How Neobanks Are Repositioning Themselves to Remain Profitable

The ease of open banking and access to digital banking infrastructure has led to a flurry of neobanks serving every demographic and interest, from students to gamers. But by attracting new customers with free services and charging smaller fees, they have significantly impeded their profitability.

While neobanks have greatly increased their customer base, they’ve failed to become their customers’ primary banks and operate with only a few hundred euros of deposit per customer. According to Tom Merry, managing director at Accenture Strategy, “The newcomers need to prove they can translate customer acquisition into income and capitalise on their clear cost-to-serve advantage. There’s movement in this space but a sense of real momentum has not yet been established.”

Read more abouthow neobanks are struggling to remain competitive in the first part of this article. Below, we look at some of the strategies neobanks are adopting to become profitable. 

Pursuing profitability

As venture capitalists continue to pour money into neobanks, they expect a shift from growth to profitability. This is shifting the way neobanks operate in the following ways:

• Going after more profitable financial products and services: Currently, neobank revenue streams include transaction fees, premium account subscription fees and open banking commissions from brokering third-party services. But these fees don’t generate enough revenue to break even. They will have to seek out more profitable products like offering investment services and credit cards, while targeting more profitable customer segments like small businesses. Providing banking-as-a-service to other fintechs and offering non-financial services through their apps and charging commissions could also increase their revenue.

• Changing their pricing strategy: Neobanks that attract new customers with free services may have to start charging fees. Both Monzo and Starling have implemented fees for services they previously offered for free. However, this strategy could reduce the transparency of neobanks, which is one of their assets.

• Reconsider scaling up: Because international expansion means facing more regulatory constraints and customizing products to offer localized banking services, many neobanks have shied away from the international markets that they were trying to disrupt.

• Regaining agility: Neobanks have lower operational costs than incumbent banks, but many have lost their agility due to increased regulations and their application architectures are beginning to show the first signs of aging. Regaining their initial momentum and innovative approach could help neobanks shift from growth to profitability. 

Niche positioning

If neobanks continue to struggle, they could be bought out by large incumbent banks. While that’s a decent exit strategy, it would take away from the innovation they brought to the financial sector in the first place. One possible course of action would be for neobanks to reposition themselves by targeting a niche based on the products and services or customer segments they serve:

• Products and services:The outbreak of neobanks of the past few years has largely resulted in “me too” services without any real innovation. Some banks have niched based on their services – such as Revolut (foreign currency transactions), SoFi (short-term lending) and Chime or N26 (debit cards). Innovative products that offer customers personalisation and flexibility will give neobanks more of an edge.

• Customer segments: Although their initial focus was digital natives, neobanking behemoths like Monzo and Starling now cater to the general public. Smaller neobanks can gain loyalty by serving underrepresented communities through neoniching, which allows banks to create products that are finely tuned to the needs of their customers and resultantly gain their loyalty. Examples of this include VIVA Wallet, which serves SMEs; Monument, which is “Monzo for the extremely wealthy” and the Longevity Bank, which targets the elderly.

Lines in fintechs continue to blur with Big Techs and Platforms offering banking services and traditional banks offering digital services. Despite these uncertainties, the neobank model is here to stay and it looks like virtual services will become the standard in the finance industry. Whether you’re a fintech innovator or a leader in traditional banking services, you need in-depth knowledge of this field.

Learn more about the Oxford Fintech Programme to understand how fintechs will continue to disrupt the financial industry.