And where do EMIs fit?
As new entrants to the banking sector, neo and challenger banks have grown massively over the past decade. According to Fintech Magazine the Compound Annual Growth Rate (CAGR) of both these banking sectors currently stands at 46% with the rate set to top US$356m by 2025. The success of neo and challenger banks have seen is undeniable. But how do we identify them?
Neobanks are entirely digital, cloud-based concerns that reach their customers using web platforms and mobile applications. Current, leading neo banks include Monzo, Atom Bank, Volt, Chime, Starling, N26 and Moven.
Neobanks not only provide current accounts, but additional features such as payroll, expense management and automated accounting services. Neobanks also provide a range of add-ons that offer solutions to the financial challenges SMEs struggle with. They use APIs to help integrate business workflows with banking requirements.
Neobanks do not hold a banking license - in order to operate they rely on a partner bank. Challenger banks maintain a physical presence in addition to being fintech operations. They are also much smaller than mainstream banks.
Today, there are an estimated 100 challenger banks globally. They all hold banking licenses and can offer a range of traditional banking services as well as digital features. These traditional services are also easier to access than mainstream banks. Current challenger banks include Allica, Amicus, Revolut, Tandem, Monese, Metro and MyBank.
Regulators are opening up the marketing to digital banks, with licences for E-Money (EMI) and Payments Institutions accounting for more than 900 licences in 2018. These new entrants are recognised as competitors to traditional banks in the region. In the Economist Intelligence Unit report 2020, most European banks agree (77.6%) that: “Fintechs will continue to have a material cost advantage over traditional banks” and further “that the top two ‘non-traditional entrants to the banking industry’ will be your company’s biggest competitors by 2025.”
There are upcoming generations whose digital-first outlooks are helping the challenger banks to grow. Europeans are increasingly looking to digital banking as an alternative to visiting bank branches. We have entered an era of digital-first generations, who do not differentiate between a digital banking service or a digital TV streaming service. The trend is to push towards one single mobile phone as an enabler of holistic service for everything.
One good example is purpose-driven EMI Bank FLOWE in Italy, which educates young people on the issues of innovation and economic, social and environmental sustainability. Through its mobile app and the growing ecosystem of partners, Flowe is building a BetterBeing Economy to help young people live a more meaningful, sustainable and happy life. Bringing such an ambitious project to life meant that the bank's creators needed to find a banking platform that was truly flexible.
The bank wanted to onboard customers quickly and benefit from the best technology in the market. The bank made scalability and API enabled flexibility a focus. The launch of the bank was planned in 2020 and thus was met with the difficulty of launching through times of lockdown. Through the SaaS platform, they chose they were successful and were able to bring Flowe to life remotely.