From bricks to clicks: the rise of the neobanks

How much of an impact are the disruptors really having on the traditional retail banking market?

The term “neobank” is gaining currency as a definition of retail banks without a physical presence. These are the disruptors, the innovators, and the new kids on the block when compared with traditional brands established in previous centuries.

The Banca Monte dei Paschi di Siena in Italy can trace its history back to 1472, whereas Revolut celebrated its fourth birthday in July 2019.

Together, the neobanks – Revolut, Monzo, N26, Fidor, Alipay, WeChat and the rest – can boast hundreds of millions of app downloads worldwide. And counting. So what impact are they having on the retail banking markets in which they operate, and how are traditional banks being affected?

Our 2019 study reveals that the neobank impact on the retail banking market is remarkably strong in China, India and Brazil, but remains limited (so far) in the US, Singapore and the European countries we’ve featured in this study.

Market penetration

Chinese consumers are the champions of neobank usage. Almost everyone (93%) with a bank account does business with one or more of the local neobanks: Alipay, WeChat and JD Finance. Admittedly, the integration of payment apps in social media platforms plays a significant role here, but this does not fully explain it – as the significant level of penetration enjoyed by Alipay and JD clearly shows. India has the second-highest market penetration, at 50%, followed by Brazil at 35%.

Within other more traditional banking markets, neobank penetration averages considerably less than 5%: in the USA it’s only 2%, and in Singapore, less than 1%.

These results show that Chinese retail banking differs significantly from the other markets: on average, customers make use of at least two of the three key neobanks, Alipay, WeChat or JD. And an impressive 91% of Chinese consumers with a bank account will be using Alipay. This level of use is unparalleled.

What’s more, 42% of Chinese customers consider one of the neobanks to be their primary bank. This is way ahead of customers in Brazil (9%) and India (6%) according to our findings.

In the other markets in our study, there is no comparison to be made, with just 1% (or fewer) customers using neobanks for their primary account.

It’s no surprise, then, that at the time of writing, UK customers are being encouraged to have their salary paid into their Monzo account, with a bonus of £25 if they do so.

Finally, neobanks in the three prominent markets have been able to capture a noticeably larger share of wallet than elsewhere: Brazil 40%, China 39% and India 24%.

Bank app usage

Our findings showed that, on average, two out of three retail bank customers in the study markets will use a banking app to manage their financial affairs, with the exception of the USA, where just 25% use a banking app. 86% of neobank clients make use of a banking app (from any bank) and 60% of traditional bank clients will use a banking app.

On average, a neobank customer will use their neobank app for 40% of interactions. In Brazil, this is slightly higher, at 50%.

So, while millions of people may be downloading apps and opening neobank accounts, there’s still a long way to go before neobanks achieve the numbers of transactions, balance levels and regular use enjoyed by traditional banks.

Customer appeal and trust

When it comes to being trusted and liked by their customers, neobanks in Brazil, China and India have established an equal footing with traditional banks. The situation is different in other countries, where traditional banks clearly put neobanks in the shade.

It’s interesting, but perhaps not surprising, to see that neobanks are liked more than they are trusted by their own customers. Neobanks invest strongly in brand building and are overt in their efforts to deliver an engaging, innovative and often responsive customer experience.

But longevity could be a factor in trust: neobanks have not been around for long, so their proven track record is short compared with that of the much older traditional banks. And for some customers in Europe and the US, neobanks’ lack of bricks-and-mortar presence may also be a factor, although with branch closures continuing apace across Europe this is likely to become less of an issue in the future.

The notable difference in customer attitudes may explain why traditional banks in the Netherlands, UK, France, Germany, Spain, Singapore and USA are not yet experiencing any major impact from neobanks in the retail market.

What makes China so different?

Since the advent of the smartphone, the Chinese population has embraced technology in all kinds of innovative ways. For many consumers, it has become embedded into their lifestyle, as the “codeconomy” flourishes. For example, people begging on the streets are seen using QR codes and eWallets; QR codes have been seen on waiters’ shirts (for tipping purposes). A significant proportion of neobank users (as previously unbanked customers) will have completely bypassed traditional banks to go straight to mobile. In comparison, the Netherlands, for example, has a retail banking market that has consolidated to such a degree that there are only four traditional banks.

