Competition is increasing between nimble, efficient and user-friendly neobanks with reengineered value propositions targeting a niche group of consumers and incumbent banks tailoring their products and services to meet the needs of specific customers.

To avoid losing out, banks must embrace digitisation and become more agile. New banks continue to win in this competition, being accustomed to partnering with financial technology providers to become increasingly cloud-based, hosting their applications and centralising their data in the cloud.

Finextra Research spoke to Eelco-Jan Boonstra, managing director, EMEA at Mambu about their recent report ‘A Panorama of the Changing Banking Landscape in EMEA’ and how neobanks could provide the blueprint for recovery from coronavirus to others in the fintech industry.

Viable and tempting alternatives

As banks start to bundle their value propositions, neobanks are targeting groups of individuals to ensure that all customers are well-served, especially those that have traditionally been unbanked or underserved.

Alongside this and, amid Covid-19, neobanks are an especially tempting alternative, offering the same services users traditionally accessed at bank branches, but now available online or on a mobile device - and for free.

“It remains to be seen how far neobanks will penetrate the market. It will vary across EMEA depending on consumer preferences, regulation, and how well incumbent banks are addressing customer demand.”

Traditional banks in the EMEA region are now embracing unpredictability by digitising core infrastructure, perhaps now at a faster rate than initially planned prior to the pandemic.

“It costs neobanks around a third of the cost of a traditional bank to serve a customer, and in some cases as little as a sixth of the cost. Neobanks can alter products in a matter of days or weeks. For older institutions, it can take months,” Boonstra says.

The cloud-native blueprint to recovery

Most modern architectures are cloud based. Boonstra highlights that with a single code base, banks can build for the masses with the ability to make daily updates, quickly addressing changing market needs and demands.

“Integration with APIs and microservices is widely available as the ecosystem around the cloud grows, allowing neobanks to get their products to market at a tremendous speed.

“Legacy and stack type architecture require a lot of consulting and tailoring to release a feature or make an update. It takes time, it takes planning and that type of architecture, even if migrated to the cloud, cannot compete against cloud-native.”

As coronavirus has had such a reverberating impact on financial services and technology, neobanks could potentially create the blueprint for the recovery of the entire fintech industry. Agility and efficiency are core components of a neobank, and these are the qualities that all organisations must foster in order to prepare for uncertainties in the future.

Boonstra explains that “this needs to be weaved into the DNA by the leadership, the ability to change. Banks have historically resisted change, but they were slowly evolving and now Covid-19 has sped that up.

“This doesn’t mean banks should migrate their entire core systems to the cloud overnight. Most start by dipping their toes, testing these new technologies out.”

For neobanks, profitability doesn’t happen overnight

UK neobanks trebled their consumer base in 2019, growing from just under eight million customers in 2018 to almost 20 million last year, according to Accenture. Yet the problem of monetising customer acquisition and capitalising on investment persists.

While Covid-19 may reduce the number of favourable funding rounds and alter market conditions, Boonstra predicts that consumers will increasingly turn to neobanks, especially those that are offering lending or services for SMEs.

He adds that for larger, more established neobanks, growth will continue as digital transactions are increasing under lockdown and social distancing rules. “Neobanks are still in the early stages of development and are focused on customer acquisition, rather than profitability.

“When you’re disrupting a market, profitability doesn’t happen overnight.” Referencing Amazon’s 14-year journey to profitability, Boonstra reiterates that revenue generation is dependent on maturity and of course, newer financial institutions will reap rewards at a slower rate thanincumbent banks with broader propositions.

Further to this, while the fintech industry has benefited from VC funding in the past, the consequences of the coronavirus will likely result in neobanks entering new markets with trepidation or possibly postponing moves such as these for several years.

Read Finextra Research and Mambu’s report ‘A Panorama of the Changing Banking Landscape in EMEA’ here and sign up for the upcoming webinar on how banks in EMEA can thrive amid economic uncertainty on 2 July 2020 here.