See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/335205599

How neobanks' business models challenge traditional banks

Article · August 2019

CITATIONS READS

0 5,289

4 authors:

Gabriel Hopkinson Diana Klarova

Aalborg University Aalborg University
1 PUBLICATION   0 CITATIONS    1 PUBLICATION   0 CITATIONS   

SEE PROFILE SEE PROFILE

Romeo V. Turcan Valeria Gulieva

Aalborg University Aalborg University
130 PUBLICATIONS   275 CITATIONS    6 PUBLICATIONS   9 CITATIONS   

SEE PROFILE SEE PROFILE

Some of the authors of this publication are also working on these related projects:

High Impact Entrepreneurship View project

TBRP: Theory Building Research Programme View project

All content following this page was uploaded by Romeo V. Turcan on 16 August 2019.

The user has requested enhancement of the downloaded file.

 How neobanks’ business models challenge
traditional banks
The banking sector in developed countries has been dominated by a small number of established
institutions for many years, with new entrants struggling to gain a foothold. But changes in regulations
and customers’ behaviour in recent years have opened up new opportunities. Neobanks are a new form
of direct bank that have emerged in the last decade and are seeking to challenge the traditional banking
business model. This article will map out the emergence of neobanks and outline how they create value
from their business models, as well as assess their impact on the industry in Europe thus far, including on
Denmark’s fintech sector.

The banking landscape is changing
For a long time, new entrants into the financial
services sector found it difficult to compete with
the well-established incumbents, who possess ad-
vantages in capital, customer base and networks
(PwC, 2016). The global financial crisis in 2008
arguably marked a turning point in the banking sec-
tor in many developed countries. The crisis high-
lighted the vulnerabilities in the traditional banks’
operations, and the government bailouts and pub-
lic scandals resulted in a loss of trust. In a bid to
promote competition in the industry, governments
in some countries, such as the UK, have made reg-
ulatory changes to encourage new entrants. These
include reducing the capital requirements and offer-
ing temporary restricted licenses. Additionally, new
regulations around the use of customer data have
been introduced in the new 2018 European Union’s
Payment Services Directive (PSD2) and General
Data Protection Regulation (GDPR). Whereas be-
fore banks had sole access to their customers data,
now customers can opt to allow other organisations
to access their financial data, contributing to a sys-
tem of ‘open banking’ (EY, 2019).
Banking for the digital age
Banks are also under increasing pressure to meet
customers’ needs with regards to digitalization.
Nowadays, many people manage various aspects
of their life via their smartphone and demand conve-
nience and ‘user-friendly’ applications to help them
do this. Adoption of internet banking is significant
in Europe, and highest in Denmark where 90% of
the adult population use it. Mobile banking is yet to
reach this level but still rapidly increasing (eurostat,
2018). Last year 64% of smartphone owners in Eu-
rope used the device for banking purposes (ING,
2018).
Neobanks driving innovation
Neobanks are a new type of direct bank that are fully
digital, without physical bricks-and-mortar branch-
es, and are 100% independently owned (Nielsen,
2019). Examples of two of the most established
Neobanks in Europe are Monzo, which launched
in the UK in 2015 and currently has over 2m cus-
tomers, and N26, which launched in the same year
in Germany and currently has over 2.5m custom-
ers. The highest proportion of those adopting them
have so far been among tech-savvy millennials.
Since their launches they have received significant
amounts of capital from investors. Monzo recently
acquired £113m in fresh funding, putting its value
at over £2bn (Financial Times, 2019). Most of these
banks started by offering simple current accounts
and debit cards, which can be managed via a mo-
bile app, where users have access to a number of
innovative features. Since then they have been ex-
panding their product range to include lending and
savings, as well as giving users the ability to access
offerings from other financial service providers via
their in-app marketplaces.
Whilst neobanks offer the same core services as
traditional banks, the absence of branch networks
means their business models exhibit notable dif-
ferences. Neobanks are financial technology com-
panies, meaning that rather than purchasing and
relying on existing IT systems, they develop their
own from scratch, using cloud-based operating sys-
tem providers such as Amazon Web Services as a
foundation to build from. Compared to the legacy

Young Graduate News, July 2019

International Business Centre at Aalborg University
systems which most traditional banks still rely on,
which are costly to maintain and slow to implement
changes, the core banking systems developed by
neobanks are characterized by a network of micro-
services, with many different components operat-
ing separately but integrated together, rather than
having the whole system in the same program. The
result of this is that implementing changes can take
around 2 weeks, as opposed to 3-6 months for tra-
ditional banks (Oliver Wyman, 2019).
Neobanks have created innovation in 4 key areas,
which have been identified as the following:
Customer experience - Neobanks focus on opti-
mising customers’ experience by providing supe-
rior customer support and convenient solutions.
Customers can open an account in less than 10
minutes and the user interface of the apps makes
navigating quick and simple. Customers can also
make overseas transactions more cost-effectively.
For example, Monzo allows users to use their card
overseas without markups, and has low fees for
making international transfers.
Features and money management tools - Com-
pared to the mobile applications offered by tradi-
tional banks, those developed by neobanks aim to
give customers much more functionality in manag-
ing their money. Features include giving real-time
spending notifications, offering detailed insights
into spending habits and the ability to sort money
into different ‘pots’, such as saving for a holiday.
Agility and low-cost structure - The absence of
branches and the focus on technology mean that
neobanks can respond to changes more quickly
and implement new features. It also reduces their
operating costs significantly, enabling them to offer
lower fees for customers.
Transparency - Generally neobanks focus on being
open with the public about their operations. This in-
cludes releasing yearly financial reports, document-
ing problems as well as positives on their blog, and
using a less corporate tone in their interactions with
customers.
Young Graduate News, July 2019
International Business Centre at Aalborg University
The future of banking
How far neobanks can go in disrupting the bank-
ing sector remains to be seen. Whilst some have
achieved rapid growth to date, they are yet to be
adopted in large numbers by the mainstream mar-
ket. Therefore, whilst they exhibit characteristics of
disruptive innovation, a significant market disrup-
tion is yet to occur. In Denmark, neobanks have yet
to make a significant breakthrough. However, given
the strength of the country’s Fintech sector and en-
couragement of innovation, this may be only a mat-
ter of time. UK based neobank Revolut launched in
the Nordic countries last year, and Danish neobank
Lunar Way is looking to replicate the success of
Monzo, N26 and others.
To continue growing, neobanks are also being faced
with a number of challenges. First and foremost is
in winning the trust of consumers. Experience and
reputation are widely deemed as crucial factors for
many customers in their choice of bank, so being
newcomers to the market, many consumers are
hesitant to trust neobanks with their life savings,
mortgage or other services. Getting customers to
use them as their main bank is therefore proving to
be a challenge. Increasing their customer base will
prove to be crucial to the long-term sustainability
of their business models. Whilst they can contin-
ue growing through capital investment, they are to
yet to achieve significant revenue and are incurring
yearly losses.
Secondly, many traditional banks are beginning
to respond, in some cases by launching their own
greenfield digital banks or by investing into Fintechs
to improve their customer experience. Such is the
case with Royal Bank of Scotland launching their
own digital bank ‘Bó’ later this year and Danske
Bank investing into open-banking platform Nordic
API Gateway.
The banking sector is therefore experiencing signif-
icant changes due to digitalization, shifting custom-
er expectations and regulatory changes. Neobanks
aim to make the most of the new opportunities pre-
sented and successfully challenge the established
incumbents. The question is, will they succeed?
References
EY (2019). How banks can balance GDPR and PSD2. [on-
line] Available at: https://www.ey.com/en_gl/banking-capi-
tal-markets/how-banks-can-balance-gdpr-and-psd2
For further information about the research project beyond
this article or about the article, the authors can be reached
using the following details:

Nielsen (2019). Market Ripe For Neobank Success. [on-

line] Available at: https://www.nielsen.com/au/en/insights/
news/2019/market-ripe-for-neobank-success.html

PwC (2016). Financial Services Technology 2020 and Be-

yond: Embracing Disruption. [online] Available at https://
www.pwc.com/gx/en/financial-services/assets/pdf/tech-
Gabriel George Hopkinson
nology2020-andbeyond.
MSc International Business Economics (Graduate 2019)
gabrielhopkinson94@hotmail.co.uk
Oliver Wyman (2019). The state of the financial services https://www.linkedin.com/in/gabriel-hopkinson/
industry 2019: Time to start again. [online] Available at:
https://www.oliverwyman.com/content/dam/oliverwyman/

v2/publications/2019/January/The-State-Of-Financial-
Services-2019-Time-to-startagain.

Christensen, Clayton M., Michael Raynor and Rory Mc-

Donald. 2015. ‘What is Disruptive Innovation?. Harvard
Business Review, December 2015

ING. 2018. How do you prefer to pay? International sur- Diana Klarova
vey mobile banking. [online] Available at https://think.ing. MSc International Business Economics (Graduate 2019)
diana.klarova@gmail.com
com/uploads/reports/ING_International_Survey_Mobile_
https://www.linkedin.com/in/dianaklarova/
Banking_2018_-_ways_to_pay.pdf

Eurostat. 2018. Internet banking on the rise. [online] Avail-

able at https://ec.europa.eu/eurostat/web/products-eu-
rostat-news/-/DDN-20180115-1
Supervisor:
Financial Times. 2019. Digital bank Monzo doubles its Professor of International Business
valuation to over £2bn in over 8 months. [online] Available and Entrepreneurship
at https://www.ft.com/content/31527e48-9689-11e9-8cfb- Romeo V. Turcan
rvt@business.aau.dk
30c211dcd229

Editor:
Academic Officer
Valeria Gulieva
vgl@business.aau.dk

Young Graduate News, July 2019

International Business Centre at Aalborg University
View publication stats