The growth of new players in the financial sector is a wake-up call for traditional banks, which need to adapt to the digital transformation process and avoid being left behind
Neo-banks burst onto the financial scene by targeting a very specific audience: the Gen Z and millennial generations, who prefer banking solutions that are readily available on their cell phones.
The trend began in the UK and Germany and has expanded rapidly in Europe and Latin America. Neo-banks now account for 29% of the digital banking market in Spain and four of the world’s biggest are Latin American: NuBank, C6Bank, Neon y Ualá.
This dramatic growth goes hand in hand with the low structural costs fueling neo-banks’ expansion, as well as continuous product upgrades due to technological advances. At the beginning, they only offered payment services but today, they offer a variety of services, such as savings accounts, debit and credit cards, transfers, financial management, loans, and more.
The arrival and of subsequent expansion of neo-banks are a wake-up call for traditional lenders, which need to adapt to the digital transformation processes and avoid being left behind, because more and more users prefer to use mobile banking, which is available 24/7.
A survey conducted by Rapyd, a fintech as a service (FaaS) that offers payment solutions, showed that 65% of Mexicans said they would be willing to leave their traditional bank for a digital one.
So, what makes these new financial institutions so attractive? From a superior user experience to new economic models, neo-banks enjoy several advantages when it comes to acquiring new customers.
Some of neo-banks’ biggest merits—ease of use, practicality, time savings—stem from the fact that all of their services are virtual. Users can do everything without leaving home, from seeking technical support to paying bills or accessing their financial information in real time.
They also offer the opportunity for instant, low-cost transfers whatever the time of day, and attract attention in a society that is constantly engaged in economic—and digital—activity.
As a result, users enjoy a good navigation experience with an application that is customer-centric, easy to use and cost-effective, satisfying their needs around the clock.
Even though they enjoy manifold advantages, these new financial institutions still face many challenges compared with traditional banks.
While their wide range of digital features, such as QR payments and e-wallets, may make them more attractive, they are not going to suit everyone. In a July 2019 report, the Latin American Federation of Banks, Felaban, predicted that neo-banks wouldn’t be an option for all users due to their lack of product diversity and because they have not yet gained the trust of customers.
Although they have been adding to their offerings at an accelerated pace, many do not provide all the services that banks do, such as mortgages or transactional services for businesses. Nor have they been able to attract users who prefer physical branches.
Regulatory hurdles may be the biggest obstacle. The path to obtain a banking license or fintech license can take years depending on the country and the structure of the business. This absence of a regulatory seal of approval can diminish the user’s trust in the service. In the case of banks, regulation offers an assurance of reliability.
When the first neo-banks and challenger banks emerged a couple of decades ago, the dilemma was whether these new business models would replace traditional banking.
Today, it is abundantly clear that both concepts can coexist, but the incumbents need to streamline their digital operations in order to compete.