Emerging as a compelling alternative to traditional banking models, neobanks prioritize swift banking services, responsive customer support, fair fee structures, and user-friendly financial products. These institutions have gained prominence since their inception in the aftermath of the 2008 global financial crisis, sparking considerable debate. In this article, Alexey Veretenov, Managing Partner at Senteo Inc., offers his insights on this trending topic.

In terms of legal frameworks, neobanks encompass a diverse array of structures, ranging from fully virtual banks with independent licenses to subsidiary entities operating under established banking institutions.

Illustratively, France’s BNP Paribas introduced Hello bank, which stands out as Europe’s pioneering digital mobile bank. Similarly, New Zealand’s ASB bank established Bank Direct. Noteworthy among the independent neobanks are Revolut (UK), often acclaimed as “the premier second bank,” and Nubank (Brazil).

Neobanks in the CIS: Uzbekistan and Kazakhstan

The economic landscape of Uzbekistan, mirroring that of many developing nations, is in a state of transition and expansion. Traditionally, Uzbekistan has maintained strict regulatory measures within its banking sector, issuing licenses without a clear distinction between traditional banks and neobanks. Consequently, fintech startups faced substantial barriers, requiring considerable multimillion-dollar capital investments to initiate operations.

However, the relatively sluggish pace of digitalization within Uzbekistan’s conventional financial industry has catalyzed the swift evolution of fintech enterprises. Presently, a vast majority of citizens utilize various fintech applications for peer-to-peer (P2P) transactions, with Click emerging as the favored choice, boasting an impressive user base exceeding 12 million.

Across the border in Kazakhstan, Kaspi.kz, one of Europe’s largest fintech entities, has emerged as a dominant force. This versatile platform encompasses a marketplace and a comprehensive banking application facilitating lending, fund transfers, QR code payments, and ticket purchases for railways and airlines. Moreover, it provides full-fledged tours and serves as a portal for government services. Notably, in a recent IPO conducted in the U.S., Kaspi.kz successfully raised $1.04 billion, positioning the Kazakh fintech’s valuation equivalent to the combined assets of all banks in the country.

Presently, most fintech services within the CIS region operate as satellites for prominent digital entities in the banking sector. Nonetheless, the Kazakh market is witnessing dynamic growth, marked by an influx of relocations from Russia, a surge in foreign company representative offices, an uptick in non-cash transactions, and the introduction of mobile applications for P2P transfers.

These evolving trends indicate favorable conditions for neobank proliferation, pending legislative reforms. Consequently, Kazakhstan is poised to experience substantial expansion in non-bank fintech ventures in the foreseeable future.

Is Scale Necessary for Neobanks’ Success?

Achieving success in the banking sector, whether in the virtual or traditional realm, often hinges on attaining a certain scale. While aspiring to replicate the expansive physical footprint of banks like Kaspi, complete with ATMs lining every street, may seem excessive, pursuing an unsustainable growth trajectory can ultimately lead to project closure or acquisition by established banking giants.

Consider the banking landscape in the UAE, where every major bank boasts a nearby digital branch, proving that a lucrative digital presence can be established without the need for ubiquitous physical infrastructure.

Interestingly, it is not just traditional banks eyeing neobanks for acquisition; tech titans like Amazon and Apple are also venturing into the market to develop fintech platforms akin to Kaspi. Should a virtual bank manage to devise a successful business model and carve out a niche devoid of competitors, there exists the potential to foster an independent, profitable enterprise.

Take, for instance, Revolut, whose future remains uncertain. While initially focusing on convenient and lucrative currency conversion, it has struggled to translate revenue into profits. Consequently, there is a looming possibility of Revolut being absorbed by a major bank, thereby transitioning from an independent entity to a successful fintech subsidiary within a financial conglomerate.

Conversely, Tinkoff and Nubank have attained remarkable success by swiftly penetrating the credit market with innovative products, facing minimal competition. Crucially, these offerings not only attracted a vast customer base but also bolstered the profit margins of the virtual banks. This strategic approach has been instrumental in their rapid growth and sustained success.

Neobanking: a glimpse into tomorrow

In the landscape of global banking, neobanks have seamlessly integrated into the mainstream, blurring the once-distinct boundaries between virtual and traditional banking institutions. This phenomenon signals the commoditization of digital financial products, urging contemporary neobanks to transcend mere digitalization and instead enhancing their business models by harnessing the advantages offered by fintech.

Despite this evolution, traditional banking persists in its inertia, with segmentation strategies advancing at a sluggish pace. While conventional categorizations such as mass, affluent, premium, and private segments have been commonplace, they often fall short in truly grasping the nuanced needs of customers. The path forward lies in embracing sub-segmentation methodologies, such as micro-segmentation and adaptive segmentation based on real customer behavior analysis.

The hallmark of success for agile virtual banks lies in their proficiency at targeting specific micro-segments and delivering tailored value propositions that precisely address customer requirements. For instance, niche banks tailored for motorcycle enthusiasts, marketplace entrepreneurs, or families can offer highly personalized services that outshine those of traditional banks.

As conventional services and digital solutions undergo commoditization, the trajectory of neobank development hinges upon their ability to recalibrate their customer-centric approach and seamlessly adapt to cater to specific and relevant customer needs.