Monday, 23 july 2018 | Brenda Rodríguez López
Digitalization and innovation are the trendy words for any business. The banking sector is not indifferent to the outside trends which mark this new era that many dare to point out as the beginning of the Fourth Industrial Revolution. The development of digital finance is unstoppable, and the traditional banking is witnessing how new actors begin to come into their field without hesitation. They are the so-called neobanks and challenger banks, new banking alternatives that seem to have come to stay, and kick it up a notch in a sector which has been very stable up to now. What is different about these new players of the fintech ecosystem? How could they transform the sector? Are they a threat to the traditional banking?
The conventional banks are witnessing how new competitors appear in the financial scenario: N26, Revolut, Bnext, 2Getherglobal, Monese, Bunq,.. These banking alternatives are still in an emerging phase in Spain, although they are gathering more and more momentum; and if Spain follows in the footsteps of neighboring countries like Germany or England, their expansion will be unstoppable. However, it is normal that in a boiling financial sector, where even words such as blockchain, roboadvisors or tokens are not being used yet, most people do not know who these new players, which are known as neobanks and challenger banks, really are. This article aims at putting an end to this situation.
These new agents of the banking sector are characterized by their simplicity, easy way of use and speed. They are completely digital. This condition makes possible for their customers to access them from any place and at any time. It is no longer necessary to go to the branch office to perform a simple process. Besides, they are able to simplify even the most complex procedures. Their goal is to optimize the financial experience and offer clients a high level of personalization.
On the other hand, neobanks and challenger banks keep a low cost structure. Thanks to this, their customers benefit from a reduction or, even, a elimination of fees. This is precisely the element that makes them more attractive in comparision to traditional banking, especially for millennials who are more inclined to adopt readily changes that are driven by new technologies.
Although they share these features, there are certain differences between these new digital agents. Neobanks have behind them a traditional bank or a physical branch office. In other words, they are not entirely independent, they are backed by a financial institution and supported by a traditional infrastructure. They also do not hold a license as a credit institution -they operate with an electronic credit license-. When they are granted one, they become the so-called challenger banks.
Despite this condition, they offer very similar services to the ones that traditional banking provide. They tend to be specialized in current account or savings services, and, as they grow, they start offering other services like the ones which are designed to meet the needs of small businesses.
Their design is focused specifically on a mobile-first experience -although, in some cases, they also offer a web version-. Therefore, they take advantage of all the progress in technology. This is one of its competitive advantages compared to traditional banking, which is not capable of dealing with digitalization as effortlessly as they are.
Challenger banks are credit entities holding a bank license. They differ from neobanks in that they are pure fintech entities. That is to say they are independent and self-suffient entities that are not backed by any bank. This is the reason why they enjoy more freedom and that, in contrast, they can generate more distrust among the most conservative clients who have objections to trying new alternatives.
BaaS, which stands for banking as a service, is yet another service which is less frequently mentioned, but one which is also relevant in this new financial ecosystem. They offer services as digital financial platforms, either through their own license or by means of one held by a third party.
Since the 70s, the banking sector has not faced such a changeable scenario. At first sight, it may seem that the arrival of these alternatives has struck a blow to traditional banking. Nonetheless, it should be noted that not only are startups betting on this new banking model, banks themselves are backing the creation of some neobanks (that is the case of CaixaBank with imaginBank). They might even end up becoming the new distributors of fintech products. Therefore, their appearance does not imply the decline of the traditional banking sector, but it forces them to adopt a change in mindset which boosts their transformation.
Banks have the largest number of clients so far, even including the ones which have a younger profile. In addition, banks enjoy a generous accumulated experience, which is something that these new emerging actors lack. It is important for both traditional and new agents to understand that they can benefit from the strengths of their competitors and compensate their weaknesses, as long as they are able to take advantage of the moment.
Neobanks and Challenger banks are enjoying a full adaptation to the new digital scenario, which is now key to the survival of any entity. Banks that are willing to modernize and learn from this new fintech ecosystem will have the opportunity to face digitalization from a privileged place.
The CEU IAM Business School bets on a up-to-date training which is adapted to all the changes that the unstoppable technological transformation brings along. Our Executive Master's Degree in Finance offers a complete perspective upon the financial world, both from a business standpoint and from its banking and financial aspects. Thanks to this learning process, you will be able to perform duties that range from working in a bank or a business consultancy to becoming the CFO of a company. You will also be ready to participate in company mergers, a venture capital acquisition, an IPO or a millionaire investment in the capital markets.