The term 'neobanking' is gaining increasing attention in the media – but what is a neobank?
The deregulation element of PSD2 means new fully digital players can emerge, offering everything from savings and loans to insurance and credit. These players are all very different, so we'd argue that the term 'neobank' doesn't do enough to describe the organisations in the challenger-banking sphere.
In the myriad of emerging players, it can be difficult to identify the different segments. This isn't surprising, because the challenger banking market a way off maturity. Here, we provide some guidelines to the unstructured landscape.
Challenger banks can be characterized in various ways. To understand how challenger banks differ from traditional banks, it may be useful to look at how they relate to a pillar of traditional banking: the right to offer banking services. All traditional banks have their own bank license, but one way to group challenger banks is based on how they acquire the right to operate.
These banks apply for a full banking license, and so can compete independently and on equal terms with traditional banks.
Examples: MYBank, N26, Atom, Starling bank, Monzo
These are greenfield subsidiaries of existing banks, or joint ventures where existing banks are central owners. Beta banks get the right to offer bank services through the existing bank's license. If the beta bank's purpose is to allow the mother bank to expand across country borders, betabanks may also leverage partner banks' licenses in the target market. Because beta banks are often set up as lightweight entrants to new markets, the services they offer may initially be limited – but the strategy may be to expand by offering more services as they gain foothold.
Examples: Sberbank direct, Baidu Bank (China's largest search engine in alliance with Citibank China), Simple (BBVA)
Neobanks These are neobanks in the true sense of the word: they don't have their own bank license, but use partners to offer bank-licensed services. Apps that facilitate the administration of accounts and credit cards are typical neobanks – they rely on customers having an account with an underlying bank with a corresponding bank license, but offer a user- friendly interface. The extent to which customers are aware of the underlying bank relationship day to day may vary.
Examples: Yolt (ING's newly launch in the UK retail banking market), Lunarway, Webank (Tencent, the company behind China's most popular social media platform WeChat), Moven
Non-banks Perhaps the most exciting category of challenger banks: these are players who don't have a connection to traditional banking licenses, but meet the conditions necessary to provide financial services in other non-traditional ways. An example of this is Monese, which bases its offering on an e-money license. Non-banks are Fintech start-ups that operate independently of existing banks, and can largely disrupt traditional banking.
Consumers want to carry out their financial tasks in a simple and seamless way. When confidence in technology increases, the traditional banks that keep focusing on owning the customers rather than solving customer problems will lose the race against players who manage to offer good user experiences – with or without bank license.
The functionalities banks offer vary both internally and across the various categories we've described, and may also vary over time. The Norwegian peer- to-peer payments market is an example of this, where the battle for supremacy is arguably cooling down. As the countries' largest bank coalitions accumulate behind the common platform VIPPS, more functionalities will likely be added to the platform. Meanwhile, neobanks like Lunarway, Yolt and Moven are expected to launch their solutions for cross-account spend analyses and tracking in the same market. Which players will win the market remains to be seen.
In addition to this, we see the emergence of actors offering niche services that traditionally may not have been regarded as core banking services, like peer-to-peer loans. Other examples include account services for immigrants, facilitated through new onboarding procedures not based on traditional ID documentation. With initial narrow targeting, such players could expand by adding more functionality and services over time.