By Roisin Levine, Partnership Manager – Wise Platform
Over the past decade, neobanks have reshaped the global financial landscape, disrupting the market and creating a new banking experience for current and future generations of tech-savvy customers. Yet thanks to their relatively new position as major players in the industry, challenger banks have been among the hardest hit by the recent economic downturn.
A recent study by consultancy Simon Kucher found that less than 5% of neobanks are currently breaking even, and fintech fundraising in the last quarter has fallen by 21%. In many ways, this is no surprise – when risk becomes less exciting and more dangerous, markets favor what is known, established and stable. A slew of companies that have been primarily driven by rapid innovation, trial models and constant startup fervor are a less compelling sell for suddenly cautious investors.
This seems to signal danger for challenger banks struggling to achieve profitability. Marketing budgets are being cut, many are retreating to a conservation mindset and a number are being acquired by incumbent banks as their valuations fall. But the economic slowdown could instead offer a window of opportunity for challenger banks to emerge from the crisis with new services and an expanded offer.
The question of how neobanks can continue to do what they do best – innovate, grow and reshape banking services for their customers – may find its answer in a very simple solution: partnerships. Partnerships with leading fintechs and banks across the industry drive innovation, drive customer growth and retention, and unlock new revenue streams quickly, efficiently, and seamlessly.
A familiar feature in banking today, partnerships allow businesses to focus on their core offering while expanding what they can offer customers, which in turn increases and retains their customer base. These can still be considered a “nice to have” – a great way to innovate without entailing years of development costs and growing pains; but integrations, integrated finance and partnerships are becoming increasingly necessary for the survival of neobanks.
This is partly due to customer demand for a one-stop-shop – a one-stop-shop where they can keep tabs on their finances without getting bogged down in cumbersome processes or the hassle of attending a local branch. Customer growth and retention relies on providing multiple services seamlessly, which is where partnerships come in.
Creating the infrastructure for a new service in-house is of course an option, but given the expense and capacity constraints within neobanks, this might not be feasible. Integrations, on the other hand, are simple, relatively cheap, and much faster to implement.
To differentiate themselves from other challenger and Tier 1 banks, neobanks could consider a host of potential solutions that help them enter new market segments and play the long game of customer acquisition. For example, in a 2021 study, Wise found that 34% of small business owners are unhappy with the cost of sending money overseas using their national bank. This represents a large number of SMEs – and customers – willing to seek out alternative providers who offer cheaper, faster and more convenient international payment options. A neobank could meet this need through smart partnerships. The rise of digital nomads and remote work options is creating a culture of living, working and traveling abroad, which means solutions for people and businesses to pay and spend abroad will only grow in importance over time.
But it doesn’t have to be an entirely new service offering either – integrations can also revolutionize existing processes to make them more seamless, less time-consuming and therefore more enjoyable for customers. This could involve a partnership to accelerate two-factor authentication through a company such as Twilio. Berlin-based neobank N26 recently launched a partnership with Stripe to power their payments and facilitate onboarding. All of these are examples of simple integrations that drive user growth by creating a frictionless onboarding experience.
It’s all well and good to imply that these integrations will create long-term benefit for neobanks, but what about the short term? By driving innovation and driving customer loyalty, partnerships also increase profitability. A smooth onboarding experience reduces the number of potential customers who hit that last hurdle to look elsewhere for an easier option, and can encourage them to use the service more if they had a positive initial experience. Additional services such as convenient and cheap foreign exchange payments open up a whole new revenue stream for neobanks who, to date, may have focused primarily on their home markets.
There is no sweetening that neobanks, fintechs and, let’s face it, all financial services organizations, operate in a difficult environment. It’s about finding what gives your business an edge and provides opportunities for growth despite this pressure that will be the difference between sinking or swimming.
We have only scratched the surface of what neobanks are capable of achieving. The future will arrive regardless of a downturn or recession, and when it does, consumers will demand even more to have intuitive, innovative and, above all, simple ways to manage their money in all scenarios. In fact, even if the economy is floundering, it will be extremely desirable to have full control over our finances and to keep things simple and streamlined.
So when the economy begins to recover, the challenger banks most likely to thrive will be those that can offer the most value and flexibility for customers to control their money in one place. Partnerships with all sorts of fintech providers allow neobanks to break through market competition, increase profitability, and deliver added value to customers. Integrating new offers for your customers through an API integration is so simple, yet it opens up a world of possibilities.
Despite a challenging landscape, the value and potential of neobanks is unchanged. Now more than ever, we need access to the exponential innovation offered by these companies, and through partnerships we can continue to drive the industry forward and create future-ready financial services.
About the Author:
Roisin Levine is Head of UK and European Partnerships at Wise Platform. Previously Head of Banks at Flux, she is also 3 x Women in Fintech Rising Star. Roisin also hosts Wise Platform’s upcoming video miniseries: “How We’re Fixing,” where she speaks to executives across the industry about how they’re solving customer problems and changing the future of finance. You can find her on Twitter @roisinlevine.