What's really new about Neobanks?
The traditional banking industry has been shaken up by the appearance of digital banks. With the so called Neobanks popping up across the world attracting attention from both customers and investors, the future of the banking industry and the ability of incumbents to resist and reinvent themselves has been put into a stress test.
According to the book Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game by IMD Global Centre for Digital Business Transformation, disruptors are creating value to customers by undercutting price (cost value), improving customer’s experience (experience value) or using platforms to expand their reach exponentially (platform value).
Cost Value
Disruptors employ a multiplicity of strategies to lower the cost of a product or service for the end customer such as price transparency, consumption-based pricing, reverse auctions, buyers aggregation, rebates and rewards etc.
Experience Value
Experience value disruptions provide customers with choices by allowing them to buy only what is needed when is needed, by offering the ability to personalize their experiences, by turning inconvenient processes totally transparent through automation, by reducing latency and offering a holistic experience anytime, anywhere.
Platform Value
Platforms create network value as the number or type of users impacts the value derived by other users. Marketplaces, crowdsourcing, peer-to-peer, sharing and data monetization are examples of platform value. An individual telephone by itself, for example, is not very valuable, but as the number of users grows, so does the value to each owner of a telephone. In platforms, market changes are not linear, but rather exponencial.
Basically Digital Banks have the potential to create value in all three areas at the same time. Because they were born in a moment where technology and mobile communication have become ubiquitous, they can be much more effective in driving operational costs down and offer transparency to customers as well as a complete and personalised experience through an elegant design solution.
But fundamentally, nothing has changed in the way banks make money. Banks "digital or not" make money out of transaction fees, spreads and service fees. To be profitable in the banking industry, scale is the name of the game, but what to say when a Neobank reaches 30 million customers but is still not making a profit. This is the case of the Brazillian unicorn NuBank. Nubank has surpassed the mark of 30 million customers in 2020 and it is by far the largest Neobank in number of customers and ranked 4th place in Brazil when compared to its traditional pairs. But similarities end here, because traditional competitors are way more profitable. Itau (the largest bank in Brazil) with over 55 Million customers and 92,000 employees for example makes USD 62 of net profits per customer per year while Nubank is loosing USD 1.60 for each customer. But Nubank is not alone, analysing annual reports and financial statements of the top 20 Neobanks worldwide, only one is profitable, the Russian digital bank Tinkoff. It seems that the recipe used by digital banks — offering current accounts used for day-to-day transactions by the customer at zero fees may not be sustainable in the long run. Tinkoff, on the other hand took a different approach, they leveraged their large customer base of ~12 million clients to offer third party products, making expressive returns on commissions, along with its traditional banking activities. In 2020, Tinkoff made revenues of USD 480 million in commissions out of the total USD 1.2 billion reported. But even Tinkoff has a long way to go to reach the same level of productivity of a traditional bank. For example, Tinkoff profit per employee is 1/3 the profit per employee of a bank like ING which has a been in the forefront of digital banking since the first days of ING Direct in the 90's.
So, coming back to the original question: — What is really new about Neobanks? The novelty here is that they have set a new and outstanding standard in how users experience financial services, becoming a benchmark for the so called traditional banks to catch up with and some of them became love brands. But they have been around for a while now and it is time to start thinking on how to take advantage of their position in the heart of consumers to translate their amazing design and user experience into profits?
We may see rounds of consolidation and acquisition coming up soon as traditional banks can leverage technology and process of these Neobanks to potentially accelerate the digitization of certain parts of their value chain.
