Neobanks: A Global Deep Dive [July 2020 Update]

July 2020 Update:
1. The following article provides information about MEDICI's first Neobanking report published in 2019.
2. In May 2020, MEDICI published the Neobanking 2.0 report with the latest data that deep dives into this fascinating and rapidly-growing segment, offering a comprehensive analysis of the subject from various angles. Access it here.


At the turn of the millennium, in 1999, movie theaters around the world witnessed the release of the massive box-office success The Matrix. A revolutionary movie for its time, it featured a protagonist named 'Neo,' who was the savior of a world caught in crisis. Leveraging advanced technology, he was able to alter the very fundamentals of his environment. Something not dissimilar has occurred in the financial services industry.

Fast-forward to 2016: a new breed of technology-driven and customer-centric financial institutions, aptly named 'neobanks,' are working to transform the banking landscape as we know it. MEDICI's new report on neobanking takes a deep-dive into this fascinating and rapidly-growing segment, offering a comprehensive analysis of the subject from various angles.

To provide some context: after the financial crisis of 2008–09, the banking sector, especially in the developed markets, suffered a heavy loss of trust and is undergoing incremental reform ever since. Legacy technology systems and processes remain, to this day, a constant for most banks globally, and it would seem that they remain hesitant to embrace change.  High penalties of non-compliance, competition from tech giants penetrating the financial services market, the pressure of running physical branches in a digital era, and challenges surrounding consumer engagement have further put more pressure on the incumbent banks. Simultaneously, traditional banks have been increasingly competing with FinTech players, among others, which are young, dynamic, and more adept at providing financial services in today's digital era.

In such a compelling scenario, banks are resorting to innovation – not just as a good-to-have strategy that looks at the future, but even more as a means to sustain a healthy profit margin. The incumbent banks have started to realize how the road to innovation begins with digital transformation. Additionally, lower interest rates, a legacy banking culture acting as an impediment to fast innovation, and the demand from customers for a Google/Facebook-like simplicity in banking experience led to the creation of an entrepreneur-led banking product revolution through the rise of neobank players. The neobanking landscape is an amalgamation of non-licensed over the top banks, digital initiatives of traditional banks, marketplaces, and licensed challenger banks.

Check out MEDICI's new Neobanking 2.0 Report


Neobanks: How is their service offering different from traditional banks?

Neobanks offer innovative features and offerings that are different from traditional banks including fast account opening, free debit cards, instant payments, cryptocurrencies, lower costs, mobile deposits, P2P payments, mobile budgeting tools, user-friendly interfaces, etc. Here are some of the top innovations happening in this space below:

  1. Digital Onboarding/Account Opening: Neobanks offer simple and fast online account opening compared to traditional banks.
  2. International Payments/Remittances: Neobanks offer the usage of their debit card in foreign countries for no fees and at live exchange rates.
  3. Money Tracking/Account Aggregation: Neobanks can simplify money tracking and account aggregation.
  4. Lending/Credit Products: Neobanks can provide credit products at lower charges and interest rates compared to traditional banks.

Growth of neobanks over the years

Neobanking startups have been growing steadily over the last few years. The startup activity in this space started around 2004 and gathered pace after 2011. Here are some interesting observations:

  • Around 50% of the startups were founded in 2016 and 2017.
  • Before 2010, there were 6 such startups; by 2015, the number rose to 28.
  • However, in the last three years, the number of neobanks established has increased to 45.

Neobanks exploring partnerships for mutual growth

Globally, it's clear that neobanks are on an upward growth trajectory. As time goes by and neobanks pursue newer markets to provide a superior experience for their customers, these players have increasingly been leveraging the power of partnerships with FinTechs. Why? Such partnerships help neobanks rapidly add to their existing catalog of services; this, in turn, helps them reduce costs and move towards breaking even. Some of the advantages of these partnerships include benefits like cheaper customer acquisition, increased speed to market with new services, and contain upfront infrastructure costs, to list a few.

