Though traditional banking institutions have dominated the financial sector for centuries, changing consumer habits point to a growing need for alternative systems, with Neobanks posing a genuine threat to established banking institutions by providing innovative, customer-centric solutions that are quickly winning consumers over.
The following statistics highlight the increasing market value of neobanks globally:
- Statista reports that the market size of neo and challenger banks was just over $47BN in 2021.
- However, this is set to soar to $333.4BN by 2026, with an annual compound growth rate of 47.1%.
- ABI Research predicts the world’s top 57 neo and challenger banks customer figures will jump from 155 million to 590.6 million between now and 2026.
What are neobanks?
Put simply, neobanks champion customer-centric online banking services, operate with agile management methodologies and leverage the use of technologies such as artificial intelligence (AI) and machine learning (ML).
Neobanks have differentiated themselves from traditional banking institutions by taking a data-driven approach to finance and implementing AI and ML techniques in their operations to better understand the needs of the market.
Successes in neobanking: Revolut, N26 and Chime
Revolut is one of the most well-known neobanks globally, boasting 15 million users and annual revenue over £261 million. The company’s impressive rise is in large part due to its reputation for applying innovative technology to transform banking services, with the app’s Sherlock AI leveraging machine learning techniques to protect customers against fraud, continuously monitoring each user’s transactions.
The system’s AI model works by detecting and blocking potentially fraudulent transactions, before blocking the purchase in question and automatically freezing the user’s card. Users then receive a push notification with details of the suspicious activity. If the transaction is genuine, they can log into the app to confirm it wasn’t fraudulent and unfreeze their card.
Revolut’s innovation-first mindset is reflected across all of its services and products, with the company’s founder recently announcing the creation of an AI-fueled venture capital arm called The Quantum Light Fund. The fund will be built on an AI-powered system and will scour corporate databases and LinkedIn to identify high-growth startups without relying on human judgement.
N26 generated €112.4 million in revenue in 2020 - the latest year for which financial figures are available - and has over 3.5 million users. The bank relies on AI and ML not only for fraud prevention but also to provide improved customer service and increased personalization.
In recent years, N26’s data science team have created an AI customer service assistant that can operate in five languages, serve customers on both their website and app and handle complex tasks such as reporting lost and stolen cards.
Chime bank has approximately 12 million customers, bringing in annual revenues of roughly $600 million. Interestingly, the bank uses AI to fuel its advanced predictive personalisation capabilities, enabling its systems to analyse website visitors’ behaviour, segment users by preference and tailor their front-end experience to match the needs of each user group.
Just four weeks after implementing their AI systems, Chime saw a 79% uplift in new accounts signups.
Why consumers are switching to neobanks
Neobanks have turned the global banking landscape upside down by being more innovative and customer-centric than traditional institutions, offering increased customer personalisation, greater convenience and stronger security protocols.
Personalized customer experiences
By delivering their services through digital channels, neobanks gather a wealth of consumer insights and data points that can be used to tailor their offerings. And with 72% of consumers rating personalization as highly important in the financial products and services they use, an increased focus on tailored experiences looks to continue in the long term.
Chime’s increase in account signups was achieved largely through monitoring how potential customers behave with their products, allowing for better accuracy in predicting their users’ needs and enabling the platform to respond accordingly by providing made-to-suit experiences.
Speed and convenience
Neobanks are rapidly increasing in popularity because they are quicker and more convenient than traditional banks. Consumers can access banking services on any device, at any time, from anywhere. Compare that to traditional banks that require consumers to go into physical branches, which are only open from 9am - 5pm five days per week.
Not only are neobanks more convenient, but they’re also far quicker than traditional banks. RBI has found that customers spend 7.5 hours on average opening an account in a bank branch. With a neobank, however, they can complete the same process in minutes.
An innovation-first approach
Chime’s success is in large part underpinned by an emphasis on mobile functionality, big data, cloud computing and personalization. Similarly, Revolut employs 100 Python developers who are dedicated to working on everything related to AI, ML, and computer vision, while the Director of Finance and Capital Planning at N26 attributes the company’s success to ongoing investments in innovative financial technologies.
Using security technologies such as biometric verification, two-factor authentication (2FA), role-based access control (RBAC) and advanced encryption to aid in preventing cybersecurity threats and fraud, neobanks can provide additional layers of protection to their customers with speed and ease, boosting the user experience and reducing customer journeys.
While a segment of consumers express concerns that the digital-only nature of neobanks makes them less secure than traditional alternatives, many industry experts cite digital banks’ streamlined approach as key to facilitating increased security and an enhanced online and in-app user experience.
What can the collections industry learn from neobanks?
In order for consumers to truly benefit, collections teams should critically assess their existing processes and consider incorporating the transferable elements of neobanks’ service into their own systems, optimising their approach with tailored customer experiences such as self-service functionalities and personalised messaging.
Transitioning to an AI-driven, data-led system can arm collections operations with the power to better understand their customers’ needs, operate strategically and leverage insightful, actionable reports to remain competitive in an uncertain trading landscape.
Ultimately, market instability and recessionary periods increase lending risk for businesses, as delinquency rates increase due to financial constraints on consumers. And with numerous sectors experiencing slow recoveries after several years of COVID-affected trade, modern, innovative collections techniques are becoming an essential means of reducing rates of non-payment.