UAE's digitally-savvy neo-banks are having a good run - it will only get better
Neo-banks continue to impress, and now, they need to work towards profitability
As a career banker, I often get asked for personal advice on banking. From friends, family – and, sometimes, by my physiotherapist. One question in recent months relates to whether to open an account in one of the emerging neo-banks in the country. My answer : why not?
The evolution of neo-banks in the last decade has been nothing short of breath-taking. There are nearly 400 neo banks globally today serving 1 billion customers. About half of those banks were set up in the past 3 years.
What is a neo-bank? It is a ‘challenger’ bank that aims to disrupt the status-quo of traditional banks in products, processes and service levels. It establishes a digital-only customer relationship across multiple products delivered typically through a mobile app. Core to this goal are paperless processes and a significantly improved customer experience.
Unicorn status
About 40 neo banks have reached unicorn status with valuations of over $1 billion. The biggest is Nubank valued at $45 billion and, with 84 million customers, half the bankable population of Brazil. Other notable examples are WeBank in China; N26 in Europe; Revolut, Starling and Monzo in the UK; Chime and Robin Hood in the US; and Tinkoff in Russia.
The global market valuation of neo-banks was estimated to be $300 billion last year. The two most disrupted markets are Sweden and UK, followed by Brazil, South Korea, US and Australia.
One interesting trend is that traditional banks are launching neo- banks as ‘speedboats’ for innovation. These are digital start-ups within established financial services groups, with the freedom and opportunities of upstart fintechs.
As many as one in three neo-banks can be classified a speedboat. Examples are Chase from J P Morgan Chase, Marcus from Goldman Sachs and, closer home, Liv from Emirates NBD and Mashreq Neo.
Such speedboats are used as digital attackers to support the incumbent’s strategy to go after new segments or markets. For instance, Liv was launched by Emirates NBD to target the millennials with an app that combines banking and lifestyle.
Financial inclusion
New digital banks are becoming more niche, targeting start-ups or specific customer segments.
- Nerve, for example, is a digital bank that helps musicians to network.
- Dave is focused on gig workers, listing job opportunities on their platform.
- Cheese primarily serves Asian-Americans while Purple is a bank for people for disabilities.
There is also a growing focus on financial inclusion, and neo-banks, with their ease of onboarding, are a great way to address the unbanked and the under-banked. That is one reason why regulators in many jurisdictions have introduced a custom licencing regime for digital banks. Examples of this approach are in Singapore, Hong Kong, South Korea, Malaysia and Philippines.
Digital banks have better technology and lighter operations, enabling them to offer more affordable, user-friendly services to underserved customers than their brick-and-mortar counterparts. In this way, digital banks can advance financial inclusion, especially in Africa and Asia.
The new entrants also provide a much-needed injection of competition and innovation in the banking sector, often dominated by a few large traditional players.
The Middle East is catching up
Since the launch of Emirates NBD’s Liv and Mashreq’s Neo in 2017, there have been a number of digital banks launched, mostly as subsidiaries of traditional players. The most recent two launches in UAE, Wio and Zand, are exceptions.
Today there are 25 digital banks in the region: nine in the UAE, three in KSA and 13 elsewhere. There are five main business models: pure personal banking, pure business banking, payments, personal finance and savings and wealth management.
With a young digitally native population, high internet penetration and a large base of under-banked blue collar workforce, the GCC seems ripe for digital disruption. STC Pay in KSA, Weyay in Kuwait and Ila in Bahrain are already making waves in their respective markets, as is Wio in UAE with its assertive marketing campaigns.
My estimate is that at least 18 per cent of the 5 million banking population in the UAE is already banking with neo-banks, though only a small fraction of these customers would consider them their main bank.
My estimate is that at least 18 per cent of the 5 million banking population in the UAE is already banking with neo-banks, though only a small fraction of these customers would consider them their main bank.
And there lies one of the key challenges for neo-banks. Average revenues per customer are still very low. According to estimated figures, they range from about $50 per annum for Revolut to $90 for Nubank and $135 for Tinkoff.
The equivalent numbers for traditional banks are way higher. Added to this is the limited product range, high inactivity rate of the customer base and increasing churn. As a result, less than 5 per cent of neo-banks globally have achieved profitability.
But with their stand-out interest rates, simplified processes and nifty new apps, neo-banks are a compelling proposition for consumers.
Their biggest differentiator is the user experience, re-imagined from the ground up to be significantly better than traditional banks. That alone is reason enough to try them, even if you might not be ready yet to trust your life’s savings with them.