Asreertebat – Luigi Wewege is President of Caye International Bank , FinTech School Instructor and Author of The Digital Banking Revolution.
He believes that It is of paramount importance that governments properly regulate the operation of neobanks, as well as their growth, who and how are people being granted banking licenses. In addition to regulation of the institutions themselves, due to the digital nature of the industry, governments must be highly aware of client data
We had an interview with him about the future of neo-banking.
– What do you think is the perspective of neo-banking? Do you have statistics in this regard? Which countries are leading?
Firstly, I would like to clarify the definitions of many new terms commonly used in the banking industry are subjective and in many cases a matter of semantics. My responses are based on my understanding of the terms, financial institutions, and the banking industry as a whole. With this said, neobanking is the digital evolution of new financial institutions without the backing of legacy institutions, the Barclays, JPMorgans, HSBCs, etc. of the world.
In terms of laissez faire economic theory, neobanking will increase market entrants, thus furthering perfect competition in a historically oligopolist sector. As more options appear, consumers benefit from new players on their own right but also their presence will drive change within older financial institutions.
Regarding recent statistics its estimated that the global neobanking market size was valued at USD 47.39 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 53.4% from 2022 to 2030. The rising demand for convenience among customers in the banking sector is expected to drive market growth in the following leading countries: the United States, Canada, Germany, United Kingdom, China, India, Japan and Brazil.
– What are the differences between neo-banking and digital banking?
These two terms can and frequently do overlap, with ‘neobanks’ being new, tech-focused seemingly ‘independent’ financial institutions where digital banking refers to consumers being able to perform banking activities digitally without the need for brick-and-mortar locations. In most cases all neobanks only provide digital banking (Evolve, Revolut, etc.), traditional banks provide digital banking as an additional service required to compete and survive in the current digital banking climate.
– What are the most important challenges for governments to develop neo-banks? (Information integration and regulation in this area – Awareness of customers and managers – Data security and others?
It is of paramount importance that governments properly regulate the operation of neobanks, as well as their growth, who and how are people being granted banking licenses. In addition to regulation of the institutions themselves, due to the digital nature of the industry, governments must be highly aware of client data: How is this data protected, shared, transmitted, and secured. The ‘balanced equation’ nature of this regulation must include full and transparent disclosures by institutions pared with complete acceptance by customers.
– For the development of neo-banks; What steps should the government and relevant agencies take to facilitate and support financial institutions (for example: infrastructure – Internet speed and cost – financing to reduce costs – knowledge and skills, public awareness …)?
For governments to properly nurture the growth of the neobanking industry they must start with comprehensive requirements and equally important, ‘guidance’ regarding compliance. Fraud, criminal activity, customer breaches/losses are the quickest way for an institution to rapidly lose the faith of its investors, employees, and clients. The best way to mitigate this risk is through robust and required compliance programs and regulatory oversight of such.
– It seems that neo-banks are somehow in conflict with fintechs, what is your opinion on this?
This is a misconception; while neobanks, by definition, are banks; fintechs can provide a wide variety of services in the financial services/banking sector. The most common is payment processors and electronic money institutions.
In this use case, fintechs actually assist neobanks grow and expand faster giving them the ability to find new payment rails outside the traditional direction connections to the SWIFT network and SEPA.
– Given that fintechs can be more agile and innovative than traditional banks, they can help accelerate this area. Are there any challenges? And what solutions should be done?
The main challenge of the neobank is the same as most businesses – capitalization! Many neobanks spend enormous amounts of money in marketing, public relations at time of launch to maximize adoption with the assumption revenue generation will keep rolling.
However, we have seen once fees increase, or new options enter the market there is very little customer loyalty compared to traditional banking. When there is a diaspora of clients, projected revenue based on an initial CAC (Customer Acquisition Cost) versus future revenue skews towards huge losses.