Digital banks have been one of the main #fintech disruption use cases, but as the competitive landscape evolves, they find themselves at a crossroads. This is a Europe 2024 deep-dive.
Neobanks, challenger banks or digital banks are terms used interchangeably and although they are not the same, they all share a #technology-first approach that involves a flexible, branchless, digital-native model challenging traditional #banking.
The concept emerged in the early 2010s on the back of a few main premises:
- Technological #innovation decoupling, for the first time, the front-end from the infrastructure layer and web APIs becoming ubiquitous as the connecting rails underneath
- The rise of seamless, end-to-end digital experiences in industries such as #ecommerce and entertainment, acting both as a benchmark and a guide
- Big gaps in traditional banking offerings: non-transparent, complex, expensive and inelastic products built on top of outdated systems
- The 2008 financial crash acting as a springboard in 2 directions: 1) laid-off talent looking for new opportunities 2) available capital (i.e. VCs) seeking alternative bets as a hedge to traditional financial institutions
Two major models rose in Europe:
- Greenfield players (i.e. N26, Revolut, Monzo) starting from scratch via a niche market or segment, and focusing on seamless customer experience, attractive design, competitive pricing and a digital or mobile only set-up.
- Incumbent banks launching their own neobanks (i.e. Hello Bank! by BNP Paribas, Boursorama Banque by Société Générale and FinecoBank by UniCredit) as a means of competing with the fintech challengers and of retaining their customers. They leverage infrastructure and resources and quite often integrate with existing parent offerings with an eye at cross-selling and up-selling.
Despite a rosy start, most players have faced increasing challenges over the past years, especially with the new macro reality. Rising interest rates have boosted the industry as a whole, however challengers have, largely, not managed to reap the full benefits (owed to their business model). According to C-Innovation, only 14 out of 101 digital banks in Europe are profitable.
Going forward challengers are facing difficult choices:
- Focus has shifted from growth to profitability, but the latter goes through lending, which, in turn, needs a banking license that is not always easy to get with a compliance-light, start-up model (as the Revolut UK saga has shown)
- Monetization and scale go through transitioning from a convenience, niche-based set-up to becoming the primary bank (get the payroll and build long-term relationships). Trust is the key here but building it is a long and uncertain path.
In entering their 2.0 play, challenger banks are facing the odd situation of having to balance an innovation, growth-first agile culture with more traditional ways of doing banking.
Opinions: Panagiotis Kriaris LinkedIn's Post, Graphic source: C-Innovation