Many FinTechs offer a host of banking services without any licenses – simply by partnering with an existing bank, which, of course, has all the requisite licenses. This model is already in use across the world: examples include Revolut and Simple, which outsource their banking responsibilities to banking partners already equipped with licenses. They partner with the banks, offering a holistic suite of comprehensive business banking or consumer banking solutions. This way, the end-customer avails of the banking services as offered by FinTechs. However, from a regulatory perspective, the money involved is being managed by the banks the FinTechs have partnered with. Operationally, there are various models to do this; deeper analysis of this is contained within MEDICI's report on neobanking.

Neobanks: Region-wise analysis

The region-wise break-up shows the maximum concentration of neobanks in Europe, followed by the Americas.

One finds that the UK has a high concentration of challenger and neobanks owing to two factors, chiefly. One: compared to the US, which has very high numbers of large banks, the UK has far fewer. Two: when it comes to digital banking, the UK can be considered an early adopter, going back to the dotcom boom between the late '90s and early '00s. This provided it a 'prime-mover' advantage, through which the UK came to be at the forefront of challenger/neobanks and alternative models. Another factor providing the UK with an edge in this space is the EU's common standards being introduced, which has aided neobanks rapidly expand their customer base while remaining in compliance with regulations.

A detailed and updated analysis is available in our new Neobanking 2.0 report. Access the full report here.

Europe has been the bright spot for neobanks for the best part of this decade. According to AT Kearney’s research, European neobanks' customer base has grown by more than 15 million since 2011. On the other hand, retail banks' customer base has declined by 2 million. It is projected that by 2023, Europe's neobanks will win up to 85 million customers, reaching over 20% of the population over the age of 14.

In comparison to Europe, the US seems to be lagging in the growth of neobanking. It is important to point out that the US is the home of some of the oldest neobanks like Simple (founded in 2009), Moven (founded in 2011), and some relatively new neobanks such as Chime, Varo, and Aspirations. However, neobanking has failed to attract US customers in the last 10 years, and just 3% of millennials have opened a primary checking account in a digital-only bank. For neobanks to grow in the US, the strategy would be to combine 'Price + Digital' and offer easier financial management tools, better rewards programs, and unique user experience for millennials while baby boomers would only care for better interest rates than their traditional bank accounts.

European neobanking appears to be the only success story so far. However, that does not mean other geographies are not promising for neobanking players. There are a few interesting case studies in Latin America, such as Nubank which was recently valued at $10 billion – it has achieved exponential growth in its numbers of customers. However, the real growth is being unlocked in the APAC region where many countries are formulating their own virtual banking regimes. Hong Kong, Taiwan, and Singapore have already rolled out their virtual banking licensing while Thailand and Malaysia are expected to follow suit in the years to come.

For a highly detailed region-by-region analysis of this, our latest neobanking deep-dive report can now be accessed on the MEDICI website.

Clearly, neobank fever is spreading around the globe. This can be inferred primarily from the growth that we have witnessed in this segment in terms of an increase in investments, the number of players, and customer growth.

With a view to understanding this segment even further, this report on neobanks was prepared by MEDICI as a deep-dive study that presents the pulse of underlying global currents in the challenging landscape banks compete in around the world. Read on to learn about how neobanks are emerging as the new wave of disruption with unprecedented success stories in banking in terms of geographic growth, customer acquisitions, valuations, and more. In this report, you will uncover the story of the evolution of neobanks across the world, profiles of noteworthy neobanks, business models, core technologies, and partnerships.

July 2020 Update: 

In June 2020, MEDICI published the second special Neobanking 2.0 report that deep dives into this fascinating and rapidly-growing segment, offering a comprehensive analysis of the subject from various angles. The second edition of this report from MEDICI gives an in-depth look at:

  • What the present and the future look like for virtual/digital-only banks
  • Feature-level benchmarking of global virtual/digital-only banks 
  • Strategic review of opportunities 

The Neobanking 2.0 Report by MEDICI is a comprehensive study based on MEDICI’s proprietary FinTech data of over 13,000 startups, deep market intelligence derived from years of tracking the FinTech industry, and secondary research which was refined through brain-storming sessions & in-depth interviews with segment experts to extract valuable market signals from the noise, identify market trends, and develop point-of-views.

Access the FULL REPORT here.