What are the Biggest Opportunities and Threats for Neobanks in 2022?

Neobanks are increasingly taking over the financial industry thanks to more diverse and immediate needs for digital banking solutions amid a pandemic that’s showing few signs of slowing down significantly. Large enterprises, investors, capital-infused startups, and traditional banks have all noticed the evolution of white-label Neobanks as they perch on top of existing banking infrastructures to provide more personalized, timely banking solutions and enhance customer experiences. As of January 2022, there are 247 neobanks worldwide.

While more white-label digital banks are entering the financial landscape, they have to address as many risks as they do opportunities to try and secure their respective futures. Neobanks have typically targeted small businesses and retail banks. Still, they have evolved to attract large enterprises and major bank providers seeking to digitize their services to keep their customers/clients happy. As the pandemic continues the acceleration of financial service digitization, these are some of the opportunities and threats Neobanks face in 2022 as they continue to make their presence felt.

How the Pandemic Has Paved the Way for Increased Neobank Emergence

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The pandemic has led to the increased adoption of neobanks

The global pandemic has been one of the biggest drivers of Neobank adoption. Around 65% of Americans are expected to use digital banking in 2022, and the global digital banking sector should topple the $30 billion mark by 2026. The desire for white-label banking solutions and increased digitization throughout the financial industry is clear. Neobanks are grabbing the attention of business leaders and investors because they provide conveniences for customers that include, but are not limited to:

  • IBAN and ACH bank accounts
  • Prepaid Debit Cards
  • Instant domestic and international money transfers
  • Frictionless online registration
  • Access to various offers embedded into the internal marketplaces

Neobanks also don’t have the hassle of physical branches or extensive legacy infrastructures like traditional financial institutions have, meaning that they boast less operational costs and can offer inexpensive financial products/services to their customers. However, with the increased prominence of Neobanks comes a fair share of threats and concerns that operators must address so that their long-term outlooks are more promising.

Regional Variety Makes for a Complex Outlook for Neobanks

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How different regions set contrasting rules for neobanks affects their future outlook

One threat neobanking solutions have to address to secure themselves for the long haul and become more dependable for the larger entities that partner with them is that the regional profiles of neobanks in different places differ entirely.

For example, in the United Kingdom, several full-service digital banks are successfully replicating what larger financial institutions offer. By contrast, the United States hasn’t developed or adopted as many. Part of the reason for this difference is that banking licenses are easier to obtain in the United Kingdom than in the U.S. The United States’ biggest neobank to date, Chime, does not have a banking license despite having a user base topping the 25 million mark.

Typically, American neobanks partner with traditional financial institutions to provide back-end services via a contract, with revenue generation primarily coming from payments. Because it’s easier to obtain banking licenses in Europe, lending and investment have become more prominent income sources for neobanks across the continent. Service charges and net interest margins supplement revenues from payment markets that aren’t as lucrative as their American counterparts.

Another example showing the regional complexity of neobanks is in South America. Like their North American counterparts, South American neobanks need to establish partnerships with larger financial institutions, relying on commission to supplement their income generation. Though the conditions for neobank evolution are somewhat restrictive in South America, Brazil has seen significant neobank adoption, with its neobanks making revenues through credit card balance interest and payments.

In Asia, South Korea particularly has full-service neobanks operational while Chinese providers focus more on serving small business owners rather than large financial institutions or enterprises. Meanwhile, in Oceania, Australia operates full-service neobanks with an increased focus on their business-focused clientele, creating major competition across the nation.

The Challenges Neobanks Face With Their Growth Strategies

Neobanks have typically been launching with some signature features to capture the attention of enterprises, traditional institutions, and investors alike. These signature neobank features include inexpensive forex, international money transfers, business accounts, and credit cards with no annual or hidden fees. Some neobanks in Europe are also going beyond that, creating full-service accounts that cover investments, lending, and insurance.

