to improve their value proposition, not just for direct customers, but for all stakeholders.

The Current Neobank Model

With reference to the number of companies that have entered neobanking, the competition is fierce. Everyone’s fighting for a slice of the multibillion-dollar pie, but in the process, profitability is being left by the wayside — a minuscule 5% of neobanks have actually been profitable to date.

Now, this is understandable, given that hypergrowth investments and marketing costs associated with customer acquisition are in focus. But once you’ve landed new customers on your platform, the monetization loop needs to get going, quickly.

Certain limitations apply, though. Neobanks, for the most part, deal with two core products:

  1. Deposit accounts
  2. Card-based payments

Of course, there’s nothing wrong with this. Interchange fees — the money that card issuers earn on payments — are a great way to add to your top line. The real battle for neobanks is the lack of diversification within this model. 

Many have become over-reliant on this revenue stream, bringing long-term sustainability into question, especially when those around you are innovating by adding new products, offering new benefits, or attaining national bank charters.

Why Interchange May Not Be Sustainable for Neobanks

Credit and debit interchange fees are all well and good, but they don’t make a noticeable impact on your platform unless you have scaled dramatically. It looks like the situation could worsen from here, too. 

Visa and Mastercard effectively operate a duopoly when it comes to global payment networks. During the pandemic, these two kingpins held off on interchange rate hikes. But with lockdowns in the rearview mirror, Visa and Mastercard upped their take in the first half of this year. As the take-home percentage rate for neobanks dwindles, revenues could take a heavy hit. 

Tumbling global markets are only adding to the pain. Energy crises, currency fluctuations, valuation reversals, civil unrest, and a looming recession aren’t helping to calm the waters, either. The combination of consumers tightening their purse strings and payment networks hiking their debit interchange fees doesn’t spell good news for those that are claiming 90% (or more, in some cases) of their revenue from transactions. 

Without complementary financial products and services, customer retention and churn worries begin to creep in — hence the importance of creating a diversified business with multiple revenue streams. By moving beyond a few signature features, neobanks can work toward higher-margin products that allow them to succeed in all market conditions.

Why Neobanks Should Dip Their Toes Into Credit Products

Why does credit offer opportunities for neobanks? Well, credit products are a multitrillion-dollar industry internationally. However, as one of the most profitable categories in the banking sector, credit is still dominated by the leading incumbent banks. Without a strategic move toward credit and lending products, many neobanks will have a difficult time gaining market share.

There may be hundreds of millions of consumers currently using neobanks or digital-only banking, but the industry still needs to mature in this sense. According to research conducted by Galileo Financial Technologies, only 21% of adults consider these apps to be their primary banking account. That’s where it needs to change, though some have already taken the leap.

It’s not a coincidence that the neobanks that command the highest valuations worldwide have a suite of financial products, not just one or two services. Nubank in Latin America, Revolut in Europe, and Chime in the U.S. come to mind. Other neobanks will need to follow suit in order to remain competitive in such a saturated market.

What Is the Impact of Moving Into Credit and Lending Products for Neobanks?

The main impact of offering credit and lending products to your customers is a mindset shift. Right now, your customers might look at your app icon on their mobile devices and think of it only as their “early-paycheck app” or “split-the-bill app.” Building out credit and lending services helps you move beyond payments into credit cards; loans; buy-now, pay-later financing; bill management; and much more. 

The more involved a neobank is in the financial lives of its customers, the more likely it is that they start seeing it as their primary banking app. Without a full banking suite, customers will look into your competitors, which means already-acquired customers can fall out of your ecosystem.

We’ve entered an important stage, at which millennials and Gen Z are increasingly turning to neobanks and digital finance technologies. The new customer experience demands a financial super app that permeates users’ financial lives, and this is what will create long-term value for each customer you gain. 

At no sacrifice to your company’s core values and mission, you can increase your competitiveness in the market and hang on to a growing customer base. In fact, you’ll have the chance to target brand-new audiences, too.

Ready to Get Into Credit?

The easiest way for neobanks to thrive is by getting into credit. Credit can be complex to enter, from gathering the data needed to make decisions to understanding how to bring a credit product to market that meets your customers' needs. It doesn't happen overnight, but the industry needs to shift in this direction. Bloom Credit is here to answer any questions and help you navigate the waters.

 

References

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