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Neobanks have demonstrated their ability to disrupt the status quo of banking over the last few years. Their superior customer-centric approach, delivery of modern banking experiences, and innovative operating models have given them massive pulling power compared to their traditional counterparts. It’s no wonder neobanks have consistently grown in numbers and attracted droves of customers. According to a neobanks listing, there were over 272 neobanks globally in 2023, and the number of neobanking customers is expected to reach over 1 billion by end of 2024.
In response, many incumbents have embarked on digitizing their legacy systems to align their banking services to the needs of modern customers. Many have done this by building dedicated digital arms of their financial institutions, while others have opted to build entire digital-only banks from the ground up. As a result, the neobank market value has continued to boom. Statista reports that in 2023, the transaction value for neobanks globally was USD 4.96 trillion and is expected to cross USD 10 trillion by 2028.
While the impact of neobanks on the financial industry cannot be understated, as the industry matures, the question that lingers on the minds of investors, entrepreneurs, and financial institutions is – what is the state of neobank profitability?
A Global Perspective of Neobank Profitability
Revolut, founded in 2015, did not attain profitability until 2021. The challenger recorded £638 million in revenue in its first profitable year, 2021, which then increased to £923 million in 2022. For the 2023 financial year, Revolut projects revenues of £1.7 billion.
Another example is Starling Bank, which achieved neobank profitability in 2022, eight years from inception. The British challenger recorded a £142 million revenue in March 2022, a 222% growth from the previous year. This was 2X+ growth in terms of revenue, from £216 in 2021 to £453 million in 2022.
Many other profitable neobanks, such as Nubank, RedwoodBank, and judobank, began recording profitability around the same time, 2021-2022, as shown in Figure 1 below. This trend could be attributed to the global pandemic that occurred during this period, driving more and more consumers to seek the convenience and benefits of digital-only banks.
It’s impressive how leading neobanks such as Tinkoff and OakNorth Bank were able to achieve profitability relatively quickly compared to many other neobanks. Tinkoff’s success in 2009, just three years after its launch, is particularly noteworthy, especially considering the challenging economic environment at the time.
OakNorth, on the other hand, achieved neobank profitability and fueled its growth by targeting an underserved market segment which it describes as the “missing middle”. This segment comprises midsize businesses situated between micro-businesses and large corporations, which often lack access to business financing. The company built and licensed its OakNorth Credit Intelligence (ONCI) technology to banks globally, an approach that not only generated revenue but also enhanced their business reputation. OakNorth’s partnership-driven business model, which focused on collaborating with fintechs, accountants, brokers, and other lenders, enabled them to expand their deposit base and acquire SMB customers cost-effectively. Additionally, OakNorth’s focus on sustainability, evident in products like ON Climate, showcased their commitment to making a positive impact beyond profits. This strategic approach, coupled with innovative technology and strategic partnerships, has been key to OakNorth’s remarkable success and profitability.
In a nutshell, these examples highlight the considerable potential for neobanks to achieve profitability and rapid growth within a relatively short timeframe, particularly through the provision of innovative products and services aligned with customer demands. However, to truly expedite their trajectory towards profitability and sustained expansion, several critical factors must be carefully considered.
Success Factors and Recommendations for Building a Neobank
Achieving success in the FinTech sector has proven challenging for many startups. Despite receiving substantial investor backing, 75% of Fintech’s globally end up failing. This statistic particularly speaks to the essence of strategic business planning and careful decision-making every step of the way. Neobanks, in particular, encounter obstacles such as a lack of market understanding, regulatory complexities, and the challenge of finding a balance between monetizing their offerings without compromising their value proposition or alienating a segment of their customers. From our experience building digital banks, there are several strategies that neobanks can use to not only achieve success in terms of profitability but also market prominence and sustainability.
