The rapid growth of neobanks and digital-only banks has forced traditional institutions to bite the bullet and overhaul their strategies and infrastructure to match new “digital transformation” standards. Some have even launched their own digital-only subsidiaries to match.
Incumbents do have advantages including trust and capital, yet sheer number of consumers responding to the appeal of convenience, flexibility and transparency of new digital-first competitors should be like an alarm going off. These neobanks are already reporting millions of customers who engage on their mobile platforms and analysts predict that momentum is just beginning to build.
Global tech market advisory firm ABI Research specifically predicts the top 57 neo and challenger banks worldwide could amass several million more users in the next few years — potentially with an extraordinary jump from 155 million in 2020 to 590.6 million in 2026.
“Traditional banks are feeling the pressure from their customer base to deploy digital solutions for financial services, competing with other traditional banks as well as neo/challenger banks,” observes Sam Gazeley, Digital Security Analyst at ABI.
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The increased demand for digital solutions during the pandemic has stimulated investors’ interest in neobanks, and increased their visibility to target markets, onboarding new customers looking for compelling digital offerings, Gazeley warns.
Research from Insider Intelligence, while showing significantly lower totals of neobank accountholders in the U.S. than ABI Research’s figures (which include all of North America), likewise predicts the total will more than double by 2025 — actually one year sooner than the ABI prediction. Either way the conclusion is much the same: Neobanks are on a tear.
In a separate Insider Intelligence report, Analyst Tom Auchterlonie wrote that non-traditional banking providers are expected to open 6.5 out of every 10 new digital banking accounts in the next five years. “They’ll meet pent-up demand from their major demographics: the unbanked, Gen Z, and Millennials,” the analyst explains. He also points to their aggressive marketing, niche-market focus and access to direct deposit funds as factors lighting the fire of their rapid growth.
Neobank Growth Region By Region
The fintech revolution can be traced back to Europe, where neobanks established their roots quicker than in the United States. “North America has somewhat emulated Europe” when it comes to these banking alternatives, ABI states.
Here are the research firm’s predictions for neobanks’ account growth region by region.
It’s less than ten years since Chime launched in 2013, yet the leading U.S. neobank now has 13.1 account holders. Impressive as that total is, ABI estimates it will at least double in five years. Chime is one of 15 top North American neobanks in ABI’s research. (It doesn’t release the list publicly but cited Chime, SoFi and Upgrade as three examples). The firm predicts the account total for all 15 to increase from 56.9 million in 2021 to 162.8 million in 2026.
Europe’s markets are expected to grow even more — by 233% collectively — with the top 19 neobanks (which ABI says include Revolut, N26 and Monzo) expanding their collective user base from 49.8 million in 2021 to an estimated 165.8 million in 2026.
While Middle Eastern and African markets are trailing the rest of the world in terms of their own neobank revolutions (ABI admits countries in these regions are still “very much in infancy” when it comes to non-traditional banking providers), the Asia-Pacific market will likely display the highest growth rate over the next five years, ABI reports.
More specifically, the region’s top nine challenger bankers (headed by Kakao Bank and K Bank) will see major advances — not just doubling or tripling, but almost quadrupling their number of accounts from 22.1 million to 76.6 million.
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A Light At the End of the Challenger Tunnel?
“Trust is a critical issue when start-up neo and challenger banks look to onboard as many customers as possible and pivot them toward premium accounts and subscriptions.”
— Sam Gazeley, Digital Security Analyst at ABI
Even with all the projected growth in the neobank sector, the largest traditional banks still have the upper hand in several ways. People certainly are drawn to fintechs, opening accounts with the unconventional players to experiment, but app downloads and digital onboardings don’t always indicate customers are staying loyal to the new players.
“Trust is a critical issue when start-up neo and challenger banks look to onboard as many customers as possible and pivot them toward premium accounts and subscriptions,” Gazeley observes.
The analyst goes on to say he thinks the challenger banks won’t always have it their own way, especially as traditional banks branch out and launch their own digital divisions.
“These offshoots will have a benefit as it relates to the trust stemming from brand association and a considerable war chest of capital for innovation,” he says.