Neobanks have fundamentally changed the way people bank today. By providing customers with exclusively digital services, they are a far quicker, more efficient and a more secure method of banking than traditional means.
The exponential growth of neobanks across Europe has been one of the major disruptors of financial services over the past decade. Established neobank brands have managed to attract tens of millions of customers thanks to their innovative digital offerings, while even the newer market entrants are starting to quickly make their mark.
But, despite their relentless pursuit of rapid market penetration, customer acquisition and retention, and growth, the vast majority of neobanks have struggled to make a profit, with less than five percent breaking even, according to a report by Simon-Kucher & Partners.
As neobanks have continued to capture market share, thus, many have spread themselves too thinly by expanding across new regions and geographies far too quickly. Some have failed to look past their initial innovation or product, and been caught out because they didn’t identify new trends that could impact them, while others, in the race to acquire customers, have focused on opening as many accounts as possible without determining how to make them profitable.
So how can they turn this around and start to move into the black? One solution is to provide financial trading services, as early pioneers Revolut did when it launched its commission-free stock trading platform in August 2019.
Trading service offering
Given that neobanks already have vast amounts of customer data they have collected over many years at their disposal, they are well placed to offer trading services. Equipped with the knowledge of their customers’ financial situations and spending habits, they can provide a fully bespoke trading offering that best meets their needs.
Lack of trading services
The problem is, however, that, while digital banks have made good progress in terms of opening up new trading services, the majority still don’t offer any such product directly to their customers. Of those that do provide trading as a service, half only offer access to one financial instrument.
The chief reason is the complexity of establishing such a service. As well as the initial development of the necessary financial infrastructure, workflows and logic, neobanks need to secure regulatory licensing to ensure that they remain compliant.
Also read: Digital Bank: The Future of Banking.
Technology partnerships
To overcome this hurdle, neobanks could look to team up with innovative Fintech startups that already provide trading services. Many of them already are, with 59% choosing to partner with an investing-as-a-service provider to launch new offerings, according to our recent study.
Revolut, the self-styled ‘financial super app’, has also made the addition of new services a priority. The company reported its first full-year profit in 2021, with more than half of its revenues generated from foreign exchange and wealth services.
At a crossroads
As they approach maturity, so many neobanks now find themselves at a crossroads. In order to keep growing and maintain their competitive edge, they need to put in place concrete strategies that will drive future profitability and sustainability.
The key enabler is technology. After all, the most successful neobanks go beyond merely just providing a slick customer experience – they actually understand their pain points and solve them.
Leveraging technology
Neobanks need to leverage the digital service and tools they provide to convert customers. The better and more personalised experience they have, therefore, the more satisfied they are, and the more likely they are to choose them as their primary bank, use their other products and services, and recommend them to others.
The end result is more customers and less churn, meaning greater overall revenue growth. That, in turn, leads to better profit margins.
At the end of the day, it’s a no-brainer for neobanks to offer trading services, given its rise in popularity over the past few years and the surge in investors during the Covid-19 pandemic as people were required to stay at home through lockdown. As demand continues to grow, so they need to make sure that they are providing these services moving forward.