Leveraging Assets
Building from existing assets is indeed the cornerstone of sustainable growth in any business endeavor. It entails capitalizing on current resources and capabilities to drive innovation and expansion into new realms of opportunity. This strategic approach allows companies to optimize their strengths while concurrently cultivating new competencies to navigate emerging challenges and seize untapped potential. In the context of neobanks, leveraging assets involves enhancing branding capabilities, cultivating a culture of industry partnerships, and improving their existing products. That is:
- Strong brand recognition: Building a strong brand requires consistent branding, innovative marketing strategies, and exceptional customer service to maintain trust and loyalty. Neobanks, with strong brand recognition, benefit from high awareness and deep trust among customers, which is integral in attracting and retaining customers in a competitive market.
- Ecosystem advantage: Successful neobanks extensively leverage partnerships with other industry players to tap into their technologies, customer bases, and market understanding. This allows them to cross-sell financial products and services more effectively, reduce customer acquisition costs, and increase revenue streams.
- Existing financial services: Innovators with prior financial services experience can leverage their expertise to build more customer-centric products and services. Such experience is important in navigating processes such as regulatory requirements, product development, and alignment with market needs, which form the foundation of success.
Building and Scaling a Neobank
The technology model that a neobank has adopted from the outset defines its success not only in the present but also in the future. In the present, it determines the time to market, its first impression in the market, and the competitiveness with existing neobanks. In the long term, however, scalability to accommodate new propositions, responsiveness to market changes, and cost-efficiency for maintenance and upgrades become integral concerns. These factors can be addressed by building on the right infrastructure, establishing the appropriate organizational structure, and most importantly, being customer-centric from the beginning.
- Scalable and flexible technology: The ability to build and launch new products easily and quickly is the lifeblood of successful neobanks. Considering the high dynamism in FinTech, successful neobanks build on highly scalable infrastructure to innovate easily and adapt to market changes in record time.
- Agile organizational structure and governance: This involves creating flexible processes and decision-making frameworks that enable rapid adaptation to market changes. Agile governance ensures that the organization remains nimble and resilient to seize opportunities and overcome challenges in its journey to success. Such frameworks enable neobanks to respond swiftly to customer needs, regulatory requirements, and technological advancements.
- Customer obsession: Neobanks success by obsessing over their customers’ needs and preferences to ensure they deliver effectively on their value proposition. This involves developing products, commercial strategies, and branding that resonate with their target market. Capitalizing on customer obsession as a differentiator gives them an edge over traditional financial institutions.
Sustaining Success
The longevity of neobank profitability hinges on its strategies to foster innovation, reduce costs, and mitigate risks and threats to its business. This largely routes back to the technology infrastructure upon which the neobank is built. Continued success requires a relentless pursuit of customer-centric solutions, which comes down to leveraging data for actionable insights and adapting swiftly to market dynamics.
- Data-driven: One of the strategies successful neobanks use for sustainable growth is by leveraging data for insights into customer behavior, preferences, and market trends. Analyzing data from various sources, including transactions, interactions, and customer feedback enables them to identify opportunities for product innovation, personalized marketing campaigns, risk management strategies, etc. Eventually, this approach empowers them to make informed decisions that drive growth, enhance customer experiences, and maintain their competitive edge in the industry.
- Risk management: Risk management is a fundamental aspect of sustainable growth for any business, let alone neobanks. Neobanks must effectively mitigate risks as both a bank and a tech player. This includes implementing robust cybersecurity measures, complying with regulatory requirements, and managing operational risks. This allows them to protect their reputation, safeguard customer data, and ensure long-term success.
- Path to profitability: As neobanks chart their innovation path, it’s important to do so along with their profitability goals because both are integral for sustainability. Thriving neobanks do so by strategically and sequentially launching products that generate revenue while keeping their innovation costs on check. With such an approach, they are able to attract investors, reinvest in their business, and continue to innovate as market demand changes.
APAC is Leading the Way
A closer look at the regions of operations for the leading neobanks globally shows that 60% of them are located in Asia. These include Kakao Bank in South Korea, Paytm Bank in India, and several Chinese digital banks such as WeBank, AIBank, XW Bank, and MyBank. In Japan, notable players include Jibun Bank, Sony Bank, PayPay Bank, and Rakuten Bank.
