Why are neobanks popular?

why choose a neobank

Why do people choose a neobank instead of the digital services offered by a traditional bank? Mainly for two reasons:

  • better level of services and customer experience on digital channels, especially mobile;
  • lower costs.

It is true incumbent banks already have many customers, a solid funding structure and a trusted brand. But traditional banks are also limited by their legacy IT systems, that slow down the development of new services and innovative user experiences.

On the opposite, neobanks natively digital IT infrastructure allows them to quickly launch new features and provide great digital services to their customers. But only a few neobanks are profitable. New and incumbent players are already collaborating in many markets, offering Fintech services to traditional banks’ customers.

In the next years, a season of consolidation in the Fintech market may lead to M&A between banks and neobanks.

The Rise of Fintech

We need to look at some recent history to understand how neobanks could offer a better service at a lower price.

The rise of FinTech began in 2008 when financial institutions had to divert a lot of their spending budget to tackle the new compliance requirements introduced after the financial crisis. Just a year before, in 2007, the first iPhone arrived on the market and the m-Pesa system redefined the relationship between people and money in Eastern Africa. Using SMS text messages, not smartphones.

A new generation of technology-based banks

Neobanks leveraged technology to offer brand new mobile-based financial services to consumers that were getting used to use their smartphones for, well, anything.

Most neobanks initially launched a single product or service, working on providing the best possible user experience. TransferWise (now Wise) offered international transfers, for example. Incumbent banks often ignored new competitors in niche market segments, relying on their ability to serve the existing customer base with a wide range of products.

But many customers began using FinTech services for specific needs. Like, as said above, international transfers. And smarter neobanks began widening their offer to new products and services, often creating partnerships with other highly specialized FinTechs.

The neobanks challenged the incumbent financial players and this was very good for the market. As traditional banks reacted investing in innovation and improving their digital channel services: sometimes imitating FinTechs, other times collaborating with them through partnerships or acquisitions.