Why Some Neobanks Are Changing Their Business Models

Optherium Labs
4 min readSep 6, 2022

In the past few years, more and more digital and tech-savvy customers have joined the market as potential clients for banks. With a customer-centric approach, neobanks have appealed to exactly this segment of users that don’t necessarily want to rely on physical branches and prefer to have it all on their mobile devices.

As long as open-minded regulatory rollouts like the UPI, PSD2, and the UK’s Open Banking Standards are up and running, there will be a place for neobanks in society. The good thing is that a very large portion of the population has already adopted them and is not willing to go back to traditional banking.

Specific Example of Changed Business Models

Since Nubank, the largest neobank in the world, is absolutely dominating the neobank industry in Brazil, competitors had to find a way to somehow get a piece of the pie. Neon, for that matter, decided to focus on SMBs and entice them to sign up by offering a management system for employee payrolls.

That way, Neon managed to both increase the SMEs which use it and also greatly increase the number of end customers, which were the employees.

What Might Cause a Neobank To Change Business Model?

The simplest answer to why anyone would want to change their business model is because it’s no longer working as intended. Apparently, as with any business, there are ups and downs, but when a neobank is no longer profitable or begins to operate at a very tight margin or loss, something needs to change.

Moreover, it would be good to foresee such circumstances and change the business model before actually reaching the stage where you’re operating at a loss. Foreshadow by monitoring trends and data analytics.

Higher Acquisition Cost

Since more and more traditional brick-and-mortar banks started digitizing and offering digital apps, it’s getting increasingly harder for neobanks to gain new users. With traditional banks filling all the missing gaps that initially led to the development and use of neobanks, it’s likely that some people will transition back to the original banking system. This further reduces the expected customer lifetime value for neobanks.

No Physical Location

No physical bank branch means no unnecessary expenses, but after COVID-19, ironically, people are more concerned regarding what would happen in the case of power outages and unexpected events. Moreover, during times of turmoil, economic instability, recession, or stagnation, it’s increasingly difficult for neobanks to raise capital, which is one of the most important aspects of successful startups. Mainly due to these two reasons, very few customers are utilizing neobanks as their primary bank accounts.

How to Go Over These Difficulties?

The majority of the aforementioned end-customer concerns can be battled. Neobanks aim to specialize further in products and services that traditional banks don’t offer quite yet. A very good example here is how Neobank developed the payroll system for SMEs.

Since the neobank market size is expected to reach over $2.05 trillion USD, at a CAGR of over 53%, it’s very likely for neobanks to continue their growth and overcome the difficulties. With the help of features that nobody else offers, you can definitely take a piece of the market, especially if the newly brought solution is much needed in a certain segment.

The Smartest Way For a Neobank to Come Up With New Features

The smartest way to create new features and services as a neobank is to analyze your consumers with the help of data analytics, surveys, and focus groups and determine what they need. Once you know that, reach out to third-party software or banking as a service provider that can develop or integrate for you their ready-to-use solutions on the spot.

Instead of spending resources to hire research and development professionals and pay thousands of dollars in salaries, the opportunity cost can be used in hiring an external company that is already working with the competition and has worked with other neobanks across the world.

Not only can such a company help you in terms of implementing new features, but it can also give you ideas on what else you might be missing as a neobank compared to others. They can also partially audit your internal and external processes and compare you overall with the competition by offering you the missing and most suitable features for your relative market.

Final Words

Lately, neobanks have been receiving a lot of pressure from digitizing brick-and-mortar banks, Big Tech, and FinTech companies. Often, that results in higher acquisition costs, lower margins, and overall decreased profitability.

Some have started offering paid subscriptions, while others began increasing the levels of security to try and gain more primary account holders. One of the safest bets a neobank owner can make is to implement new features to satisfy market segment needs, mainly by the use of third-party solutions.