What Are Neo-Banks and How Will They Shape the Future of Finance?
According to new data from Adroit Market Research, the FinTech market is set to hit $460 billion by 2025, at a record 11.67% growth rate.
In a report called Fintech (Financial Technology) Market to hit $460 billion by 2025 – Global Insights on Growth Drivers, Key Trends, Strategic Initiatives, Value Chain Analysis and Future Outlook, the market research group outlines the biggest trends in the evolving FinTech industry, as well as the business models that will rule the finance field from now, including neo-banks, whose influence on the banking ecosystem cannot be denied.
Also known as “challenger banks”, these institutions are a relatively new addition on the finance market, but they have already registered a CAGR of 50% between 2016-2020 and are redefining the approach that financial institutions should have towards banking services. Given their growing influence on the finance market, neo-banks are also expected to change consumer perception of finance services and generate important market trends. But how do they work exactly?
What are neo-banks?
Neo, or new banks are a modern interpretation of banking services. Unlike traditional banks, which may offer online services, but typically rely on their physical branches, neo-banks are digital-only financial institutions. This means that anyone who wants to use their services doesn’t have to come down to the bank’s headquarters to meet with a representative, fill in documents, or do any kind of manual work for that matter. Every process is 100% digitalized and everything can be done from the bank’s website or smartphone app.
So, instead of spending funds on the needs of a physical branch, neo-banks focus on online services instead, investing heavily in AI-powered risk assessment tools, chatbots, user-friendly interfaces, and advanced fraud detection systems. Why this shift?
It all started in the UK, after the financial crisis ended. Struggling with heavy financial losses, banks could no longer lend each other money, so the government changed regulations allowed neo-banks to raise capital and build online infrastructure before obtaining a full banking license.
This caused a boom in startup activity, enabling disruptive companies like Revolut and Monzo to compete with traditional banks. Since these startups became wildly popular, the trend quickly spread all over the world. Now, neo-banks are regulated just like traditional banks and they’re becoming a lucrative business model in North America and China.
It seems that almost every startup that launches today is a neo-bank and that this type of business is a surefire way to win clients and gain funding. For the following years, experts expect this sector to expand even more and engulf a higher percentage of the finance market.
Services offered by neo-banks
Neo-banks have proven that you don’t need a physical office to gain customer trust. In fact, the very absence of a physical office is what gives challenger banks higher ground. Otherwise, their services are the same. People can create an account with a neo-bank to get a loan or set-up a savings account, often benefitting from better terms and lower fees.
Neo-banks appeal especially to the young generation of digitally-savvy consumers who no longer want to deal with the bureaucracy and lack of flexibility of traditional banks. This generation wants to compare online loans, submit their application with a few clicks, and receive approval in a matter of minutes. And this is exactly what neo-banks offer them: speed, friendly customer support, and relevant services.
Neo-banks are all about convenience and respect for the customer’s time. Of course, this is all possible thanks to AI and Big Data, which allow banks to rapidly assess risk and suggest bespoke financial services. These innovations have also allowed neo-banks to expand their customer base and appeal to clients with no credit history or low credit scores. Compared to the old risk assessment model, where credit was at the center, the modern risk assessment tools of neo-banks also look at other factors to calculate risk, such as the applicant’s spending history and online activity. This not only paints a more complete and accurate picture of the applicant’s personal saving habits but also increases the approval rates.
The flexibility of neo-banks has also made them popular among small business owners and young entrepreneurs, who often don’t qualify for conventional loans. After the recession, many banks have struggled to maintain the loyalty of small business owners and even neglected the segment completely because they saw it as too risky, and neo-banks were there to bridge the gap. Since almost all businesses in the world fall in the SMB category (99% of companies have fewer than 50 employees), there was a huge migration from traditional to challenger banks, especially in terms of funding.
At present, Europe is the most mature neo-bank market but recent legislative changes in North America and Asia have led to the development of a competitive ecosystem that favors innovation.
Should you trust neo-banks?
In short, yes. The fact that a bank doesn’t have a physical branch and offers digital-only services doesn’t mean it’s not reliable, in the same way that the existence of a physical branch doesn’t guarantee good customer support or convenient fees. Neo-banks may be new, but they’re a highly regulated industry and companies have to comply with many security and quality standards before they obtain their license. Since they’re online-based, cybersecurity is very important, so neo-banks invest heavily in secure authentication and fraud detection systems.
With the influence of challenger banks growing constantly, consumer adoption is expected to increase exponentially and people from all generations will accept them in the future, not just digital natives. Besides, with online reviews and comparison platforms widely available, it’s very easy to check whether or not a neo-bank is reliable and offers the best terms.