What Is Going On With Neobanks?

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A lot has changed for neobanks in the last 5 years. During the second half of the 2010s, neobanks such as Monzo and Revolut were landing on the scene with a big splash. They were ambitious and well-funded and customers were excited to post about their colorful new debit cards on social media.

Fast forward to today. These same banks are delaying IPOs, customer growth is sluggish, funding is slowing down and profits seem a way off for many. Have customers and investors lost interest, have the banks struggled to realize their own ambition as “challengers” or is the best yet to come?

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Challenging The Banks

Neobanks started in the same way as many other types of fintech companies – with bold plans to challenge what the incumbents offer. This “challenge” differed depending on what market you were in.

In the US, challenger banks were largely looking to meet the needs of people that big banks underserved. This included those who were underbanked as well as others who wanted to avoid high fees and low savings returns.

The digital bank disruption started earlier in the UK, with the first digital bank receiving its license in 2010. British challengers primarily offered innovative services to customers, drawing on the advantages of new technology and a lack of legacy systems.

In Australia, challenger banks seemed to arrive on the scene at the same time, with most starting up between 2017 and 2019. Australians were already enjoying low or no fees from incumbent banks, plus new payment technologies such as contactless systems. To actually “disrupt”, Australian challenger banks focused on creating apps packed with features such as cheap foreign transfers, spending analysis and insights.

The aims of the challenger banks in each market have changed over the past 5 years, some for the better and some for the worse.

The US has seen a shift to hyper-personalized digital banks that design their products and services for specific communities such as people of color (POC) or LGBTQI+.

Challenger banks in the UK have gone from strength to strength, sticking largely to their original goals. They have continuously developed their tech, improved their apps and added new features for customers.

Meanwhile, in Australia, neobanks have almost disappeared. It started with the collapse of much-hyped Xinja at the end of 2020, closely followed by the National Australia Bank (NAB) acquiring digital bank 86 400. In the past month, one of the last contenders Volt also announced plans to shut its doors and hand back customer deposits.

Funding Challenges

The products that new banks offer to lure customers are often loss-making. Savings accounts and debit cards aren’t money-making products for banks. Incumbents offer them because of the money brought in with mortgage and other lending products.

To make up for this, neobanks heavily depend on funding. This was fine in a pre-COVID world, but global events of the last 3 years have made investors harder to find.

A number of US neobanks have cited capital constraints as a growing issue, including neobanks Dave and Varo Bank. Other neobanks like Chime have also been forced to delay planned IPOs. A recent Forbes article highlighted this problem, showing that there are market factors in play such as the niche model that neobanks adopt to target a very specific market segment.

“I’ve been a supporter of the niche affinity approach to neobanks where community fintechs like Kinly, Daylight and Panacea Financial serve the unique financial needs of specific consumer segments,” wrote senior contributor Ron Shevlin.

However, he said: “It’s hard to imagine that venture capitalists will continue to fund an infinite list of neobank startups planning to go after increasingly smaller market segments with interchange-reliant revenue models.”

The issue is also centered around profitability. Investors are willing to bankroll neobanks, but they are going to expect profits at a certain point.

“Unit economics are crucial for neobanks and increasingly so because investors are asking questions around the path for profitability,” wrote former director of global product launch management at PayPal Sumeet Ahuja in an article for GLG.

“A typical neobank loses about $11 to $15 per consumer, so the economics are not favorable yet.”

Do Customers Still Want Neobanks?

Setting funding aside, are customers even still buying into neobanks? It depends where you are in the world.

In the US, there are still neobanks with considerable customer numbers. The biggest in 2021 was Chime with 14.5 million users, followed by Current with just over 5 million users. Those numbers are large considering the level of banking competition in the US. However, these still pale in comparison to incumbents, with JP Morgan counting 66 million American households as customers.

A recent survey by global comparison site Finder shows that the shine on the neo debit cards may be wearing off. In 2020, 8% of survey respondents planned to open a neobank account in the coming year. By 2021, adoption had waned and just 5% of survey respondents said they planned to open an account.

The survey also revealed that younger people are more likely to want to sign up for a neobank – 11% of respondents between 18 and 24 compared to just 5% for those between 55-64 and 5% for those aged over 65.

This is in line with other data. A survey from Deloitte found that one-third of Americans use digital banking channels more now compared to pre-pandemic days. It should be noted that this includes digital banking options offered by large incumbent banks.

Importantly, the Deloitte survey also found that Americans are likely to continue to prefer digital banking for simple transactions such as paying bills and depositing checks. With complicated banking tasks such as receiving financial advice, both millennials (33%) and boomers (35%) prefer to visit a branch.

In the US, it may not be a case of customers turning away from neobanks, but rather neobanks starting to focus and deliver what customers actually want.

Where Does That Leave Neobanks?

Neobanks have proven that they can be a solid success story when delivering on actual customer needs. The UK is a clear example, as are the unicorns we’ve seen in neobanks such as Nubank in Latin America. In the US, neobanks that have provided innovative digital products that genuinely benefit customers continue to grow their customer base.

The trick is to serve customers while also having a path forward to profitability and finding investors willing to come along for the ride.


About the Author

Elizabeth Barry is senior editor for Finder's global financial niches. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards.