From Startups to Banking Giants: Are Neobanks the New Incumbents?

Neobanks — also known as digital-only banks or challenger banks — are at the forefront of financial innovation. By leveraging cutting-edge technology, they offer seamless, customer-centric services without the overhead of traditional banking infrastructure.
Gaining traction in the early 2010s, particularly in Europe and the U.S., neobanks have rapidly expanded worldwide. By addressing inefficiencies in traditional banking, they introduced user-friendly platforms, lower fees, and more flexible financial solutions.

Today, names like Revolut, Monzo, N26, Nubank and Chime dominate fintech discussions. With multi-billion-euro valuations and successful market expansions, these digital challengers have reshaped the banking ecosystem — forcing incumbent banks to accelerate digital transformation and prioritize customer experience.

Despite their success, many neobanks still face significant hurdles in achieving long-term profitability and market dominance. Their combined revenue and assets under management remain just a fraction of those held by traditional banks. While some neobanks have reached profitability, many still struggle to maintain it consistently.

Early on, most neobanks focused on offering seamless onboarding, current and savings accounts, and payments (both A2A and card-based). However, the challenge of profitability soon became evident. With many neobanks offering free accounts and operating without a banking license — limiting their ability to generate revenue from deposits — they relied heavily on thin-margin interchange fees.

To address this, most neobanks have expanded into lending and investment services, which allow for higher commissions and revenue potential. While this strategy has fueled growth, it has also increased operational complexity, making some neobanks resemble the very incumbents they once set out to disrupt (cfr. my blog "Neobanks Should Find Their Niche to Improve Profitability" - https://bankloch.blogspot.com/2020/12/neobanks-should-find-their-niche-to.html).

Despite the challenges, some neobanks have secured strong market positions, particularly in two key areas:

Emerging markets: Neobanks have achieved significant success in regions with high mobile adoption and large unbanked or underbanked populations. Institutions such as Paytm Payments Bank (India), Tonik (Philippines), Tinkoff (Russia) and Nubank (Brazil) have capitalized on these opportunities, often outpacing their counterparts in more saturated markets.
Underserved segments: While many neobanks have targeted underserved segments, some markets proved too narrow or unable to generate enough value. However, one exception has been small and medium-sized enterprises (SMEs).
SMEs often struggle with access to financing, cash flow management, and complex banking processes. Neobanks catering to this market have unlocked significant growth potential. OakNorth, for example, has successfully carved out a niche in SME lending, demonstrating strong demand for tailored financial solutions in this space.

To achieve long-term success, neobanks must strike a balance between tech-driven agility and financial stability, i.e.

Operate like tech firms: Successful neobanks leverage modern technology such as agile microservices, modularity, API-first architecture, cloud computing and AI.
Adapt to local laws and financial habits: Compliance and localization are critical - for example, incorporating Islamic banking practices in the Middle East.
Build an ecosystem: Partnering with other players allows neobanks to offer best-of-breed solutions, integrate third-party services, and reduce time-to-market through strategic alliances.
Ensure robust compliance and security: A focus on customer experience and rapid growth should not come at the expense of compliance. Neglecting regulatory requirements can lead to hefty fines or erode customer trust.
Scale while controlling costs: A low cost-income ratio remains one of the key competitive advantages of neobanks over traditional banks.
Continue to innovate: Incumbent banks are not standing still. Traditional banks are rapidly digitizing and often deploy considerably larger budgets. For example, the combined IT budgets of JPMorgan Chase, Bank of America, and Citigroup are 50% larger than the total investment in all European fintech startups. To remain competitive, challenger banks must continuously launch new products and services, enhance user experience, and explore emerging technologies such as embedded finance and AI-driven banking.

With projections suggesting that neobanks could capture up to 20% of the global banking market by 2030, the sector’s future remains promising. However, the path forward is not without challenges. As neobanks continue to evolve, their ability to balance innovation with financial stability will determine whether they remain challengers — or become the new incumbents of global finance.

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