Neo and Challenger Banks Look to Extend Portfolios of Value-Added Services.

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By Sam Gazeley | 2Q 2021 | IN-6176

Neobanks are poised to revolutionize the world of banking.

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Neobanks Set Focus on Customer Concerns and Outflanking Incumbents


Neobanks have cemented themselves as the banking sectors first-movers, leveraging the latest technology offerings and pioneering new customer experience benchmarks. By running on completely digitized operations and contemporary business models, they succeed in the key factor of having a clear focus on solving customer pain points and addressing user experience related worries.

Revolut is a prime example of this. The UK-based neobank has consistently set the benchmark for digital consumer banking players and forges alliances with various providers to speed up time to market and to maintain the focus on the core value proposition. Most neo and challenger banks are driving segmentation in the market by initially setting a priority on providing customers with one product or service, and then outperforming traditional brick and mortar banks on customer service and product offerings to bring their service to market, with Revolut in particular having done this in the market of international transfers. The traditional brick and mortar banks have, so far, been relatively unconcerned about new entrants into the market, satisfied that they can complete with their size or range of products. However, especially during current times with the COVID-19 pandemic, the flexibility and agility of neo and challenger banks is drawing no small amount of attention both from unbanked populations and the customer base of the incumbents, who face losing out on securing the interests of an increasingly tech-savvy populace.

Value-Added Services: The Key to Securing the Future?


Through of a number of services and offerings, neo and challenger banks are drawing the focus of traditional banking customers towards their more agile business models and leveraging their digitized and operationally cheaper infrastructure to pass on operating expense savings to the end-user:

  1. Crypto Exchange—2020 saw the rising trend of crypto challengers and neobanks emerging. While cryptocurrency has previously been viewed in opposition to the traditional banking market due to its decentralization aspect, even the traditional banking sector is beginning to look at crypto as an area in which to challenge the fintech market. Crypto-first neo and challenger banks are also becoming more prominent, as Ziglu launched in 2020 in the UK with the core focus to provide a seamless way for consumers to purchase and trade in cryptocurrencies. Also in the European space, in Germany, the crypto banking app spot9 has introduced no small amount of innovation to Germany’s crypto market, going beyond standard crypto purchasing by introducing compliant crypto ATMs and offering a white label solution in partnership with Sutor Bank. Aside from traditional banks and crypto-first entrants, myriads of other neo/challenger banks are offering crypto exchange services as part of their banking package, such as Revolut in the UK.
  2. Commodity Trading—As the banking sector furthers its understanding of the transformative technologies of the aforementioned AI and blockchain, which have become vital to providing services such as fraud exposure and trading analytics, challenger banks have begun introducing a wave of commodity trading as part of their offerings. As complex trading systems having always been in operation when defining a commodity’s value and worth against other commodities like gold or currency, it stands to reason that improving information exchange and the ability to analyse market variances can be vital when developing trading strategies.
  3. Currency Exchange—One of the strongest areas for fintechs, including neo and challenger banks, is the foreign exchange (Forex) and international payments market. The traditional banking sector has experienced a long and lucrative history in Forex, providing a very profitable line of business for the banks. Now, however, transactions can now be channelled through specialist Forex brokers at a significantly reduced cost to the end-user. For a considerable number of years, traditional brick and mortar banks have been able to generate high margins on their Forex business primarily as there was a lack of transparency in the market, enabling banks to disguise transaction charges within the currency exchange rate and pass these on to the consumer. Now, neo and challenger banks are now fully involved in the Forex market, having changed the payment system by moving it away from the percentage free model and offering international payments with no mark-up, instead charging a fixed monthly cost for business accounts.

Can Neo/Challenger Banks Sustain their Margins?


Reaching the point of profitability is by far the most significant challenge for start-up neobanks, and this has resulted in myriad approaches to get there. The majority of neo and challenger banks generate revenue through card transaction fees, but the issue is the inevitable reliance on the caprice of their customers' spending habits, which limits neobank revenue if their customers don't regularly use the card, something which is more of a risk if the neobanks account is a secondary to a customer’s primary traditional high-street bank account. As a result, they are pivoting towards earning that primary account status among consumers in order to bolster profit margins and cover increasing overheads, with a number of strategies emerging.

Some neobanks operate a "freemium" pricing strategy, offering their product for free but charging for additional features, while others, like N26 and Revolut, offering multitier subscriptions with levels of premium accounts. Offering tiered and premium accounts while simultaneously expanding geographically could allow neobanks to increase profitability by not only expanding their user bases, but getting more value out of their existing customers by upselling them to premium accounts. ABI Research believes this model is the one that, to date at least, has seen the most success.