During the last decade, tens of millions of people across Europe have opened accounts with digital-first banks, or ‘neobanks’. Offering user-friendly design, fresh language and functionality not seen in traditional banking apps, dozens of neobanks have proved themselves worthy new competitors in an industry that’s remained largely unchallenged for a hundred years.
But it’s not game-over for traditional banks. Or at least, it doesn’t have to be. While neobanks are growing at a rapid pace, traditional banks still have time to adapt to meet the changing needs and expectations of their customers.
In this article, we look at how neobanks have become so popular so quickly, the role of Open Banking in this story, and how traditional banks can play catch-up in an increasingly competitive industry.
Neobanks operate exclusively online, with many of them operating solely as mobile apps. They don’t have physical branches and they tend to provide support online rather than over the phone. This allows customers to access their banking services anytime and anywhere.
Unlike traditional banks, neobanks typically focus on the digital banking experience. Intuitive design tends to be a key differentiator, and many neobanks attracted significant numbers of customers in their early days despite offering a more limited set of financial products and features than traditional banks.
Starting with the launch of Dutch neobank Bunq in 2012, dozens of neobanks have since launched across Europe and matured to offer a similar breadth of services as traditional banks. Some have even surpassed many traditional banks by offering original features such as investment products, credit score reporting and virtual debit cards. Europe’s largest neobank, Revolut (founded in 2015), has 45 million customers across 30 countries. That’s slightly less than Barclays’ 48 million customers and more than HSBC’s 42 million customers.
With no costly physical branches to maintain, neobanks can offer lower fees, higher interest rates and invest more resources into creating slicker and more tailored user experiences. This has proved a compelling proposition for customers around the world, with the number of global neobank customers projected to reach 386 million by 2028. In some European countries, neobanks have achieved significant market penetration - Denmark (47% of all banking customers), Germany (31%) and Italy (26%).
The path to success hasn’t been straightforward for neobanks, however. It took Europe’s largest, Revolut, three years to secure a banking licence in the UK - having to previously operate as an ‘e-money institution’ which limited its earnings potential by preventing it from lending money or providing regulator-protected deposits. And neobanks aren’t necessarily fully replacing traditional banks. Many people are hesitant to trust their neobank with their monthly salary, instead using them exclusively for managing their spending money.
In this episode, Netcetera CEO Carsten Wengel explores the transformation of digital banking with Martin Meier, a key figure in the digitalization of the Swiss banking sector for over 18 years.
Although on the face of it, Open Banking and neobanking are quite different things, their successes are closely linked.
Before Open Banking, banks kept their customer financial data closely guarded. If a customer wanted to share their data with another banking provider, they’d have to act as an intermediary, first requesting their data from one bank and then sending it to another. But in reality, there was little benefit to sharing data between banks and this was rarely done.
But this situation changed in the 2010s with the introduction of Open Banking - a system that allows third-party providers to access customer financial data through secure APIs, with the customer’s consent. Following the EU’s 2015 PSD2 regulations, banks were required to share customer data through Open Banking. And this led to increased innovation and competition in the banking sector.
For the first time, neobanks could access customer data, with their consent, without having to enter into formal agreements with legacy banks. This fuelled a wave of innovation, enabling neobanks to develop new and better features. For example, Dutch neobank Bunq partnered with Mastercard to enable AI-driven spending insights and financial management across multiple bank accounts. And UK neobank Monzo allows users to view balances and transactions from all their bank accounts within their app.
In addition to enabling the development of new innovative features, Open Banking also lowered the cost barriers for neobanks. Where neobanks previously had to develop their own banking technology from the ground up, Open Banking has allowed them to leverage existing infrastructure through APIs (Application Programming Interface).
Open Banking has allowed neobanks to integrate new features almost as quickly as they can design them. But this ability shouldn’t be exclusive to neobanks, which is why third-party software providers like Netcetera offer Open Banking solutions that enable banks to integrate new features and services at the same rapid pace and low cost.
While neobanks have disrupted the banking industry with their digital-first approach, traditional banks still have several unique advantages, including an established reputation, generations of customer trust and, typically, a wider range of financial products and services. But to keep pace with growing popularity of mobile-first neobanks, traditional banks must embrace Open Banking on their digital transformation journey.
Using Open Banking, banks can enhance their existing online and mobile applications as well as collaborate with neobanks and other fintechs. By leveraging Open Banking APIs, traditional banks can easily and securely share customer data and integrate third-party services. And this can enable them to develop innovative features that rival those of rival neobanks. For example, a bank could use Open Banking to access customer data from a third-party savings app to recommend a more competitive savings product. Or it could suggest relevant complimentary services based on analysing a customer’s spending data from a neobank.
There are other ways of competing too. At Netcetera, we provide a range of API-enabled solutions, including a fully-customisable mobile banking app and web banking portal. Simple to integrate and deploy, these solutions can deliver user-friendly, feature-rich digital banking experiences that deliver exceptional customer value and result in higher user engagement.
But traditional banks have a key advantage over neobanks, which is their breadth or specialist products and services. By incorporating these into their digital channels, traditional banks can offer more relevant financial solutions than neobanks are able to match. Doing so would raise the barrier to entry for neobanks and make it more challenging for them to grow their market share. While neobanks may collect large amounts of data about their customers, it’s traditional banks who are able to offer suitable products and services.
Our mobile wallet platform, ToPay, is another powerful offering that traditional banks can consider to compete with neobanks. To cater for the 72% of Europeans who actively use mobile wallets, our white-label solution enables banks to integrate a modern mobile payment experience, complete with features like HCE payments, card management and Apple Pay and Google Pay integration.
By embracing Open Banking and digital banking solutions providers like Netcetera, traditional banks can strengthen their established offerings and position themselves as strong competitors to neobanks. At Netcetera, our solutions are designed to be modular and open, enabling banks to easily choose and integrate the specific components that best meet their needs. This approach results in a flexible and future-proof digital product that ensures banks remain competitive and continue to deliver value to their customers.
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