The Cross-border Payments Security Landscape Will Change For Good
Explore the evolving cross-border payments security landscape and learn how banks will secure global transactions in the future with new safety...
Learn how neobanks can tap into the global market by leveraging cross-border payments. Case-studies & strategies to fuel growth for the banking industry.
By 2027, 376.89 million users are expected to be added into the Neobanking industry. The transaction value in the Neobanking segment is expected to reach $4.53 trillion by 2023. The user penetration is expected to be 3.3% in 2023, rising to 4.8% by 2027. With a CAGR of 18.25% between 2023 to 2027, the total transaction value of Neobanks will reach around US$8.86tn in 2027. Countries like Ireland, Luxembourg, UK, Denmark and Brazil are going to be the top markets when it comes to user penetration in 2023 for Neobanks.
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A neobank is a type of digital bank that operates primarily online and through mobile apps, offering banking services such as account opening, money transfers, and debit card usage without the need for a physical branch network. They often target specific demographics, such as millennials or small businesses, and may offer features such as budgeting tools or cashback rewards.
Source: 2018 The Nielsen Company (US). LLC
Neobanks typically offer a similar range of financial products and services as traditional banks, such as checking and savings accounts, credit cards, and loans. However, there are several key differences between neobanks and conventional banks:
Technology-driven: Neobanks are built around digital technology and mobile apps, making it easy for customers to open accounts, manage their money, and access financial services.
Limited physical presence: Neobanks do not have physical branches, which can make it more difficult for customers to access some services, such as depositing cash or receiving in-person assistance.
Lower costs: Neobanks often have lower operating costs than traditional banks, which allows them to offer lower fees and higher interest rates to customers.
Focus on customer experience: Neobanks focus on providing a user-friendly and seamless experience for their customers through their apps and online portals.
Innovation in services: Neobanks often offer innovative services and features, such as budgeting tools, investment options and sophisticated analytics.
Partnership with other fintechs: Neobanks often partner with other fintech companies to offer a wider range of services to customers.
Note that this list is not exhaustive and the "biggest" neobanks may vary depending on factors such as assets under management, customer base, and funding.
WeBank (China), Nubank (Brazil), Monzo (United Kingdom), Revolut (United Kingdom), Chime (United States), N26 (Germany), Grab Financial (Singapore), Gojek (Indonesia), CIMB's SpeedSend (Malaysia), Tonik Financial (Philippines), Starling Bank (UK), TransferWise (UK/Estonia), Varo Money (US), Square's Cash App (US), Robinhood (US) and Up (Australia)
These Neobanks operates in different regions, some of them operate globally like N26 and Revolut, others are localized like WeBank and CIMB's SpeedSend. Additionally, as the neobank market is rapidly evolving, new players may emerge and grow quickly.
Tencent, WeChat, Grab, and other super-apps are making inroads into digital payments in Asia. Korea has a higher concentration of full-service neobanks, whereas many Chinese entrants target small business owners. Australian neobanks have tended to pursue full-service models with a greater emphasis on business customers, but intense competition in this mature market has forced two of the country's four neobanks, Xinja and 86400, out.
In South America, most neobanks must form partnerships with traditional players and rely on payment commissions for the majority of their revenue. However, Brazil has been a particularly fertile market for neobanks, with 19 now operating there, including Nubank, by far the region's largest with 40 million customers. Nubank, which generates the majority of its revenue from payments and interest on credit card balances, raised $42 billion in its IPO in December, making it Brazil's third most valuable public company.
The United Kingdom has a plethora of full-service digital banks that replicate the offerings of traditional players, whereas the United States has very few. This is largely due to the fact that UK entrants find it much easier to obtain a banking licence than those in the US, where only one has done so - Varo. Chime, the leading US neobank, has over 25 million customers but no banking licence. Others are shifting to software-based banking-as-a-service models in response to a challenging growth environment. Most US neobanks collaborate with traditional banks to provide "back-end" banking services under contract, with payments accounting for the majority of their revenue. In Europe, where obtaining a banking licence is easier, lending is becoming an increasingly important source of income, with net interest margins and service fees supplementing revenue from a less lucrative payments market than in the US.
