What Will Differentiate Winning Neobanks From Losing Ones?

Optherium Labs
4 min readDec 14, 2022
https://optherium.com/digital-banking/

As of today, over 250 neobanks exist in the world. But as in any business, even some of the most established ones are experiencing difficulties. Over the next couple of years, the herd will be thinned, and those who vary their products will survive.

The quick rise of neobanks is vastly supported by the demand for digital services, primarily from Gen Y and Gen Z customers. And while this trend is destined to continue upward, that doesn’t mean more and more banks will thrive.

What Needs to Change for Most Neobanks?

In the beginning, rising Neobanks had to deal with traditional banks as their main form of competitors. Therefore, they have chosen the customer experience and cheap acquisition strategy because it plays to their largest competitive advantage over market leaders. The use of enticing pricing, such as low-interest rates on loans or minimal or non-existent costs for banking transactions, is a common strategy.

This has greatly aided neobanks in achieving a large customer base quickly. However, this must change in the future to increase profitability. To maintain their business, neobanks must engage with their clients in meaningful ways in addition to merely acquiring new ones. The dynamics of the engagement are changing even more quickly.

How to Acquire New Clients If the Business Model Changes?

Focusing on either niche communities or groups is something that can greatly help in acquisition. More than a few neobanks have successfully transitioned into servicing niches and population groups. Examples include Majority, Aspiration, and GoHenry, which address teenagers and combat climate change and migrant communities.

Neobanks concentrating on adjacent prospects are even more advantageous, such as Square Financial Services, which serves its merchant base, or RazorpayX, which offers cash management services to its business clients.

Fintech is a Serious Threat

Term deposits and loans are already available through Google Pay, and many more banking products will be available in the future. Recently, the American internet giant Google teamed up with the fintech company Setu to enable consumers to open FDs (fixed deposits).

Another example is Amazon, which has started giving out business loans through Amazon Lending. Amazon offers a loan program called Amazon Lending to give qualified sellers access to short-term capital to expand their operations. To determine who’s eligible for a 3, 6, or 12-month business loan, Amazon assesses vendors’ capacity to boost sales and deliver higher customer loyalty and satisfaction.

Therefore, the crucial question is: How will neobanks interact with their clients when they may conduct banking using consumer-facing applications rather than banking apps?

Regulations May Also Affect Profits

How can neobanks simultaneously not only keep their customers but also make a profit by interacting with them? Neobanks are still developing their monetization strategies, which are based on MDR profits from debit card sales in many areas. Regulations that are lowering MDR, however, put that paradigm in jeopardy.

This means any neobank that relies on just a few income sources must diversify and create a better revenue stream to protect itself from regulation changes that can disrupt the cash flow. But how?

What Can Neobanks Do?

Neobanks suffer losses while rarely paying for themselves. Did you know that the average neobank income per user can be as low as $12 per year, while traditional banks average a whopping $230? Depending on the acquisition cost, this means it often takes years before any given customer becomes profitable for the neobank.

https://optherium.com/digital-banking/

With just $1 per month of revenue per user, it’s very hard to break even. Fortunately, third-party turnkey solutions offer a ready-on business model that can greatly increase the average revenue per end user.

For example, Optherium’s average user acquisition breaks even in less than two years, while the average for most neobanks is more than triple that amount of time. With a smart business model, you can get up to $50 in yearly revenue per user, compared to just $12 for most neobanks.

This is owed to numerous revenue streams diversification, including:

  • Interchange fees
  • Monthly fees
  • Direct deposit fee
  • Card issuing and ACH account fees
  • SWIFT transfers fee
  • ATM fees
  • Forex fee
  • Multiple plans
  • Options for in-platform advertisements
  • Marketplace tariffs change, and access fee options

Of course, alongside these and many other revenue streams, you can choose and create the best possible business model without making things too expensive for your customers.

Final Words

There are many neobanks, and the market is undoubtedly growing with higher and higher demand for digital banking services. However, for end-customers to remain in the hands of neobanks and not Fintech, neobanking apps must step up their game and improve their business model while changing their acquisition strategy.

The easiest way to do this is to partner with third-party banking-as-a-service providers that can minimize costs while offering turnkey solutions.

--

--