Customers tend to stay put, and this stability prevents the Dutch market from being an attractive proving ground for neobank brands. In Spain, where there are 10 neobanks, the total market share is no greater than that of the Netherlands where there are only three (one of which, N26, has less than a 1% share). The total number of new players is currently only increasing competition and dividing the as-yet small overall market share.

So will neobanks be able to emulate their Chinese counterparts’ success in the European or US markets? It’s questionable whether integration with social media will be the way to do this. A disruptor like Cashapp may be gaining ground in the US, but you still need a debit card (and therefore a traditional bank account) to become a customer. Neobanks will most likely gain ground in markets where there are relatively more unbanked and under-banked consumers.

What must neobanks do to break into the wider market?

In Brazil, India and China, customers tend to use their neobank fairly often, not least because many people do not have a traditional bank account. In other markets we see customers making relatively less intensive use of their neobank, as they either signed up just to check it out (it’s free), or because they are cherrypicking for a particular benefit that the neobank offers (such as free ATM use when abroad).

Brand appeal is also involved. “Free and easy” isn’t really a term associated with banking, but in the case of neobanks, with their exceptionally userfriendly app interfaces, this is usually the case. They’re perceived as contemporary and innovative, making them attractive to young people and anyone keen to embrace a digital lifestyle.

However, existing banks are closely following what the neobanks are doing and are quick to imitate app features and benefits. A good example of this is Barclays’ promotion of their gambling block. This allows customers to block payments to certain categories of retailer, such as gambling services, in a bid to help vulnerable customers; it was introduced just months after Monzo launched the feature.

Another example is the Dutch neobank Bunq, which introduced a P2P instant money transfer in early 2016 – a feature which traditional banks started copying within a matter of months. This means many consumers could be excused for adopting a ‘wait and see’ approach before committing to change.

Generally speaking, although bank account switching rates are rising very slightly, they run at only a couple of percentage points or less in Europe and the US. Even when incentivised, people are reluctant to change their primary bank, although they may still be keen to give a neobank a try as a secondary account.

For neobanks to grow not just their client numbers but also their share of electronic wallet, it’s important that they widen their portfolio. For as long as customers see them as one-trick ponies (regardless of how adept they may be at doing that one thing), neobanks are limiting their potential for increasing market share. To put it bluntly: relying on P2P payment services alone will not be enough for neobanks to achieve and sustain growth over the longer term.

Neobanks could use some help when it comes to growing their share beyond the un(der) banked. It is all about further improving and innovating their portfolio. But how should they go about this? Kantar offers a range of products in supporting innovation from our Opportunity Identification tool to our Idea Optimisation platform, both of which help brands identify and optimise their portfolios.

So traditional banks needn’t worry, then?

Far from it – the low penetration of neobanks in European countries, Singapore and the US should not be a case for complacency. The trends seen in Brazil, China and India could extend into other markets, and future customers everywhere are likely to engage with neobanks’ user-friendly approach.

The market is now all about growing share of electronic wallet and taking advantage of delivering an excellent customer experience, This is especially true in the markets and disciplines where some traditional banks may not be keeping pace.

Inevitably, any retail bank lagging behind in digital transformation will already be feeling some pain. Now they stand to lose customers on two fronts: to the neobanks themselves, and also to those traditional banks truly invested in delivering an enhanced digital customer experience.

Both traditional banks and neobanks need to determine how to position themselves in the dynamic retail banking market, as consumers increasingly have a wider array of financial services suppliers to choose from.

This is not just about functional needs but also, to a great extent, emotions. Irresistible brands have a magnetic appeal that evokes in the moment powerful consumer desires. It makes choosing them inevitable and competing with them impossible.

Kantar’s unique NeedScope model and tools unlock the layers of needs in order to unveil the position of a bank. It identifies what’s needed to obtain a stronger position for the future, while helping to build an irresistible brand that drives a strategic and competitive advantage.

For more in-depth analysis or to find out how Kantar can help you build your user base and increase engagement amongst your customers read the Future Finance: From bricks to clicks report