With the emergence of neobanks, Diego Caicedo, the Co-Founder and CEO of OmniBnk, analyses success stories in the fintech industry Europe and LATAM
Neobanks, also known as challenger banks, emerged a few years ago to meet rising consumer demand for easier, more convenient online and mobile banking services. And consumers were quick to adopt these digital-first banking services. Business Insider estimates there are more than 39 million neobank users globally, resulting in skyrocketing company valuations as well. Revolut, headquartered in the UK, is preparing for its latest funding round, which will likely value the company at USD 10 billion, possibly more. In 2019, Germany’s N26 reached a USD 3.5 billion valuation, and Brazil’s Nubank became a serious contender in the Americas when it hit a USD 10 billion valuation.
Both Europe and Latin America stand out as early adopters of digital banking. European neobanks had a first-mover advantage, launching alongside new banking standards in the EU, which allowed them to couple regulatory compliance with rapid expansion across the region. Open Banking regulations, which allow consumers to grant third-party services access to their banking data, have also enabled European neobanks to launch the same products and services as a full-service bank without having to build everything from scratch.
Meanwhile, approximately 50% of adults in Latin America do not have access to financial services or bank accounts. In some Latin American countries, banking is also extremely concentrated. For instance, five banks hold 82% of all banking assets in Brazil. These realities, coupled with the high mobile adoption rate in Latin America, have made it an attractive place for digital banking solutions.
There are a number of neobank success stories in both regions; however, there are some unique overlaps and differences.
Creating a more convenient way to bank
Neobanks are reconstructing the existing banking business model and the technology behind it. In Europe, neobanks have found success by providing drastically faster and more efficient transactions through a digital-first approach. And while many neobanks launched and found success with a single financial product, there is a growing need to diversify offerings as competition heats up.
In addition to providing low to no-fee accounts, many neobanks are introducing niche services, such as international payments, transfers, cryptocurrency wallets, money management tools, and more, to attract and retain their largely millennial customer bases. In the UK and Western Europe, one in four people under the age of 37 now uses a digital bank. Millennials prioritise convenience and more personalised experiences, which the most successful neobanks have been able to deliver.
Bringing unbanked consumers online
In more developed markets, neobanks have eliminated many of the weaknesses of legacy financial institutions, helping to meet consumer needs and improve profitability. But in emerging markets like Latin America, there is a large consumer base that has never banked in the first place, providing an opportunity to leapfrog conventional financial infrastructures and tackle the challenge of financial access with technology.
Neobanks are on the rise in Latin America, providing consumers with new ways to transfer money and make payments – primarily through mobile devices. The percentage of the region’s population that uses a smartphone is expected to reach 78% by 2025, and 90% of all Internet connections in Latin America are expected to be through mobile devices by 2022. It’s not uncommon for neobanks to offer both digital and physical debit and credit cards to accommodate these mobile users in the region.
Focus on small business banking
There are approximately 24 million small and medium-sized enterprises (SMEs) in the EU, representing about 99.8% of all companies and employing more than 93 million people. Research shows that SMEs represent 99% of all companies across Latin America as well, employing approximately 70% of the workforce in the region.
Digital banking services provide a way for SMEs in even the most rural areas to access the financial services they need without queuing up at physical banks. Access to credit is another pain point for small businesses around the world, and neobanks in both Europe and Latin America are tapping into these unmet needs with more convenient and cheaper services. Europe currently leads the way, with more than 21 providers, followed by the Americas with eight players, according to Medici.
Opportunities to cross borders
Neobanks are moving fast and chipping away at the revenues of legacy financial institutions. What’s more, they are starting to pursue new markets in order to grow their user bases and provide better services. Complying with financial regulations in new markets, however, brings its own set of challenges. As a result, many neobanks have started to partner with existing banks that already have the proper licenses to operate.
As more traditional banks open their APIs to third-party developers, it will also accelerate the rate at which neobanks are able to launch in new markets. Backed by the largest Series A round of funding for a Spanish fintech, neobank Bnext plans to launch in Latin America, starting in Mexico where it has 170,000 users on a waiting list. Nubank, the largest neobank in Latin America, started in Brazil and is now operating in Argentina and Mexico. Nubank recently hit 15 million users, making it one of the largest neobanks in the world. The UK’s Revolut has ambitious plans for expansion to the US and Japan with help from a partnership with Mastercard. Germany’s N26 made its way to the US in 2019, adding 250,000 US customers in five months, and the list goes on.
As the neobanking sector becomes increasingly international, and therefore, crowded, the next phase will likely be a consolidation of the market. A consolidation of these various financial products and services will not only result in a banking system that is more convenient and friendlier to use, but that also makes financial inclusion a reality for so many around the world.
About Diego Caicedo
Diego Caicedo is the CEO and Cofounder of OmniBnk. With more than 15 years of experience in the finance and factoring market, Diego is a serial entrepreneur and is passionate about helping other entrepreneurs that struggle to secure financing from traditional banks.
About OmniBnk
OmniBnk, a fintech company that provides financial services to small and medium-sized businesses in Latin America.
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