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Is this the end of the neobank hype?


Portrait of Starling Bank CEO Anne Boden
Starling Bank Founder and CEO Anne Boden

The advent of neobanks was accompanied by substantial hype, as the emerging digital challengers were depicted as the future of banking. This nascent industry has seen rapid growth recently. According to GrandViewResearch, the global neobank market was valued at $35 billion in 2020 and is forecast to reach $722 billion by 2028, reflecting a compound annual growth rate of 47%. In 2020 alone, the largest 8 neobanks in Europe and the US generated over $3.6 billion in revenue. The European region currently dominates, accounting for 30% of global neobanking revenues in 2020.


Top players like Chime, SoFi, Revolut, Monzo, Starling and N26 are competing fiercely for market share. N26 and Revolut have emerged as leaders, expanding globally and now entering the coveted US market. N26 is currently valued at $8 billion on the private secondary market, while Revolut, who attained a $35 billion valuation after its latest funding round, has seen a recent 40% decline in value that would peg Revolut's worth at just under $20 billion.


Revolut's reported $15 billion valuation reduction sounds significant, but context is required given the lofty $33 billion benchmark set in 2021. With tech valuations retreating universally since then, downward revisions are unsurprising, even for the "Amazon of banking's" high-flying shares. But questions linger whether Revolut's new $18 billion price tag still overshoots potential.


Bulls tout Revolut's meteoric customer and revenue growth, global expansion, and future banking hopes. Fair points, though scaling often proves challenging. Caution may still be warranted until tangible profits materialise.


Some perspective is helpful - L&G earns 2.7 times Revolut's entire revenue in profits. Revolut's trajectory is impressive, but current metrics hardly support parity with established players.


While Revolut seems fully funded, its valuation leapt from $5.5 million in 2020 to today's $18 billion, despite minimal fundamental improvement. Revolut has potential, but doubts linger whether risky projections justify its towering valuation.


Neobanks are also now prioritising services for business clients, who made up over 50% of new users amongst European challengers. Offerings like accounts payable/receivable, payments and reporting cater to corporate needs.


The forecasted 47% CAGR for the neobanking market signals immense growth potential. While risks exist, increasing consumer and business demand for digital banking options appears set to propel the industry forward. This presents lucrative possibilities for private equity investment.


However, data on mounting pressures facing neobanks suggests the initial exuberance may have been overblown. Far from spelling the end for traditional banks, neobanks now confront a reality check, facing existential threats that call into question the sustainability of many industry hopefuls.


While some may continue to prosper through prudent partnerships and differentiation, indicators point to considerable consolidation rather than the revolution promised by overzealous advocates of the neobank model.


Though it would be premature to declare the entire notion of digital banking defunct, the swelling difficulties faced by neobanks suggest the bandwagon of unbridled enthusiasm has hit a major roadblock. The hype appears overstated, and many neobanks seem unlikely to fulfil the lofty expectations placed upon them.


The current climate hints the much-vaunted promises of rapid disruption were naively optimistic. For digital banking to have a future, the excessive hype needs to give way to realistic assessment of actual capabilities and viable strategies.


Whilst the emergence of these digital-only banks initially challenged traditional incumbents, neobanks now face pressures that threaten their viability, giving path to the end of the neobank hype.


The data indicates most neobanks are struggling to achieve profitability. Only around 5% are currently in the black, with customer revenue under $30 per annum for many players. This precarious financial position is compounded by dwindling investor appetite. With priorities shifting from growth to sustainability, securing further funding is problematic for loss-making challengers.


Differentiation is another hurdle. Many neobanks provide comparable features to incumbents, like accounts, cards and loans. As established banks enhance digital capabilities, this undifferentiated approach hampers customer acquisition and retention. Inactivity after signup is common, suggesting low engagement despite hefty acquisition costs.


Tighter regulatory oversight poses additional complications. Concerns around risk management, compliance and consumer protection accompany the growth of neobanking. Stricter supervision increases expenses and complicates scaling. Meanwhile, consumers maintain robust trust in conventional banks, impeding neobank market penetration.


The recent closures of neobanks like Volt in Australia in 2022 and Doezen in the UK this year foreshadow similar shutdowns materialising in other markets. For example, the neobank Ahead Money, owned by lending company LendUp, abruptly ceased operations in the US in 2022. When it collapsed, Ahead Money customers were left unable to access their account funds, illustrating the risks consumers face when a neobank fails.


While some closures may be inevitable as the industry consolidates, prudent and adaptive neobanks can still succeed by differentiating their offerings, pursuing careful expansion, and quickly pivoting to profitable models. Survival in this climate will demand sharper strategies beyond unrestrained growth.


Partnerships with incumbents could furnish neobanks with vital capabilities and distribution networks, potentially lowering risks and quickening scale. Collaboration may eclipse competition as the preferred approach. Though numerous neobanks will likely falter, the model itself retains potential. Failure is probable for many, but not assured for all. Adjustment, prudence and pragmatism could see some challengers emerge stronger.


Whilst data points to an extinction event for many neobanks, assuming inexorable demise overlooks nuances. Generalisation obscures differentiation. Not all challengers share identical vulnerabilities. Assuming predestined collapse oversimplifies complex, company-specific circumstances. Prevailing challenges underscore the need for caution, not capitulation.


Though profitability issues proliferate, paths to sustainability exist for disciplined players. Capital may be elusive, but astute funding strategies can unlock growth. Few neobanks may currently engage customers meaningfully, but creative offering design and marketing could reinvigorate interest. Competition is undoubtedly increasing, but intelligent positioning can still carve out market share.


An extinction implies absolute eradication, but current conditions seem more indicative of consolidation than outright annihilation. As marginal players falter, more robust neobanks may thrive by prudently leveraging partnerships, capabilities and capital. Survival will demand adaptability, but extinction does not appear the sole plausible outcome at this juncture.


While neobanks face pressures, other fintech sectors like robo-advisors, peer-to-peer lending, crowdfunding, microloans, online car and title financing, payday loans, marketplace lending platforms, lease-to-own financing, invoice factoring, supply chain financing, and secured personal loans continue growing.


In this vein, iBerotech is ready to assist companies entering the Spanish market across services like Spain market entry, investing in Spain, market expansion, internationalisation, sales outreach, consulting, doing business in Spain, B2B sales outsourcing, startup sales, and prospecting. As neobanks hit obstacles, Spain's broader fintech space led by investing apps, alternative lending, title loan platforms, factoring solutions, and more appears poised for ongoing expansion, presenting major opportunities.


In summary, while data spotlights acute challenges for neobanks, room remains for nuance. Prevailing headwinds underscore risks but do not necessarily portend extinction. With judicious strategies, differentiation and pragmatism, sustainable models can emerge. Indicators should engender caution, not fatalism. Though the path ahead will challenge all neobanks, ample opportunities for success remain for those able to adapt wisely.


 

At iBerotech, we bring over a decade of hands-on expertise in partnering with financial services organizations. Through strategic insights and a deep understanding of the landscape, we have effectively navigated the intricacies of the Spanish market, establishing a strong foothold in the Spanish fintech ecosystem.


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