Why neobanks remain optimistic about their future

Since the 2008 financial crisis, banks have been experiencing the perfect storm of regulatory pressure and technological breakthroughs. Governments increased competition in the sector to tackle risky practices while apps improved user experience and enabled the introduction of open banking, which allows third party providers to access customers’ data in order to provide a range of financial services. 

One of the fintechs to emerge through this were neobanks - which are digital only banks that provide banking services online without needing to have physical branches. The theory is that through savings on staffing and building costs, they’re able to pass on better terms to customers. 

What they have going for them are essentially two features. One, ease of access for customers through quicker onboarding and KYC process. Two, they offer “basic banking, payments, and credit” to underserved sections of the population, including lower-income households, “small businesses, gig workers and rural customers.”

Neobanks boomed during the pandemic. Everyone was stuck at home and saw the point of banking purely online. It made perfect sense to deal with new players who moved into the credit space once you lost contact with traditional banks anyway.   

The outlook for neobanks is quite promising: its global market was valued at USD $18.6 billion in 2020 and is expected to reach USD $333.4 billion by 2026. This has not been without its effects on traditional banks, which have had to close, in Australia for instance, many branches and ATMs partly in response to increasing reliance on digital services.

There have been striking Neobank success stories across the world, such as NuBank in Latin America and Revolut in the UK. 

Nubank started in 2013; it first gave free credit cards, then took deposits from customers, moved into personal loans, insurance, and small business banking. It now has over 100 million customers in Brazil, representing 57% of the country’s population. It turned in $2 billion in profit in 2024, has a market value of $56 billion and is close to being Latin America’s biggest bank. 

Revolut is another high-profile neobank in the UK which offers features like “multi-currency accounts, commission-free stock trading, and cryptocurrency exchange” and now has 50 million customers, a $45 billion valuation, and reported a pre-tax profit of £438 million in 2023. 

Neobanks attract interest from tech-savvy and often younger customers but the sector faces several challenges, prompting questions about their viability in the future. 

A major concern is about their profitability over the long-term. Neobanks depend on interchange fees, which is often their primary source of revenue, and analysts argue that that may not be enough. A consultancy firm reported in 2022 that only two out of 25 advanced-stage Neobanks “reached operational breakeven; it also calculated “that less than 5 percent of the world’s 400 Neobanks” were profitable at the time. 

Customer loyalty to traditional banks is a constant constraining factor on potential growth. 

Smaller neobanks are unable to offer mortgages or offer higher rates in an already tough interest rate climate. Digital banks like Nubank which have focused on growing the customer base and have a greater appetite for risk are now facing the burden of non-perfoming loans (NPLs) on their books. 

Meanwhile, traditional banks are either improving their digital offer, getting “really good at client opening and account openings and transfers, user interface, transactions and basic budgeting tools,” as an senior executive puts it - or are launching neobanks of their own or acquiring them where they can.

Another source of competition to neobanks is expected to be non-financial brands since consumers express a strong interest in product categories “like gaming, electronics, home fitness, fashion, pharmacy, home improvement, automotive, and general retail” – and may in the future prefer to get financial services from such firms. 

Neobanks remain optimistic, notwithstanding these reasons. One such is Debut in New Zealand which focuses on underserved sections like Maori, rural users and seniors. Debut has a mobile app and is seeking to be a registered bank. It attempts to expand its customer base through marketing, word of mouth and outreach to communities and currently partners with a registered bank and Mastercard to offer savings, payment services, and debit cards. 

Co-founder Sulabh Sharma reckons that there is scope for digital banks to grow because trust in traditional banks is at an all-time low; “people are looking for options, they are fed-up with sub-optimal experiences.” Traditional banks are structured to be driven by shareholder returns; they are, he argues, in a position to let go of some revenue streams to generate more value for customers but that is not currently happening owing to lack of competition. “That’s why New Zealanders end up paying more for services which are cheaper in other countries” – the fact that a nation of five million is among the most profitable in the banking sector of OECD countries is staggering, in his view.   

Sharma recognises the limitations of interchange fee as a revenue stream and is thus focusing on banking and lending products to be sustainable. 

Counterintuitively, he says that an app’s features are not what will determine success in this space. “It’s the best intention for the customer, and what the execution looks like, listening to customers and solving their problems… if we compare the four big bank apps today they look exactly the same, their products look exactly the same; it’s not the features but who creates more value for the customer that will make the difference,” he reckons. 

Debut’s success will depend on simplifying complex financial products for customers, he says; Sharma is conscious that his bank cannot be all things to all people, it would have to decide what it is best at and stick with it, whilst collaborating with other participants where necessary. 

Many have written off neobanks but they are likely to remain in the market, regardless of whether they are independent entities or owned by traditional banks. For one, the underserved market remains huge. In 2021, around 50 percent of the population in Latin America was unbanked, while credit card penetration was 21 percent. In theory, neobanks may be useful as vehicles for traditional banks to offer services to the ‘precariat’ in times of economic uncertainty. More broadly, youth as a segment will be drawn to neobanks as a form of banking, especially given the amount of time they spend online. 

Sharma is confident that neobanks will thrive and expects that one or two players will emerge as clear leaders in New Zealand over the next two to five years. They can, in his view, garner up to 15 percent of the market share over the next decade.

Market trends seem to affirm such optimism. Revolut recently announced that it was seeking a banking license in New Zealand, after starting operations in 2023.

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