As the ad suggests, most neobanks are not technically
banks. They offer debit cards and online banking services through fanzy apps.
The startups are proud of their speed: they typically deposit paycheques a few
days faster than large banks and, thanks to simpler identity checks, open
accounts in minutes, even for customers with poor credit histories.
Unlike conventional banks, which also earn money on
overdraft and other fees, neobanks make most if of their money from interchange
fees on debit-card transactions. Regulators allow small banks to charge at
least double the interchange fees that large ones do; the benefit is passed on
to the fintechs that latch on to them.
The pandemic partly explains neobanks’ success.
According to Apptopia, a data provider, the number of monthly active users of
neobank apps doubled between July 2019 and June 2021, while those of
traditional banking apps shrank a little. Top neobanks boasted nearly 20m
downloads in the first half of this year alone.
The underlying drivers of the boom, though, are
long-standing. Many customers have been poorly served by the financial system,
if not shut out altogether. The larger
neobanks aspire to help those living paycheque to paycheque; others cater to
specific underserved groups such as migrants. Social purpose aside, this makes
business sense: such customers tend to save little and spend often, which suits
the interchange-fee business, explains Max Flötotto of McKinsey, a consultancy.
Jarad Fisher of Dave, another neobank, hopes that, once in the system, customers
“graduate” to using more profitable services. To that end, his firm helps
consumers find gig work.
Optimists say traditional banks will struggle to
compete with neobanks, given the difficulty of modernising technology and
customer service, and the risk of cannibalising their fee-based business.
Banks’ shareholders may also be less keen on innovation than venture
capitalists, says Scott Galloway of New York University.
Many neobanks have realized that to achieve sustained
profitability, they have to get into lending, says Jeff Tijssen of Bain,
another consultancy. A few firms are launching credit cards and other lending
products, venturing further into the terrain of conventional banks.
However, the challengers face hurdles, too. A business
based on interchange fees is only viable if costs are contained and volumes are
high. Surveys suggest that a small fraction of bank customers regard the
fintechs as their primary bank.
Meanwhile, giants such as Google and Walmart are
starting to dabble in digital finance.
From The Economist (edited)
