How The Neobank Model Should Evolve

Neobanks as a concept, even if they weren’t known by that name at the time, first arose in the early 2010s, following the global financial crisis of 2008, when consumers’ faith in traditional financial institutions dwindled. Neobanks have grown significantly over the past 10 years, and now there are roughly 400 operating worldwide.

Despite the rapid growth, only 5% of neobanks have turned profitable due to multiple factors. One of the leading reasons for the lack of profitability is that most neobanks are still in the growth phase. Focusing on client acquisition is their top priority instead of monetization. However, in times of recession and economic turmoil, investor money might cease, and self-reliant businesses will be on top.

What Should Neobanks Do In Times Of Uncertainty?

Evolution requires adaptation and flexibility. A neobank must constantly change terms and assess risks, especially after the launch and growth phases have passed. The lack of revenue sources with high-profit margins has been the root of the problems with neobanks’ profitability. Neobanks cannot profit from fractional credit as a natural source of income because they cannot provide such a product without a valid banking charter.

The main five reasons why neobanks fail or struggle with reaching profitability are:

1. Lack of a monetization strategy.

2. Scaling and acquisition are a priority, not profitability.

3. No geographic or niche-group focus.

4. Rapid non-structured growth.

5. Lack of innovative features and post-MVP innovation.

The Solutions

However, I believe these five struggles can be overcome. Adapting neobank-as-a-service software to increase features and implement an already working monetization strategy with various income sources and striking partnerships is key. The truth is that many neobanks currently on the market will either be acquired or forced to merge with some other neobanks or banking institutions.

Partnering

Doing it alone just isn’t the best option for the handful of neobanks that have a chance of establishing long-term viability. Neobanks can acquire financial products and services that aren’t presently available to them due to regulations by utilizing existing technologies and networks within the financial sector.

Focusing On Niche Communities And Geographies

In the future, it will be crucial for both entrants and established neobanks to pinpoint the problems their customers are experiencing and develop creative solutions to address those issues. As other neobanks have already done, such as Dailight’s focus on the LGTQ+ community in the U.S., one clever strategy is to establish a niche by concentrating on smaller population sectors.

Neobanks need to be able to slow down long enough to identify new market trends before adjusting their product offering thanks to this laser-like focus. The possibilities of whether to target groups of people or key interests are endless. Moreover, there are many markets that remain unbanked, with over 2.5 billion adult people worldwide without access to bank accounts.

Adding Innovative Products

Adding features is one of the main drivers of engagement in mobile applications. With just an eight-second average user attention span in 2022, it has become the greatest challenge for mobile marketers to engage the audience and keep them on a platform.

Gamification and the constant addition of new and well-researched features are necessary for the survival, growth, and profitability of neobanks.

Will The Market For Neobanks Continue To Grow?

With 91% of the population (7.26 billion people) using phones and 6.64 billion smartphone users—and with the constant expansion of internet coverage—the market for neobanking continues to grow. This leaves 1.3 billion people who are both smartphone users and are not owners of bank accounts of any sort, while 1.2 billion don’t have access to both.

A large percentage of both of these groups of people, at some point, will experience the need for a bank account. With a 52.3% CAGR, the neobank market is estimated to reach a revenue forecast of over $2 trillion in 2030, compared to a market size of $66 billion in 2022.

Final Words

Neobanks have the potential to become much more involved in the industry rather than merely being actors that encourage international competition among financial institutions. This is possible with the appropriate strategy and thoroughly thought-out alliances. They can provide practical use cases, significantly increase financial inclusion globally and, you guessed it, boost profitability.