The 21st century has brought with it advancements in technology that have affected how people work and operate, and this effect has triggered disruptions across different sectors. One sector that is facing the technology onslaught currently is the banking sector. Technology has moved banking from the traditional banking halls to the customer’s mobile phone or laptop. Traditional banks have had to adapt their business models and implemented easier banking channels that allow their customers to access their services online.
Despite having been in the market for decades with significant brand positioning, traditional banks are facing competition not only for their current customers, but also for potential customers. This competition is coming from start-ups in the digital space that are disrupting the banking sector – the neobanks. These institutions can also be referred to as “challenger banks” a term that was initially used to refer fintechs that are bringing disruption and change to the way traditional banking was done. These neobanks are giving banks a run for their money as they present themselves to existing and potential clients as the better alternative offering better banking products.
We have heard the term neobanks, digital banking, online banking and most recently phy-gital banking being used interchangeably. However, there exists clear distinctions between these terms. Online and digital banking tend to be used in reference to traditional banks that have extended their product offering online. This can be through the launch of a mobile application or by allowing their customers to login online and access the banking services that they would get by going to a physical branch. “Phy-gital” is a term used to represent this combined offering where the bank still maintain and grow their branch network (“phy”) and at the same time continue expanding their digital offering (“gital”).
Neobanks on the other hand represent completely different institutions. Neobank are banks that provide banking services such as access to credit, savings accounts and credit cards but completely operate online. These banks do not have branches or physical presence in the areas that they operate. This means that as a customer of a neobank, if you encounter any challenge with the services that they offer, your problem will be solved online either with one of their representative or artificial intelligence (AI); since there are no physical branches that you can visit.
Neobanks fall into three main categories. Most of these institutions do not have banking licenses, and due to this lack of regulation, they do not offer certain banking products such as credit lines to businesses or individuals. Most of them offer payment solutions only. Due to lack of regulatory approval, neobanks tend to partner with traditional banks that have the banking license in order to offer additional products such as savings and checking accounts on their platforms. For example, Chime one of the largest neobanks in North America offers checking and savings accounts; however it has partnered with 2 licensed banks that offer the banking services as well as issuing of the debit cards.
The second category of neobanks are those that are fully licensed by their respective regulatory body to provide banking services to their clients. However, there are very few of these globally. Kuda a neobank based in Nigeria, offers overdrafts to individual clients and have a microfinance banking license from their central bank. Having this banking license allows such institutions to expand their offering and Kuda is in the beta stages of testing the products to be offered to businesses.
The third category of neobanks includes the traditional banks that move on to launch stand-alone digital banking platforms. The demand for convenience among their banking clients pushes the traditional banks into offering applications and web-based online banking. These platforms are an extension of the same services that the bank would offer its clients who would come to the banking hall. For example, clients are able to order for new cheque books without visiting the branch.
Africa-based neobanks are bringing significant economic development to the continent as the focus of the target clients for most of them is the market segment getting banking services for the first time. This is contrasted with the global trend where those who already have access traditional banking services are being moved to digital banking. The continent still lags behind in terms of number of neobanks with less than 20 of the 300 global neobanks operating in the continent. These institutions have the ability to increase access to finance to populations that have no access to banking services from physical bank branches. This convenient access to finance translates to higher productivity and higher at both the personal and business level for the consumers.
Neobanks looking to expand into Africa are also looking at the regulatory landscape. These institutions are keen on seeing regulatory bodies that are not stuck in the traditional way of doing things; but are able to adapt to the new business model, whereby a bank can exist fully online without having a physical presence in their jurisdiction. Additionally, neobanks are also following trends that are affecting access to their digital services such as the cost of smart phones and access to electricity.
Author: David Kageenu