The global neobanking market is expected to reach USD 333 billion by 2026. And, in the next two years, the UK’s cohort of neobanks will have captured more than half of the UK’s digital banking users – almost 40% of adults overall.
A key component of profitability for any (neo)bank, is using customer deposits for lending. And the key driver of neobanking's success over and above traditional banks is the adoption of embedded lending. Embedded lending is the practice of integrating lending into other services, such as payments and investments. It enables digital banks to offer pre-approved, or pre-selected credit services to their customers, where and when customers need it, instead of applying in branch or online via their traditional banks.
Embedded lending isn’t a new trend, but neobanks are taking it to the next level. By leveraging technology to create a seamless customer experience, it takes away any barriers for customers to access finances. Traditional banks face losing customers because of their sluggishness in acting and reliance on clunky and costly client support infrastructure.
It is, after all, consumer demand that is driving innovation. Technology has changed expectations, and the rise of digital payments, ecommerce, and mobile banking has led to a shift in consumer behaviour. Those sceptical that there has been a shift should consider that some of the biggest names in neobanking, Revolut, Monzo, and Starling, have only been operating for a little over a decade and yet, year-on-year, are consolidating more of the market. Consumers now expect a seamless and convenient banking experience, regardless of the device or platform they use; and these neobanks are delivering it.
They are leveraging the power of embedded lending – aided by AI – to quickly analyse customer and credit data and offer customers personalised financial solutions. Think tailored loans with rates specific to each customer, analysing risk profiles to reduce the risk of customers going into debt, and tracking suspicious behaviour and patterns to minimise fraud.
The rise of neobanking and embedded lending is driving incremental innovation in the payments ecosystem, as neobanks are partnering with fintech startups – and established players – to offer a range of services including unique funding solutions. A flexible infrastructure means that neo-financial services aren't limited to just payments and lending, but can also offer cross-border payments, personalised insurance offers, cheaper foreign exchange, and cryptocurrency trading. These partnerships are enabling neobanks to expand their product offerings and reach a wider customer base, without having to build the ‘best in class’ products themselves. But these changes are also forcing traditional banks to emulate these services for their customers – improving the ecosystem as a whole for consumers.
However, the growth of neobanking is not without its challenges. Regulatory compliance, cybersecurity and customer acquisition remain some of the key challenges they are facing. With the introduction of AI and machine learning into the financial framework, neobanks will need to stay ahead of the ethical and legal frameworks that are being written as AI develops. Additionally, whilst the widespread convenience of in-app banking is good news for consumers, its adoption by traditional banks means that neobanks have to work even harder to differentiate themselves, all whilst earning the trust of new customers, especially post demise of SVB and several other smaller banks in the US.
Rob Straathof is a leading financial services expert, and CEO at Liberis, an embedded finance solution and platform. Rob has a wealth of experience from his roles at various SME-focused finance providers, such as Everline and Newable Business Finance, as well as senior-level positions at Wonga, and in the J.P Morgan technology investment banking team in both London and San Francisco.
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