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Neobanks are changing the modern banking system

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Reinis Tumovs

This time our author is Reinis Tumovs, banking expert, board member of Wellcome keys worldwide. He made his contribution: Neobanks are changing the modern banking system

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Neobanks are changing the modern banking system

Digitalisation is gradually changing all spheres of social life. The banking sector is no exception. Ten years ago, it was enriched with fundamentally new organisations – neobanks, which professed their rejection of classical customer service principles and relied on remote work. How far is the progress of the new formation of banks, and are they able to take a dominant position in the market?

Appearance and formation

First and foremost, Neobanking owes its appearance to the rapid development of digital technologies, which made remote service possible without loss of quality of services. In Europe and the US, the first neobanks appeared about ten years ago and were warmly welcomed by customers: they found that people were comfortable with the absence of physical offices and remote services.

This was great news for neobanks because they could count on the loyalty of the general population at a very low cost. Networking relieved digital banks of renting expensive offices and paying huge salaries. This enabled neobanks to offer their customers very favourable service conditions.

The development of neobanking technologies can be assessed by the rapid growth in the number of these organisations: in just ten years, their total number throughout the world has reached two thousand. In the UK alone, there are several hundred neobanks. As for Russia, the first neobanks appeared here 5 – 6 years ago. The pioneers in this area were “Tochka”, “Modul”, and “Tinkoff”.

Variety of types

Staking on digital technology allows neobanks not to limit themselves in choosing a particular business model, so now there are at least four varieties of these credit institutions. They can represent independent banks with their licenses and subsidiaries of classic parent banking structures.

Perhaps the brightest representative of absolutely independent neobanking is Revolut, which dominates in its niche in the markets of several European countries and represents a developed ecosystem, where clients can get the same range of services as in the traditional bank, but much faster and without visiting offices. The peculiarity of the development of neobanking in Russia is that apart from credit institutions themselves, the large payment systems show significant activity in this market and successfully cope with a great part of neobanking functionality.

Dreams about a beautiful future

Even though the business model of any neobank is much more effective than that of a credit institution of the traditional type, it is still early to speak about the beginning of the era of total domination of digital banks. Firstly, according to existing rules in the industry, many operations require a client to be in a bank branch and only with a document proving his identity. Secondly, neobanks themselves enjoy minimal credit of trust from users, and it is a much more serious factor constraining the development of digital banks than any legal restrictions.

Thus, according to Accenture, in the UK, most of the clients of neobanks perceive them only as a convenient and inexpensive addition to the existing services of classical credit institutions. People use digital banks for several things: they pay bills quickly and with minimal commissions, make small transfers (within 200 – 300 pounds), but keep their savings in banks with a long history.

An interesting detail: if before the recent global economic crisis the average size of a deposit in the British neobanks was close to 500 pounds, now it is not even 300. With this confidence level, we cannot talk about any serious potential for development. At least not for the foreseeable future.

Thus, the next few years will see a slowdown in developing new digital banks. The diversification of classic banking structures will expand the target audience for the parent structures by creating subsidiaries with advanced digital competencies. This will happen by improving the ease of use of remote services, expanding their presence in messengers and social networks, and the appearance of fundamentally new services, such as access to foreign investment platforms and brokerage.

Of course, all this will be accompanied by a gradual improvement in customer service. In other words, it is much more correct to call this process the evolution of classical banking than the digital banking revolution.

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