Neobanks have become popular for a number of reasons:
Convenience: Neobanks often have mobile-first or even mobile-only offerings, which allows customers to manage their money and make transactions through their smartphones.
Lower fees: Neobanks often have lower fees than traditional banks, such as no monthly maintenance fees, no foreign transaction fees, and lower ATM withdrawal fees.
Simplicity: Neobanks often have a user-friendly and streamlined interface that makes it easy for customers to understand and manage their finances.
Innovation: Neobanks often use technology such as artificial intelligence and machine learning to personalize the banking experience and offer new financial products and services.
Better Interest rates: Neobanks often offer higher interest rates on savings accounts than traditional banks, making them more appealing to customers looking to grow their savings.
Customization: Neobanks often allow customers to customize their accounts to suit their needs, such as setting up automatic savings and budgeting tools.
Security: Neobanks often employ advanced security measures to protect customer information and transactions.
All these features and services make neobanks an attractive option for many consumers, especially for younger generations who are more comfortable with digital banking.
Historically, neobanks have launched with a few classic features, such as low-cost FX and international money transfers (Revolut), fee-free credit cards (Nubank), and business accounts (Tide), and gradually evolved the proposition to include a broader range of services. The German neobank N26 and Revolut have a different approach, the ultimate goal is to build a multi-country, full-service digital bank that offers current accounts, lending, insurance, and investments.
Licensing: Neobanks partner with existing financial institutions and use their licenses and infrastructure to provide banking services to customers. Example: Chime, a neobank in the US, partners with The Bancorp Bank and Stride Bank to offer banking services to customers.
White-labeling: Similar to licensing, neobanks partner with other companies and use their technology and infrastructure to offer banking services under their own brand. Example: Monzo, a neobank in the UK, has a white-label partnership with Barclays, allowing them to offer banking services to customers under their own brand.
Independent bank: Neobanks obtain their own banking license and operate independently, setting up their own infrastructure and technology. Example: N26, a neobank in Europe, holds its own banking license and operates independently, offering banking services to customers in several countries.
E-wallets: Neobanks operate as e-wallets, providing customers with a way to store and transfer money, but not necessarily providing all of the services of a traditional bank. Example: PayPal, Square cash, and Venmo are e-wallets that provide a digital way to store and transfer money, but do not offer full banking services.
Hybrid: Neobanks operate as a hybrid of one or more of the above models, combining elements from different business models. Example: Revolut, a neobank in the UK, operates as a hybrid of licensing and independent banking, holding its own banking license and also partnering with other financial institutions to offer additional services to customers.
Monzo bank is a good example of independent bank model where they have obtained their banking licence and operate independently, setting up their own technology and infrastructure.
Venmo app is a good example of E-wallet model where it provides customers with a way to store and transfer money, but not necessarily provide all of the services of a traditional bank.
Neobanks are able to differentiate themselves and gain an advantage over traditional banks in the following ways;
Better customer service: Neobanks often provide 24/7 customer service through their mobile app, chatbot, and online communication channels, which can be more convenient for customers than traditional bank's customer service channels.
Innovation: Neobanks often focus on innovation and new features, such as budgeting tools and automatic savings plans, which can help customers manage their money more effectively.
New segments: With digital banking reaching the low-income and inaccessible areas of Africa and Asia, new business opportunities have emerged. MicroEnsure, an insurance provider teamed up with AXA insurance to create low-cost, tailored insurance schemes for people living in remote locations based on their requirements. The services are delivered through mobile network operators, microfinance institutions and other trusted organizations.
Lower costs: Neobanks have lower overhead costs than traditional banks, which allows them to offer better interest rates on savings accounts and lower fees.
User-friendly technology: Neobanks typically have a strong focus on technology and user experience, which means their mobile apps and online banking portals are often more user-friendly than those of traditional banks.
Transparency: Neobanks often have a more transparent fee structure and a customer-friendly policy which is more transparent and easier to understand, compared to traditional banks.
Faster onboarding: Neobanks' onboarding process is often faster and more convenient than traditional banks, as customers can open an account and begin using banking services quickly and easily. For example the e-KYC process.
