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With challenger banks experiencing strong customer growth, can incumbents keep up in the new age of banking? Bill Lumley reports.
The global neobanking industry has grown sharply as a result of the Covid-19 pandemic, with an associated increase in demand for digital financial services. Millions globally, including 8% of US adults, now hold an account with a challenger bank.
That is up 2% from last year, according to anti-fraud software company SEON’s Neobanking Index and report on the state of challenger banks in 2022, published in September. The continued growth, the report says, is supported by the finding that the top 10 neobanks globally have each raised at least $1bn.
The market has not been without its casualties. UK-based North Bank, for example, ceased business earlier this month after failing to raise sufficient funds for a banking licence.
Nonetheless, a growing number of challenger banks are proving successful when it comes to taking on legacy banks. Chase Bank, which was launched in September 2021 announced its millionth customer last month. In Germany, N26, which offers a free smartphone-based bank account “in just eight minutes”, last month became the first neobank to send, receive and request money via Spanish mobile payments solution Bizum.
And in the UK, Atom successfully raised £117m in new capital during the year, predominantly to fund income-generating lending. Launched nine years ago, the bank is expecting full-year profitability this year.
Growth goes global
The SEON report reveals wide disparity between the take-up of neobanks from country to country, with the greatest increases predicted for the next five years in the Philippines (154%), Mexico (141%) and Portugal (129%).
Recent growth in the popularity of neobanks has unsurprisingly been attributed to the ease of opening a neobank account, as well as the fact that many traditional banks worldwide are closing their branches, according to David Jarvis, CEO of Griffin, a banking-as-a-service provider.
the high street banks still ask for legacy pieces of information that they don't really need
“Much of it is tied into the sort of friction and expectations that these established legacy players have versus the sort of newer entrants,” says Mr Jarvis. “With a challenger bank you can open a new banking account in five minutes, whereas the high street banks, who may claim that you can open an account in five minutes, still ask for legacy pieces of information such as proof of income – information that they don’t really need – in order to service their new customers. In fact, it just creates a barrier to account opening.”
Facing up to fraud
However, the increased ease of opening bank accounts is seen by some to have a downside. Jimmy Fong, chief commercial officer at SEON, says that while he considers this growth to be good for the population worldwide, he believes it enables fraudsters to abuse the comparative simplicity of opening a neobank account. “They understand that there’s a bit of a blind spot compared with the way traditional security is done,” he says.
The SEON report shows that the top three countries by neobank adoption rate are Brazil, with a 43% take-up, followed by India with 25% and Ireland at 22%.
Mr Fong says he suspects that the larger the population, the larger the proportion of those that are underbanked. He suggests that the comparatively high speed of growth of the neobank market in regions such as South America and Africa is down to fintech serving those markets.
Mr Jarvis agrees that fraud is a challenge to neobanks but that impersonation is less of an issue than money-muling. “For example, students who have legitimate identities are recruited by drug gangs to open new bank accounts and then hand over the account to a criminal network,” he says. “That kind of thing is extremely hard to detect until transactions start flowing through the account.”
Legacy bank shortcomings
Growth is in large part due to the way in which neobanks facilitate an easier life for their customers, explains Mr Jarvis. “Consumer needs are changing, attitudes are changing, and [there are] aspects traditional banks seem to be failing to deliver on as these new bands get more and more penetration.”
New banks are frequently producing solutions for problems that “even I didn’t know” exist, adds Mr Jarvis. “Time will tell, but I definitely think the [SEON] report highlights the complacency of traditional banks.”
But the SEON report also outlines shortcomings the neobank sector is looking to improve upon to be able to attract even more customers.
For example, there are often no face-to-face options available for support, which could make them difficult to access for certain demographics. Some neobanks lack additional services offered by traditional banks such as loans or overdraft facilities. And with less history, they can find it challenging to gain consumer confidence compared to traditional banks.
Some neobanks may not even be fully chartered or licensed in all cases. “Instead, these digital-only companies sometimes partner with a traditional bank to insure their products or to enable certain services,” the report concludes.
