Responding to the rise of neobanks
Neobanks first appeared about ten years ago. In 2014, there were just eight neobanks aiming to disrupt traditional banking by delivering digital-only customer experiences, largely aimed at digital natives, according to the Simon-Kucher Neobank Database.
Fast forward to 2022 and not only have the number of neobanks exploded, but also the number and range of customers they serve. According to our calculations, there are now more than 400 neobanks around the world serving around 1 billion customer accounts. One in five of them operates in the United States, and together they serve more than 100 million active accounts. These figures highlight the growing maturity of the market here despite a slower start compared to Europe.
As competition intensifies, we expect a wave of innovation in the years to come. To date, most of the big players in the US are still focused on traditional banking products, but we expect them to start adding super-app components or building ecosystems with financial services and added value to attract business customers.
The challenges of competition and profitability will also lead to further consolidation. In the next few years, we expect three to five “super-neobanks” to emerge in the United States with broader product sets and larger customer bases.
Nubank, based in Brazil, can serve as a benchmark in terms of the size of customers to expect. It has transformed into a multi-purpose bank with a customer base of nearly 60 million accounts. Nubank has raised nearly $4 billion in funding and late last year its shares debuted on the New York Stock Exchange.
What does this seemingly inevitable rise of neobanks mean for incumbent banks, and how should they respond?
Incumbent banks don’t just need a digital strategy, they need a digital banking strategy. We see three potential paths for them, the first being a purely defensive posture that learns from disruptors and adapts their best ideas. Another option is to acquire a neobank to quickly establish a presence in the digital space. The third approach is to build a fully digital bank from scratch. We call these digital-only offshoots “speedboats,” reflecting their increased agility.
Speedboats can be used to reach niche customer segments, to expand internationally, or to serve largely as a digital transformation vehicle to disrupt the old bank and accelerate the shift to a more modern institution with digital capabilities. .
Regardless of whether a bank decides to buy or expand its own, the balance between ensuring profitability and scale is crucial. The next neobank winners will not be those with the most customers. On the contrary, the future stars of neobanks will be those who can grow profitably and innovate effectively. This requires a shift in mindset where the organization focuses as much on monetization as it does on growth.
This requires a disciplined approach guided by certain best practices throughout the business lifecycle, as encompassed in three main phases.
Success begins before launch, where an ambitious yet realistic business case must be created. Digital banks aiming for breakeven after seven years are already doomed in our view as we challenge the scale-driven strategy in an increasingly crowded market. Identifying pain points where customers are most willing to pay for solutions is essential. Otherwise, banks might succeed in onboarding customers (often at high cost) but struggle to make money.
By the age of four (preferably sooner), a digital-only bank needs to mature beyond delivering a great user interface and a nifty product. It must be able to expand its product line, identify profitable pockets in emerging product trends, and find ways to capitalize on opportunities quickly and effectively. This is the phase where the bank must focus on ways to expand its customer base with minimal acquisition costs.
To become rich
As the digital business enters its fifth year, it should have reached a minimum of scale, often defined by digital-only banks as at least 1 million active customers. At this point, neobanks need to shift gears to balance growth with monetizing existing customer relationships.
Successful neobanks design free holistic strategies, introduce loyalty programs, launch cross-selling campaigns and rethink product bundling. In addition to deepening relationships with its customers, the bank must also expand its partnerships and business ecosystems to strengthen its leadership position in the market. Managing them well is the key to success.
David Chung is a partner and Christoph Stegmeier senior partner at Simon-Kucher & Partners.