Unlike many Western digital banks, Asian neobanks have opted for a collaborative approach, forging partnerships with major tech firms possessing robust digital capabilities. Rather than operating in isolation, these neobanks integrate themselves into existing comprehensive ecosystems that span various platforms, ranging from eCommerce to social media.
The adoption of an ecosystem model has accelerated their path to neobank profitability, with these banks achieving a 49% faster time to profitability compared to independent digital banks. This trend underscores the importance of strategic partnerships and the ecosystem approach in driving the success of neobanks in Asia. Ownership of digital banks by tech companies and conglomerates helps them become profitable through:
- Access to established customer base: Tech companies and conglomerates often have an established customer base, which can help digital banks to acquire customers more quickly and efficiently.
- Leveraging technology: Access to cutting-edge technology and expertise can help digital banks to develop and deploy their products and services more quickly and efficiently.
- Cross-selling opportunities: Tech companies and conglomerates often have a broad range of products and services that can be cross-sold to digital banks’ customers.
- Brand recognition: The strong brand recognition enjoyed by these companies can help digital banks to establish their brand more quickly and effectively.
- Ability to procure a banking license: The significant resources available to the parent company have made it easier for them to apply for and obtain banking licenses.
Southeast Asian countries such as Singapore, Hong Kong, and Malaysia have notably embraced a consortium model. This model involves consolidating resources and strengths from multiple partners instead of operating independently. By leveraging this collaborative strategy, neobanks in the region establish a more resilient foundation for growth and innovation, which constitutes a primary factor contributing to their success.
One exemplary success story is Grab in Singapore. Initially a ride-hailing app, Grab has transformed into a super App offering a range of services that fulfill various daily needs of its customers. Key to this evolution is its GrabPlatform, a suite of application programming interfaces (APIs) that provides access to various tech components developed by Grab, such as transport, logistics, payments, user authentication, messaging, insights, and mapping. Businesses looking to build solutions can leverage Grab’s platform without starting from scratch, thus accelerating their development process and enhancing their offerings.
What sets Grab apart is its strategic partnerships with numerous leading companies, both regionally and globally, such as Microsoft, Zapier, SAP Concur, Mastercard, Disney, and Gojek, just to mention a few. These partnerships have been instrumental in enhancing GrabPlatform’s infrastructure, functionality, and performance. For instance, Microsoft’s cloud services play a crucial role in bolstering the platform’s infrastructure and scalability, while Zapier’s integration capabilities enable seamless connectivity with a myriad of other applications and services.
Closing Thoughts
The increasing popularity of neobanks is poised to grow further as customers increasingly get accustomed to banking from their mobile devices. Statistics show that 27% of global consumers have relationships with neobanks and that 69% are open to adopting digital-only banks. Coupled with enablers such as the availability of modern technologies, the growth of digital infrastructure, and widespread mobile connectivity, the stage is set for neobanks to thrive and become even more profitable.
However, the time taken to achieve profitability depends on the strategies neobanks employ, from conceptualization to building the right partnerships and aligning their products with market demands. Codebase Technologies supports both incumbent financial institutions and nascent Fintech’s with a full stack neobanking platform, Digibanc, as well as strategic consulting services to ensure your path to neobank profitability is accelerated.
For further reading on neobanks download our latest whitepaper “A Guide to Building Financially Inclusive Neobanks in the MENA Region.“
Tagged:
- digital banking, global
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Omar Mansur, Managing Director APAC
Tech focused and savvy disruptive strategy expert with a strong passion for exploring innovation and making a difference. Having an extensive history working with various Tier 1 and 2 financial, government and fortune 500 institutions across the GCC, Africa, ASEAN and South Asian region whilst delivering game changing and revolutionary initiatives to change the world. Always on the lookout for the "next big thing", currently looking to invest in startups and ideas that aim to change the world and impact lives.
