Neobanks first emerged about a decade ago. As of 2014 there were only eight neobanks aiming to disrupt traditional banking by providing digital-only customer experiences, aimed largely at digital natives, according to the Simon-Kucher neobank database.
Fast forward to 2022 and not only has the number of neobanks exploded, but so has the number and range of clients they serve. By our count, there are now more than 400 neobanks globally serving an estimated 1 billion client accounts. One in every five of them operate in the U.S., and together they serve more than 100 million active accounts. These numbers highlight the growing maturity of the market here despite a slower start compared to Europe.
As competition intensifies, we expect a wave of innovation in the years ahead. As of today, most of the larger players in the U.S. still focus on traditional banking products, but we expect them to start adding super-app components or creating ecosystems with both financial and value-added services to attract commercial clientele.
Competition and profitability challenges will also lead to more consolidation. Within the next few years, we predict the emergence of three to five “super-neobanks” in the U.S. with broader product sets and larger client bases.
Brazil-based Nubank can serve as a benchmark in terms of how big of a client base to expect. It has transformed itself into a full-service bank with a customer base of nearly 60 million accounts. Nubank has raised almost $4 billion in funding and late last year its shares debuted on the New York Stock Exchange.
What does this seeming unstoppable rise of neobanks mean for incumbent banks, and how should they respond?
Incumbent banks not only need a digital strategy, they need a digital bank strategy. We see three potential paths for them to take, the first being a purely defensive posture that learns from the disruptors and adapts their best ideas. Another option is to acquire a neobank to quickly establish a presence in the digital space. The third approach is to build a digital-only bank from scratch. We call those digital-only offshoots “speedboats,” reflecting their enhanced agility.
Speedboats can be used to reach niche customer segments, to expand internationally or to serve broadly as a vehicle of digital transformation to disrupt the legacy bank and accelerate the shift to a more modern institution with digital capabilities.
Regardless of a bank’s decision to buy or grow their own, the balance between ensuring profitability and scale is crucial. The next winners in neobanking will not be the ones with the most customers. Rather, future neobank stars will be the ones that can grow profitably and innovate effectively. This requires a mindset change where the organization’s focus is as much on monetization as it is on growth.
This demands a disciplined approach guided by certain best practices throughout the lifecycle of the venture, as encompassed in three major phases.
Success starts before the launch, where an ambitious yet realistic business case must be created. Digital banks aiming for break-even after seven years are already doomed for failure in our view, as we question the scale-focused strategy in an increasingly crowded market. Identifying pain points where customers have a high willingness to pay for solutions is key. Otherwise, banks might succeed at onboarding customers (often at high cost) but struggle to make money.
By the age of four (preferably sooner), a digital-only bank must mature beyond delivering a great user interface and an ingenious product. It must be able to expand its product line, identify profitable pockets within emerging product trends, and find ways to capitalize on opportunities quickly and efficiently. This is the phase where the bank must focus on ways to expand its customer base with minimal acquisition costs.
As the digital venture moves into its fifth year, it should have attained a scale minimum, often defined by digital-only banks as at least 1 million active customers. At this point, neobanks need to shift gears to balance growth with monetizing existing customer relationships.
Successful neobanks design holistic free-to-fee strategies, introduce loyalty programs, initiate cross-selling campaigns and rethink product bundling. In addition to deepening customer relationships, the bank must also expand its partnerships and business ecosystems to fortify its leadership position in the marketplace. Managing these well is the key to success.
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