Neobanks are threatening established banks – but competition heats up

Neobanks, a term that is still reasonably new, is an interesting word for an interesting battleground. Banking is being violently disrupted.

We thought that neobanks were just targeting established banks and financial institutions. And so they are, and with some great advantages. They don’t have the legacy anchor of real estate.

Neobanks also do not suffer from the same range of regulation that bricks and mortar banks do. They are free, for instance, to target particular segments of the population. Globatalent, for instance, is targeted at sports fans and offers a range of incentives and special offers, as well as piggy-backing on the feel-good factor of the sports community itself.

Neobanks, though, like telco start-ups from 20 years ago, have many rivals, creating some interesting and innovative offerings. And will create many interesting mergers and acquisitions in the future.

One of the ‘traditional’ ways of neobanks (or neoanythings) making money is to adopt the freemium model. The basic banking service is for free, and premium services are chargeable. It is tried and tested, but neobank forerunner Revolut had broken with this tradition and is now offering its virtual card for free, whereas before it was only available to Premium customers. This service is available only in Ireland at present.

However, it illustrates the competition that is escalating the disruption in the banking sector as neobanks experiment with products and services in the race to attract and keep customers.

Offering premium services for free is only one method that banking companies are experimenting with to keep costs down while being agile and innovative. The banking sector in general and neobanks, in particular, are constantly expanding their use of automation. While the older (and obviously wiser) industry observers might ‘tut’ and sigh at the use of robo-advisers for instance, the younger generations are embracing them.

According to Business Insider, a significant minority of Generation Z and Millennials prefer robo-advice to human beings’ advice.

The world of banking is changing fast, and innovation and experimentation are everywhere. Neobanks will continue to challenge the old fashioned institutions (while the latter launch their own neobanks) and the next few years will be interesting to watch. And it will be extremely interesting to see which, if any, banks have learnt from the lessons of other newly competitive industries, such as telecoms.