Types of business models adopted by Neobanks

Neobanking is gaining traction as its technology powers competitive advantages such as speed, security, and a better overall customer experience. Traditional banks that have had to rely on typically siloed, and older legacy systems until now have been scrambling to keep up and their need to update their systems and services has produced an entire industry to serve the need for their digital transformation. This would suggest that Neobanking as a ‘model’ is where financial services are heading for the foreseeable future - but this lacks specificity. Below, we examine various business models which Neobanks are utilising to track data and make decisions - but first, we must answer the obvious question:

What is Neobanking?

A Neobank is, as the name suggests, a completely new form of banking. Financial technology (fintech) firms, also sometimes known as ‘challenger’ banks are revolutionizing the way people do their finances at every level. Neobanks are able to provide equal or greater security thanks to advanced encryption and related technologies, utilise data to provide a better experience for their clients, and eliminate transfer delays and hold times, among many other benefits.  

Many of these organisations are able to cater to specific niches and, like traditional banks,  nations. If one were to type “Neobank Singapore” into a search engine, they would find listings of many different Neobanks catering to that demographic. The open competitiveness of the field drives innovation in service and technology. This brings us to the main question of the article: what is a business model that will allow organisations to stay competitive in this climate? Let us dig a little deeper to find out.

Ecosystem-led

It is safe to say that Neobanking is not the only fintech facet out there. As such, the ecosystem-led model has evolved. This centers around using application programming interface (API) technology, which allows for different financial applications to communicate and integrate in. Neobanking firms that provide this service are known as using an ecosystem-led approach.  

Interchange-led

A model called interchange-led neobanking is a strategy in which the neobank charges a transaction fee for every time money is transacted. A couple of examples of neobanks that use this model are Chime (USA) and Neon (Brazil). Chime earns a portion of the Visa fees that are transacted when a client uses their Chime Visa to pay for something.  

Credit-led

Another business model is credit-led. Another Brazillian Neobank, Nubank, uses this model to sustain growth and profitability. This organization has a credit card business and builds its revenues using credit as a foundation. This type of business model will see transaction fees and profit from balances carried and their associated interest rates.  

Asset-led

The asset-led business model, when employed by neobanks, allows them to offer saving accounts and deposits. These types of high-yield savings and certificates of deposits (CDs) allow these banks to participate in the consumer banking market and profit from an asset-led business model. A famous example of this in action is Marcus, by Goldman Sachs of Wall Street. By honing in on their niche products rather than a diverse range of services, they are able to grow and profit. Zeroing in on the product is not always the way it is done, however - another business model extrapolates the product to generate its income.  

Product Extensions

Where an ecosystem-led business model is designed to provide connectivity and integration between financial services, a production extension-focused model removes barriers outright. A well-known example of this is Robinhood, which launched a product extension a few years back called Robinhood Gold.  

This allows users to get in-depth market analysis that is not immediately available otherwise to the masses. In providing this service in conjunction with a subscription based model, Robinhood Gold takes advantage of the product extension model to secure its competitive position in the market.  

Risks and Opportunities

The business model that a Neobank chooses to utilize is closely related to the market they wish to compete in, and the service or product they choose to provide. With neobanks challenging the status quo, it is certainly a good time to be in the business, but it is not without risks. One of these to consider is the massive investments that are being made by traditional banks. It is expected that they will catch up with their vast resources, however, there is still room for the right services to flourish. Depending on their approach, product, and of course, business model, neobanks are here to stay.

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