Personalization: Neobanks typically use data to personalize the customer experience, offering tailored financial products and services, which can be more relevant to their customers' needs.
Focus on niche market: Neobanks often focus on specific niches, such as the underbanked, that traditional banks may not serve as well.
Open API's: neobanks often have open APIs which enables them to connect with other fintech companies, and offer more services to customers.
Automation: On mobile platforms, for businesses, neobanks provide automated and near real-time accounting and reconciliation services for bookkeeping, balance sheets, profit and loss statements, and taxation services such as tax payments record keeping, GST-compliant invoicing and reconciliation.
Financial insights: For services such as payments, payables and receivables, and bank statements, most neobanks offer dashboard solutions with highly enhanced interfaces and easy to understand and valuable insights. It is advantageous for businesses with significant expenditure and a sufficient number of employees to be provided with such insights in order to reduce expenditure and increase productivity and revenue.
BaaS: Third-party developers can access banking APIs and processes via BaaS. BaaS is currently divided into three categories: white-labeled platforms, API stores that will aid in the development of better banking services for consumers and fintech, and BaaS as a co-branding proposition to traditional banks.
These are some of the factors affecting the financial growth of the neobanks;
High customer acquisition costs: Neobanks often have to spend a lot of money on marketing and customer acquisition, which can be a significant drain on profits.
Limited services: Neobanks may not offer all of the services that traditional banks do, which can make it difficult for them to generate enough revenue to be profitable.
Lack of regulation: Some neobanks may not be as heavily regulated as traditional banks, which can increase the risk for customers if something goes wrong.
Limited geographic reach: Neobanks may only be available in a few countries, which can limit their potential customer base and make it difficult for them to be profitable.
Regulatory challenges: Neobanks may face regulatory challenges and compliance costs, which can increase their operating costs and make it difficult for them to be profitable.
Limited deposit insurance: Some neobanks may not be FDIC insured, which means that in the event of a bank failure, customers' deposits may not be fully protected.
Intense competition: Neobanks face intense competition, not only from traditional banks but also from other fintech companies, which can make it difficult for them to differentiate themselves and generate sufficient revenue.
Limited creditworthiness assessment: Neobanks may not have the same level of creditworthiness assessment as traditional banks, which can increase the risk of defaults on loans or credit lines and decrease their profitability.
Lack of trust: Some customers may not trust neobanks as much as traditional banks, which can make it difficult for neobanks to attract and retain customers, resulting in less revenue.
Dependence on technology: Neobanks rely heavily on technology and internet connectivity, which can be a disadvantage in case of technical issues or outages, resulting in less revenue.
Data security risks: Neobanks store a large amount of sensitive data, which can be a target for cyber criminals, hence data security risks are higher for neobanks than traditional banks.
It will be critical for both newcomers and existing players in the neobank space to identify their customers' pain points and devise innovative solutions to those problems. One wise strategy would be to carve out a niche by focusing on smaller segments of the population or offer most competitive options in one particular business segment, like cross-border payments.
Neobanks can leverage cross-border payments to increase their revenue growth by offering a variety of services and benefits to customers:
Low-cost international money transfers: Neobanks can offer low-cost, real-time international money transfers to customers, making it easy and affordable for them to send money abroad.
Multi-currency accounts: Neobanks can offer multi-currency accounts, which allow customers to hold and transact in multiple currencies, making it easier for them to do business internationally.
Foreign exchange services: Neobanks can offer foreign exchange services at competitive rates, allowing customers to convert money between currencies at lower costs than traditional banks.
Virtual cards: Neobanks can offer virtual cards that allow customers to make online purchases in other countries without the need for a physical card.
Virtual IBAN: Neobanks can offer virtual IBAN numbers which enable customers to receive money from other countries without the need for a physical IBAN.
Business solutions: Neobanks can offer customized business solutions for small and medium-sized enterprises (SMEs) that need to make cross-border payments, such as supply chain financing, invoice factoring, and trade financing.
Remittances: Neobanks can leverage the technology and innovation to offer international remittances services to the underbanked population, who are often the ones that need it the most.
