Other parts of this series:
If you believe the hype, neobanks are disrupting every corner of the financial services market. The biggest players are signing up tens of millions of customers, with some of them experiencing 150% year-on-year growth in their customer base, according to Accenture research. But as we discussed in our last post on how neobanks can balance profit and sustainability, this growth has not necessarily translated into profits. Even after five or more years in business, many neobanks are operating at a loss.
Meanwhile, the number of new neobanks continues to grow around the globe. In the Middle East, we’ve seen a spike in interest in launching neobanks as a strategy for diversifying investments; there are now over 20 neobanks operating across the region, according to Fintech News. How many of these banks will succeed in becoming sustainable? Is “diversifying investments” a good reason to create another neobank?
It’s time for neobank leaders, and those looking to enter the market, to refine their vision of what their neobank should be. We call this stage in the neobank life cycle “envisioning.”
Many of today’s market leaders took the time to set out a clear vision and value proposition before designing and building their neobank.
Finding and defining your “why” and “what”
Envisioning, or identifying your purpose, is about answering and defining:
- Why you want to start a neobank and
- What you want to be known for.
Your potential customers will want to know what problem you are solving for them. Today’s customers have a lot of choice when it comes to financial services, and a compelling vision for your neobank will let the right customers see how your “why” aligns with their goals and beliefs. “What” you are known for will help you to attract the right customers to fulfill your purpose.
For example, rather than simply providing small business loans, your vision may be to empower women by helping them access financing. Instead of marketing your neobank as an investment specialist, you could decide to focus on teenagers and young adults by helping them to save and invest for their education and beyond. Or perhaps your vision is to assist businesses to expand internationally by providing forex solutions.
Having a clear understanding of your “why” and “what” forms the foundation of your neobank’s vision. These need to be supported with detailed planning based on:
- A defined target customer segment,
- The size of the market opportunity,
- A clear business model,
- The regulatory environment in your market, and
- An understanding of your ecosystem of potential partners.
Neobanks that begin their development without undertaking this envisioning process will struggle to carve out their place in the market and differentiate their offering in an increasingly crowded digital financial services ecosystem.
Re-envisioning to meet changing needs
Having a clear vision is important, but that vision doesn’t have to be fixed. The market is constantly changing, and today it is doing so very fast. What might have seemed like a bold vision and purpose only a few years ago may already be missing the mark.
Neobank business models need to be reshaped fast to turn customer affinity into revenue and profit.
For example, some of the first-mover neobanks—such as Monzo, N26 and Revolut—that entered the market as category killers, focusing on one niche service or one customer segment, are still learning and evolving. They are working to prove their profitability by taking risks and shifting strategy—their “why” is evolving from providing straightforward financial services to providing services both “from and to” their customers through ecosystem partnerships and digital banking as a service. Here are the approaches they’re taking:
- Monzo has decided to focus on offering distinctive services in the UK market. Instead of seeking a US licence, it will expand its offering in the US through its existing partnerships there.
- N26 is focusing on profitable premium, subscription-based accounts and using a “marketplace model,” where its customers can access products like trading and credit from third-party providers that pay fees to N26.
- Revolut is now earning two-thirds of its revenue from prepaid debit cards with favorable forex rates. It also earns commissions from allowing customers to buy and sell cryptocurrencies. Revolut is introducing commission-free stock trading to US customers as well.
The speed at which digital disruption is changing the market for both incumbents and new players means that all neobanks (and traditional banks, for that matter) must stay agile and be responsive to market trends in order to survive. Addressing this reality before starting to create your neobank provides the opportunity to build in this agility and align it to your vision.
Throughout the life cycle of your neobank, it is important to constantly refer to and refine your vision to guide your next steps. It is easy to go down an unintended path by reacting impulsively to trends or enthusiasm for a new technology. The key is to remember what you’re trying to achieve and why.
In our next post, we’ll be explaining the design process for neobanks, and how a strong chance of success can be built in from the start.
To discuss how your neobank can create a powerful vision and purpose, contact us here.
To learn more about the future of banking read our report The Future of Banking: It’s time for a change of perspective.