Share

Neobanking : Everything you need to know about a (potentially) 2.05 Trillion Dollar Industry

From “non-fungible tokens” or NFT’s to cryptocurrencies, things we once perceived as the norm are being challenged with the advent of new technologies. The banking industry is no different, and here it’s worth exploring “Neobanks”.

All Neobanks, or Virtual Banks are digital banks that provide accessible financial services via apps. With minimal paperwork, an individual can take just under ten minutes to open a neobank account with the palm of their hand. There are many differences, but a key one is Neobanks do not have physical branches, but they still offer similar services that you’d expect from a traditional bank.

The neobanking industry is currently estimated to be valued at USD 47 billion, and is estimated to grow at an annual average rate (CAGR) of 53.4% which by 2030 would value the industry at USD 2.05 trillion.

What are Neobanks?

Again, while the term “Neobanks” may make the industry sound like a daunting one to uncover. But it’s worth remembering what the function of a “traditional” bank is. In our previous article (which you can read here), “What Do Banks Do”, we’ve outlined that the three main functions of a bank are to (1) simplify transactions (2) lend money (3) keep money safe.

A key difference is Neobanks operate completely digitally, and may not offer all the services you’d expect from a “conventional bank”, as they do not hold the same licence (but how they’re classified in the future may change!).

Among the reasons as to why the Neobanking industry has grown exponentially include;

  1. The Covid-19 pandemic, as it has done to most industries, led to the accelerated adoption of digital cash, due to hygiene concerns. As a result, this has phased out the use of paper money (Furthermore, more find it more convenient)
  2. Rapid developments in new technologies have fundamentally transformed the banking system, such as technologies that enhance securities, which instil confidence in consumers to use digital services
  3. As Gen Z’s grow older and are able to use services, Gen Z’s just has a preference for digital banking
  4. Due to the lower start-up and operating costs (the lack of physical operations), Neobanks can offer their customers lower fees and higher interest rates, which gives a larger return to their customers
  5. By offering round-the-clock digital services, neobanks bypass the time gaps present in traditional banking. Since they are accessible 24/7, they are able to move swiftly in meeting consumer demands, and need not be constrained by 9-5 Office Hours.

 

However, as of today Neobanks cannot completely erase the traditional banking industry” as for the older population, they are far more resistant to adoption of using these digital technologies. For even “Gen-Z-ers”, it may be preferable to dealing with a traditional established bank when dealing with a large sum of money (>RM10000). The prefix “Neo” is derived from Greek and simply means “New”, and given its nascency lacks the operating expertise that a traditional bank would have, like ensuring all its regulatory filings are in place. Lastly, a “Neobank” does not offer the exactly the same services as an established player would, as they need to meet the regulatory framework set by the economies central bank to offer more complex financial services.

Regardless, the Neobanking industry has been booming in the past years, and is showing no signs of stopping. For one, Bank Negara has announced the 5 successful digital bank applicants to be Boost-RHB, GXS Bank-Kuok Brothers (Grab), YTL-SEA (Shopee), Aeon-Moneylion and KAF Consortium.

As part of the announcement, Bank Negara highlighted that digital banks may benefit the consumers by; increasing convenience and access, the ability to focus on “unmet financial needs” and offering more financial products that benefit consumers. With the awarding of these licences, these companies could offer more complex financial products to consumers.

Prior to this announcement that would evolve the digital banking space, there were established players in Malaysia like; Big Pay, Go Solo, Neat and Wise. Big Pay now has over 1.3 million users since its 2018 launch. In other countries established Neobanks include Tide Bank, in the UK which has over 100,000 members, JudoBank in Australia with over $1.5 Billion in Deposits and MYBank in China, which has ties with over 20 million SMEs in 2019.

A further discussion on Malaysia and Neobanks

Malaysia is set to launch its First Islamic Digital Bank in 2022. Al Rajhi Bank Malaysia (ARBM) has hired GFT, a technology and software firm, and Oliver Wyman, a management consulting firm, to develop, build, and launch a cloud-based Islamic digital bank, which will need ARBM to redesign its products, services, and channel.

Malaysian Neobank, Crowdo has gained funding of USD 5.9 Million. Crowdo, an ESG-driven neobank for SMEs, closed its Pre-Series B bridge round of S$8 million ($5.9 million), which was co-led by existing investors, Gobi Partners and iVest Capital Pte Ltd.

If you didn’t know, ESG or Environmental, Social and Governance is a framework applied to companies to ensure that criterias are met so companies are conscious of their impacts to societies, and not purely focused on profits.

