Fintech: Neobanks – the State of Play in 2022
Neobanks are what traditional banks would be if they were created fresh in the 21st century. Usually without a bricks and mortar foundation, or anything as expensive as local branches and a central head office, they overcome this physical shortcoming by using highly developed technology and apps to deliver everything that most customers want from a bank (usually barring personal interaction with flesh-and-blood bankers) through tech solutions that can be accessed from computer screens, or more frequently from smartphone apps.
The thing to understand about that is that neobanking is not a one-nation phenomenon. They’re springing up all around the world, with some countries stealing a lead on others by the maturity of their neobanking infrastructure – and a pro-neobanking regulatory structure, too. So there is no single “state of play” for neobanks in 2022, there are national or continental states of play which will differ widely. It is possible to take a look at those broad states of play though, and amalgamate them into an idea of how neobanks as a whole are progressing and performing across the world.
It’s also worth saying before we dive deep into the national and international details that neobanks are a constantly evolving animal. Some continue as they started out, with limited banking licenses that (crucially for SMB and enterprise) don’t let customers use their deposits to generate profit, limiting the uses to which money in neobanks can be put. Others, having started out in limited ways, have applied for full banking licenses, which opens them to a much wider range of uses, without losing them their technology-driven USP.
So it’s fair to say that, despite an uneven international regulatory landscape, the fundamental state of play of neobanks in 2022 is: evolving, or in transition.
The US Picture of Neobanks
The thing about a phenomenon in evolutionary flux or transition is that the same data about it can be interpreted any number of ways.
Forbes for instance admits that the top 10 neobanks in the US had a particularly strong year in 2021, growing by a total of 10 million accounts, up to 33.5 million accounts in all. But it also warns of dangerous inabilities in the US neobank sector, with Dave (one of the top ten) claiming that it was hampered in its investment hopes in late 2021 by capital constraints. MoneyLion, another on the top ten list is currently burning through cash, leading to a growing sense of investor caution about its prospects of seeing out the next handful of years.
Varo Bank too could run into serious – and even potentially fatal cashflow issues by the end of 2022, because while neobanks don’t have a structured branch system, their relentless growth still necessitates a rising staff and marketing budget, which is growing to act as a drag anchor on some of the fastest-evolving neobanks in the sector. Even Chime, the leading neobank on the US market, has delayed its IPO due to a decline in the stock valuations of fintech in the first half of 2022.
So, despite positivity in 2021, there’s some doom-mongering going on about the US neobank scene in 2022. Whether the reality will see some of the first wave of top neobanks evolve or die, while the principle of neobanking evolves, with other players coming up to fill the gaps and avoid the pitfalls remains to be seen. Some, like Forbes, are already predicting “the end of the neobank era” as pushback from both traditional banks and megafintechs like Paypal and Square Cash put pressure on the neobank model that can’t do the hardcore traditional banking work like lending, profit-generating, etc.
Certainly, while neobanking is in a period of evolutionary change, the change in the US market feels particularly turbulent as we head into the second half of 2022 – keep an eye on those stock valuations to see which way the wind is blowing for the future of US neobanking.
Neobanks in Europe and the UK
It has become necessary to treat Europe and the UK as different entities thanks to Brexit, but in the neobanking sector, it would have made some sense in any case, because the UK has a disproportionate number of players in neobanking. The UK’s Open Banking Initiative has also actively encouraged the development of fintechs to challenge traditional banking culture and practices, allowing neobanks there a step up compared to some other nations.
Certainly, the complexities of an ongoing, rather than a finished Brexit, an inflationary spiral unlike anything witnessed for four decades and the after-effects of the Covid pandemic, which saw the UK go into lockdown after lockdown – promoting as much online activity as possible at the expense of bricks-and-mortar branch teams, might make the UK an uncertain investment prospect in many regards, but in neobanking, the island nation appears to be comparatively thriving.
Across continental northern Europe, there’s a similar – if generally less doom-laden – picture to the one you’ll fine in the US. There has been tremendous growth in neobanking since the beginning of the pandemic, both in terms of start-ups and account capture, but there are warnings of a coming pushback from big traditional banks, adding their own app-first services to an infrastructure that also does everything else that neobanks don’t do – mortgage lending, highly effective business banking, etc. There’s also that same concern that, having secured enormous initial account take-up, neobanks are struggling to translate accounts into revenue-streams.
So in continental Europe, there’s more optimism, but an awareness that securing accounts does not necessarily guarantee the viable future of neobanks. The UK, meanwhile, is busy with a bonfire of its historic banking vanities, and so may benefit from a broader growth of the neobanking ecosystem.
Neobanks in the Asia-Pacific Region
The APAC region is currently a lot more optimistic overall than many western nations about the development of neobanks over the next five years. Mordor Intelligence, for instance, sees a 6% growth in neobank take-up in the region between 2022 and 2027. It also forecasts that 63% of banking customers in the APAC region are likely to use neobanks as soon as 2025. That analysis highlights the tech-forward and early-adopter worldview of the region, but as yet does not account for the problems being hinted at in the West, such as the issue of turning initial take-up into ongoing monetization and revenue streams.
Neobanks in Canada
It’s also worth taking a look at the Canadian situation. Neobanking there has been slower to develop and evolve than in some other regions. But with the news in May 2022 that Neo Financial has raised a $185 m CAD fund and garnered a million accounts, as part of over $1 bn CAD raised in the last year by Canadian neobanks, it looks increasingly likely that there will be a shift in the banking regulations across Canada, in favor of the challenger banks.
Whether that will amount to anything like the UK’s Open Banking Initiative has yet to be seen, but Canada looks to be in an earlier phase of neobank development than the US or Northern Europe, bolstering its position for growth, rather than – as yet – stirring traditional banks into pushback.
Neobanks: A Picture In Trends
From all the available data, the state of play for neobanks in 2022 depends where you stand, and where in the rollercoaster wave of neobank development you are.
In the US and continental Europe, there’s some scope for continued development and evolution out of ‘starter mode’ for neobanks. The more traditional banking services they evolve to offer, without the trouble and expense of a local branch network, the more likely they are to evolve into a sustainable prospect – but there is currently a pushback from traditional banks brewing, and revenue-streams are proving increasingly hard to find.
In the APAC region, traditionally early and rapid adopters of the most tech-friendly approaches to life and its problems, there is manifest optimism for the ongoing growth of neobanks over the course of the next five years. That takes account of that tech-savvy element of the regional culture, but also does not actively anticipate difficulty with revenue streams or any push-back from traditional banks.
And in regions like the UK and Canada, it looks increasingly likely that changes in the banking regulations will help neobanks diversify more easily, with less push-back from the traditional banking sector. The key problem of developing revenue streams from the neobank model remains, but the more services the neobanks find themselves enpowered to offer, the more likely they are to thrive.
30 September 2022
29 September 2022