Neobanks are banks, or, at least, sort of. Like many other terms in finance and FinTech, the term is more a label than a clear definition. They are typically active in one or more fields that were traditionally occupied by banks, very much as neobrokers mimic the activity of traditional brokers.
However, there are four things to note.
– First, they typically concentrate on a specific function, in particular payment. This is a relatively straightforward activity in functional terms which comes also with a lighter regulatory cost attached to it than taking deposits and providing credit, as the relevant risks are significantly lower (in particular: no counterparty credit risk).
– Second, their business model is much lighter than the one traditional banks. That is obviously a consequence of the restricted ambit of their activity (payment + …). Second, and this point is not so obvious, they benefit from an advantage of the later born (though in life later borns are said to be disadvantaged as compared to their older siblings): they do not carry the baggage of 60 years of IT history, such as the dinosaurs of the market. Instead, neobanks use slim infrastructure, relying on cloud services and outsourcing.
– Third, they leverage technology to the maximum, not only in the back office. The consumer-facing side, from the outset designed to run on personal devices such as smartphones and tables, is typically friendly and incredibly easy to handle, so that using financial integrates much easier with customers’ lives. Admittedly, even the dinosaurs are catching up recently.
– Fourth, the business model is shaped with scaling techniques in mind that did not exist until 10-15 years ago, in particular smartphone ecosystems, including App Stores. That is obviously a totally different thing if you compare it to building branches.
This is how they start. And then, because clients like one-stop shops and with a view to increase revenue, they start branching out. First, offering ‘balances’ that may turn into proper deposit arrangement at some point. Then providing loans. Then maybe offering insurance products with it. And … suddenly … you are back at what a traditional bank does, with the relevant regulatory cost attached.
There is the alternative of creating a one-stop shop by acting as platform for other providers’ services, but this comes with its own upsides and downsides, and is better discussed at another time.
This event discusses the business and regulation of neobanks, using ‘Nu’ as a very prominent case study.
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