Crowdo will use the cash to grow its ESG finance portfolio and extend its neobank platform in Singapore and Indonesia. Crowdo is based in Singapore, but has been fully approved for digital lending by the Indonesian financial body, Otoritas Jasa Keuangan, since 2017. Crowdo is registered as a FinTech company under The Securities Commission of Malaysia.

All in all, neobanks and traditional banks provide the same functions; one simply does it with the advent of technology.

In our previous article, “What Do Banks Do”, we’ve outlined that the three main functions of a bank are to (1) simplify transactions (2) lend money (3) keep money safe.

However, where neobanks could be a potentially lucrative industry, it is in creating innovative solutions that could go a long way in revolutionising finance.

References :

CNBCTV18.com. (2021, October 11). Understanding neo banks: Growth and scope in India. CNBC TV 18. https://www.cnbctv18.com/views/understanding-neo-banks-growth-and-scope-in-india-11066522.htm

NeoBanks.app. (n.d.). Neobanks in Malaysia in April 2022. NeoBanks.app, https://neobanks.app/neobanks/malaysia

Tan, V. (2022, March 1). Al Rajhi Bank Malaysia readies itself for 2022 Islamic digital bank launch. Ifnfintech. Retrieved from https://ifnfintech.com/al-rajhi-bank-malaysia-readies-itself-for-2022-islamic-digital-bank-launch/

Gundaniya, N. (n.d.). Everything you need to know about Neobank. Digipay.guru. Retrieved from https://www.digipay.guru/blog/everything-you-need-know-about-neobank/

Sorensen, E. (2019, September 9). What is a neobank? How does it differ from traditional banks. Mobile transaction. Retrieved from https://www.mobiletransaction.org/what-is-a-neo-bank/

Augustin, F, S. (2022, January 12). Southeast Asia neobank Crowdo closes $5.9M pre-Series B convertible bridge round from Gobi, Ivest. Technode Global. Retrieved from https://technode.global/2022/01/12/southeast-asia-neobank-crowdo-closes-5-9m-pre-series-b-convertible-bridge-round-from-gobi-ivest/

FinTech News. (2018, September 21). Digital banking and neobanks. https://www.fintechnews.org/digital-banking-and-neobanks/

Mind Sumo. (n.d). Next big thing in Neobanking.
https://www.mindsumo.com/contests/neobanking

WHICH-50. (2020, March 16). The rise of neobanks and their impact on banking sector.
https://which-50.com/the-rise-of-neobanks-and-their-impact-on-the-banking-sector/

Statista. (n.d). Market size of neobanks in 2021 with a forecast for 2022 and 2030.
https://www.statista.com/statistics/1228241/neobanks-global-market-size/

Tide. (2022, January 27). Bumper year for Tide: 7% of SME’s now use the business financial platform. Tide. https://www.tide.co/blog/tide-update/a-bumper-year-for-tide-7-of-smes-now-use-the-business-financial-platform/

Digital News Asia. (2021, March 5). BigPay brings cash top-ups to customers across Malaysia. Digital News Asia. https://www.digitalnewsasia.com/business/bigpay-brings-cash-top-ups-customers-across-malaysia

Business wire.(n.d.). MYbank Served Over 20 Million SMEs as of 2019, Further Spurring the Growth of China’s Small and Micro Businesses. Business Wire. https://www.businesswire.com/news/home/20200427005353/en/MYbank-Served-Over-20-Million-SMEs-as-of-2019-Further-Spurring-the-Growth-of-China%E2%80%99s-Small-and-Micro-Businesses

Azevedo, M. A. (2020, May 8). Australia’s Judo Bank Closes On $147M Series C For SME Loans. Crunchbase news. https://news.crunchbase.com/news/australias-judo-bank-closes-on-147m-series-c-for-sme-loans/

Investopedia. 2022. Environmental, Social, & Governance (ESG) Criteria Definition. [online] Available at: <https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp> [Accessed 29 April 2022].

Bnm.gov.my. 2022. Five successful applicants for the digital bank licences – Bank Negara Malaysia. [online] Available at: <https://www.bnm.gov.my/-/digital-bank-5-licences> [Accessed 29 April 2022].


Researcher: Yeow Wern Jieh, Tan Jia Chyi, Woon Wen May

Reviewer: Muhammad Bahari, Myra Kiasatina

Editors: Abigail Phang, Emelia Anne

Leave a Reply

Your email address will not be published.

Interested in achieving financial literacy?

Subscribe to us now!

Interested in achieving financial literacy?