By offering these services, neobanks can attract customers looking for convenient, low-cost cross-border payment solutions, which in turn can drive revenue growth.
One way that neobanks are leveraging cross-border payments is by offering low-cost and convenient ways for individuals and businesses to send and receive money across borders. This can include features such as competitive foreign exchange rates, streamlined and transparent fees, and fast and reliable payment processing. By providing these services, neobanks can attract customers who may have previously been underserved or who have been looking for more cost-effective and efficient ways to make cross-border payments.
Neobanks can achive this by partnering with other companies and organizations in the payment’s ecosystem, such as payment processors, cross border remittance providers, and financial technology firms. This can help them to access new markets, technologies and customer base. Additionally, by working with these partners, neobanks can gain access to new technologies, such as blockchain and digital currencies, that can help to further reduce the cost and complexity of cross-border payments.
Neobanks are also leveraging the data they collect to better serve the needs of their customers. This can include providing them with insights and analytics on cross-border payments trends, patterns, and best practices. Additionally, Neobanks can also use this data to develop and offer additional financial products and services, such as trade finance and supply chain financing, that can help businesses to better manage and optimize their cross-border payments and transactions.
To know more about the challenges faced by the traditional banking industry and strategies to overcome them, read our cross-border payments blog on Global Banking Industry Challenges And How To Overcome Them.
One example of a neobank leveraging cross-border payments for business growth is Revolut. Revolut, a neobank based in the UK, has built a platform for cross-border payments that utilizes local bank transfers in different countries. This allows Revolut to offer more competitive exchange rates and lower fees compared to traditional banks. Revolut also offers a wide range of features for businesses, such as virtual and physical debit cards, expense management, and multi-currency accounts. By offering these services, Revolut has been able to attract small businesses and freelancers as customers, which has helped it to grow its customer base.
Another example is N26, a neobank based in Europe, which has been leveraging cross-border payments to grow its business by expanding its services to different countries, which allows them to offer cross-border payments services to a larger customer base. N26 also offers a wide range of features for businesses, such as virtual and physical debit cards, expense management, and multi-currency accounts. By offering these services, N26 has been able to attract small businesses and freelancers as customers, which has helped it to grow its customer base.
These examples demonstrate how neobanks can leverage cross-border payments to attract new customers, particularly businesses and freelancers, and grow their customer base. By offering more competitive exchange rates, lower fees, and a wider range of services, neobanks can differentiate themselves from traditional banks and attract customers who need to make frequent cross-border payments.
By leveraging cross-border payments partnerships with fintech, neobanks can open up new revenue streams, attract new customers and continue to grow their businesses.
Neobanks can use the following cross-border payment strategies to improve their revenue;
Offering competitive exchange rates and low fees for international transactions.
Providing a seamless and user-friendly experience for customers.
Partnering with other companies or payment providers that specialize in cross-border payments to offer a wider range of options. Neobanks can access financial products and services that are currently unavailable to them due to regulations by leveraging existing solutions and networks within the fintech ecosystem.
Targeting specific markets or demographics with high demand for cross-border payments.
Leveraging technology such as blockchain to facilitate cross-border payments and reduce costs.
Creating a loyalty program for frequent cross-border payments and offering rewards for usage.
Offering additional services such as foreign currency accounts, remittance, and global money transfers.
Positioning the company as a one-stop-shop for all cross-border payments needs.
Creating partnerships with other fintechs and financial institutions to expand services and offer more options to customers
Investing in marketing and advertising campaigns to raise awareness of the neobank's cross-border payment capabilities.
The cross-border payments ecosystem is changing. The neobanks getting ahead are the neobanks with established client bases collaborating with cross-border payment solution providers who offer tailored products and go-to-market strategies. This is a fantastic opportunity for neobanks to gain international market share.
Fable Fintech has been a silent cross border payments technology partner to some of the biggest banks in the world. Along with being a trusted global payments SaaS for banks, Fable Fintech also provides Fx rate systems and APIs for open banking. To learn more about the right cross border remittance solutions for your neo-banking business, get in touch with a Fable Fintech cross-border payment solutions team now!
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