The issue, however, is that different regions are culturally specific, meaning that a banking approach in one country won’t necessarily work in another, complicating neobank adoption. Different countries have contrasting regulations regarding payments and deposits. Some developed countries are excessively banked, leaving an excessively saturated market and potentially posing problems for full-service white label neobanks. Also, in some countries like the United Kingdom, traditional banks are becoming more technologically savvy, narrowing the technological advantage that digital banking outlets initially set, meaning neobanks are under increasing pressure to consistently evolve or face the increasing prospect of joining forces with traditional banking outlets.

Additionally, the increased competition in the digital banking space can potentially be counterproductive to neobanks going forward as retail banking power players like PayPal and JP Morgan have launched digitized alternatives that offer many of the same special products that neobanks provide. Neobanks mainly rely on payments as their biggest income stream or compete with deposits to secure significant investments. The increased digital savvy of more traditional institutions will cause neobanks to pay greater attention.

Where are the Opportunities for Neobank Solutions?

Neobank solutions maximize their opportunities within the financial industry by targeting particular market niches that mainstream providers have long underserved. Neobanks, in tandem with established traditional institutions, can work to address these poorly served niches, improving the overall customer experience and creating new pathways to win new customers and business opportunities.

Neobanks should target marginalized markets, including families, young people, and companies that need as much assistance as possible with international trade. By seeing value in serving underserved markets, neobanks will grow their customer-friendly reputations depending on the location. Statistics also show that neobanking and all digital banking solutions are increasing in underserved parts of the population, including minorities and the LGBTQ+ community.

Additionally, neobanks are known for their customizable interfaces, part of the banks’ identity. The interface is the brand for many bankers, creating clearer identities that make them more recognizable and easy to follow. Differentiation is a significant element for success for neobanks, with white-label solutions leveraging digital delivery to challenge the long-held notion that financial products are commoditized across the board. By repackaging traditional financial products like card payments, neobanks provide newfound differentiation that offers personalized, customizable service to customers of all kinds.

Neobanks should also be seeking unfair advantages at all times. There are existing business footprints available in the banking sector that neobanks can analyze and strengthen to make their respective propositions more profound. Neobanks can use aspects of the footprint to develop clearer, convenient experiences for customers while presenting the kind of innovation that investors look for when deciding whether they should put significant financial outlay into digital banking solutions.

The Revenue Drivers Neobanks Must Champion to Accelerate Growth

For neobanks to see accelerated growth in 2022 and beyond, optimizing their revenue-driving mechanisms is key to success. One vital driver for neobanks is unit economics. Investors look for drivers like unit economics because investors consistently ask questions about digital banks’ road to becoming profitable. Customer acquisition costs (CAC) can be hefty for neobanks, with the average costs being around $35. Additionally, compliance can be costly for neobanks, with a small yet significant amount of revenue typically spent on compliance each year.

A key revenue driver for neobanks that will improve their prospects in 2022 is the continuing emergence of interchange. Significant revenue streams from interchange fees help neobanks to sustain themselves as they simultaneously minimize their maintenance and overdraft fees. Changes in interchange fees by card issuers impact how much revenue neobanks can generate. Knowing where users will use cards is paramount to neobanks making money, a key aspect neobank investors must consider if they want to see strong returns investing in the digital banking space. Neobanks in the United States makes most of their money from interchange fees. These fees are normally capped for large financial institutions in the U.S. due to the Durbin Amendment.

Neobanks have been spending money earnestly, particularly on advertising and marketing, to accelerate customer growth, leading to questions regarding whether the business model for these digital-only banks is sustainable. Because of the expenses involved with customer acquisition, neobanks can improve their revenue capacities by fulfilling the need for neobanks in emerging markets. Neobanks is a good fill-in in areas where traditional banks aren’t present.

Neobanks investment and evolutions are expected to climb in 2022 and beyond. But, it’s essential to understand the pain points and potential growth opportunities for neobanks so enterprises, banks, and startups see the full benefits of having digital-only banks. Optherium Labs provides agile white-label neobank solutions ready-made for large entities to capitalize on.

Learn more about our white-label platform!

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