For the last decade or so, we have witnessed evolution in many industries. The transportation industry evolved with the emergence of companies such as Uber, and the tourism industry has evolved with the emergence of companies such as Airbnb. A transformation in the banking industry was due – and neobanks are bringing that transformation.
A neobank is a digital bank which often works only through a mobile app and has no physical branches. Neobanks provide a wider user experience than a traditional bank. We have categorized neobanks into the following three categories:
1. Licensed Digital Banks: Startups which are licensed. E.g., Paytm Payments Bank (India)
2. Over the Top: Startups which have tie-ups with other licensed banks. E.g., Monese (UK)
3. Bank Digital Initiatives: These are traditional banks with a digital extension. E.g., CBD NOW (UAE)
In this article, we will focus on: 1. Licensed Digital Banks and 2. Over the Top.
How is the service offering different from traditional banks?
Neobanks offer innovative features and offerings that are different from traditional banks including fast account opening, free debit card, instant payments, cryptocurrencies, lower costs, mobile deposits, P2P payments, mobile budgeting tools, user-friendly interfaces, etc. We have discussed some of the top innovations happening in this space below:
Account Opening: Neobanks offer simple and fast online account opening compared to traditional banks. E.g., Joint account opening by Starling Bank.
International Payments/Remittances: Neobanks offer the usage of their debit card in foreign countries for no fees and at live exchange rates. E.g., Revolut provides its’ customers with Revolut card, which supports card payments and ATM withdrawals in over 140 countries.
Lending/Credit Products: Neobanks can provide credit products at lower charges and interest rates compared to traditional banks. E.g., Nubank (Brazil) does not charge fees for its credit card usage.
Money Tracking/Account Aggregation: Neobanks can simplify money tracking and account aggregation. E.g., Tandem is a money management app that helps users to spend, save, and manage their money.
The innovations which are happening are addressing the unmet demand in the space. Moreover, European regulations, such as PSD2 which came into force in 2018, are set to provide an additional push to neobanks. It is also likely that neobanks will integrate technologies like artificial intelligence and blockchain faster into their business models compared to traditional banks.
The region-wise break-up shows the maximum concentration of these startups in Europe, followed by the Americas. Most of these Asian startups have been founded after 2013. Startup activity in this space started around 2004 and gathered pace after 2011. Around 50% of the startups were founded in 2016 and 2017.
Note: China is not included in the analysis
An analysis of the 15 most-funded startups shows that 11 of them are from Europe and 3 from the Americas. The top 7 most-funded startups are unicorns. The highest amount of funding was received by OakNorth from the UK ($1,000 million), followed by N26 from Germany ($515 million), Atom Bank ($470 million), and Nubank ($420 million). The Asian startups which have been funded the most are Open ($7 million) and Neat ($5 million). Volt ($45 million) is the most funded startup from the Oceania region.
The startups in the space have been raising huge rounds of funding. In 2017, OakNorth raised $364 million (Series B) in funding. In 2018, Revolut raised $250 million (Series C). In 2019, OakNorth raised $440 million and in 2019, N26 raised $300 million (Series D)
After 2017, banks such as Atom Bank, Monzo, N26, Nu Bank, Oak North, and Revolut have been raising huge amounts of funding.