The Evolving Neobank Landscape and What’s Next
Throughout the 2010s, money was relatively cheap and venture capitalists were flocking to invest in neobanks. These financial institutions rapidly proliferated into traditionally underserved markets, such as low-account-balance customers, as well as deeply targeted customer demographics, like millennials, gig economy workers, and even pet owners. During this time, neobanks adopted a growth-at-all-costs business model.
In the years since the pandemic, the neobank industry has undergone a transformation, shifting away from unrelenting expansion and towards more sustainable business models seeking to monetize their existing customer base. Let's explore the reasons for this transition and take a look at what might be coming next in the banking industry.
What are neobanks?
Neobanks are digital-only financial institutions that provide many of the same products and services as traditional brick-and-mortar banks but do so via mobile apps and online sites rather than through a physical branch. Some operate fully independently, such as Varo, which in 2020 became the first neobank to be awarded a national banking charter. More often, though, they will “borrow” the charter of a traditional bank, as Chime does with Bancorp and Stride, and operate as a “front-end” service that earns most of its revenue from interchange fees and subscription services.
Because they don’t have physical storefronts, neobanks enjoy a number of advantages over conventional financial institutions. Neobanks such as Varo pay 20-30% less in overhead than their brick-and-mortar competition and are able to offer their customers many of the same services --checking and savings accounts, bill payment, investments, and money transfers -- for less. And since neobanks are designed to rapidly innovate new services and products to their clientele, they can offer benefits that traditional banks can’t match, such as AI-powered personalization and spending analysis, early paycheck access, and improved rates of return with fewer fees and penalties.
Neobank trends since the COVID-19 pandemic
As the COVID-19 pandemic spread in 2020, in-person banking practices (like most social interactions) ground to a halt. In response, customers across the globe -- especially younger digital natives adapting to indefinite work from home requirements -- flocked to digital banking services and their “anytime, anywhere” availability.
This fundamental shift in how people bank led to massive growth in the financial technology (fintech) industry. According to a 2023 report by Boston Consulting Group, between 2021 and 2023, neobanks were posting revenue CAGR of 78%, compared to the fintech industry’s global average of just 14% CAGR.
However, the Fed’s interest rate hikes throughout 2022 and 2023 deeply impacted funding for the industry and called into question whether its growth-first business model could be sustained. The aforementioned BCG report noted that only 23 of 453 global neobanks in 2023 were operationally profitable.
Neobanks gained profitability in 2024as the industry transitioned away from existing continuous growth models, towards more sustainable and stable business structures. Customer acquisition rates may have slowed, but today, revenues continue to rise across the industry.
Opportunities presented by this transition
Customers today expect their digital bank to not only be cheaper and faster than a traditional bank, but also operate globally, offer “open banking” options like access to third-party financial service providers such as Mint or Stripe, and eliminate consumer pain points like overdraft and minimum balance fees.
In response, the fintech industry has leveraged one of its inherent advantages: its ability to quickly deploy new services and offerings for its clients. AI-powered hyper-personalization, for example, utilizes artificial intelligence and machine learning technologies to generate personalized insights, investment advice, and predictive models using the customer’s own financial data.
Through these, neobanks can forecast a customer’s future spending, then recommend timely and appropriate products. Similarly, AI-based chatbots have emerged as effective front-line service reps, able to automate repetitive customer queries like answering commonly asked questions, thereby enabling human service reps to focus their attention on more involved client issues.
Neobanks’ adaptability also means that they are better positioned to take advantage of the growing “super app” market, which is expected to reach $918.41 billion by 2033. Super apps, such as China’s WeChat or Rappi in Latin America, serve as one-stop-shops allowing consumers to perform a wide variety of tasks -- from social media posting, messaging, and shopping, to financial services, transportation, and even ride hailing -- all without the need to switch to another app. As these apps grow in popularity and become increasingly ubiquitous, so too will the demand for the financial service providers that power their back-ends.
But challenges still exist
However, neobanks still face significant economic and regulatory challenges. As e-commerce continues to grow in popularity, the number of neobanks forming to serve local niche audiences will grow as well, as demonstrated by the proliferation of fintech in Africa. Being able to differentiate their brands’ products and services in an increasingly commoditized market will prove essential.
Neobanks must also operate in a highly regulated environment and navigate ever-evolving regulatory restrictions, many of which were designed to govern traditional banking institutions. This issue is compounded when operating in multiple international markets where regulations can change based on the geographical footprint. The amount of money, resources, and expertise needed to maintain international compliance could ultimately limit how much individual neobanks can expand.
Neobanks are here to stay
Despite the shortfalls in fintech investment seen in recent years, neobanks have proven that they are more than a financial fad. While they won’t replace traditional banks in the foreseeable future, neobanks continue to revolutionize the financial sector by leveraging cutting edge technologies, embracing new forms of digital payment, and adapting to rapidly evolving consumer preferences to rapidly iterate secure and personalized customer-focused services.
About the author
Jason Fuentes builds strategic revenue-enhancing partnerships between Wildfire and financial institutions and fintechs, helping them incorporate value-adding customer loyalty features powered by Wildfire’s white-label cashback platform. With deep experience building productive partnerships at fintech startups as well as ecommerce and media companies, Jason brings a unique blend of expertise across sales, partnerships, marketing, operations, and product management in multiple industries that help him facilitate the delivery of positive results for Wildfire partners and stay on top of payment and fintech industry trends.