Neo Banking Business Model Breakdown - Revenue Streams & Profitability

Natasha Munson once said, 'Money, like emotions, is something you must control to keep your life on the right track.' Remember when you had to stand in long lines at the bank just to update your passbook or deposit a cheque? Thankfully, those days of waiting are almost gone. Now, with neo-banking, your bank lives in your pocket.

Neo banks, also called digital-only banks, allow you to bank smoothly through your phone. A report by Statista says the global neo-banking market was worth $79.1 billion in 2023 and could reach an amazing $2 trillion by 2030.

You may be thinking, how do these banks make money when they don't charge you big fees for everything? In this blog, we will learn about how their business works, how they earn money, and why Neo banking solutions are the future of finance.

What is a Neo Bank?

A neo-bank is a bank that works through your phone or computer. They don't have physical branches. They use technology to give you all the banking services you know, such as savings, payments, loans, and investing, but with a user-friendly app and 24/7 access.

Many neo banks work with traditional banks behind the scenes to hold your money safely and give you cards. Some neo banks even have their banking licenses. Big names in this industry include Revolut, Monzo, N26, and Chime.

How These Neo Banks Make Money?

1.Interchange Fees

Every time you use your neo bank card to buy something, the merchant's bank pays a small fee called an interchange fee. The neo bank keeps part of this fee. One transaction may not mean much, but when millions of people spend money every day, it becomes a big source of income. The Financial Brand says interchange fees make up about 30% to 40% of revenue for some neo-banks.

2.Subscriptions and Freemium Plans

Many neo-banks give you a free basic account but offer premium features for a monthly fee. You can get things like a metal card, free travel insurance, or higher ATM withdrawal limits. Revolut, for example, made over $575 million in revenue in 2022, and a lot of it came from people paying for premium accounts. It works like Netflix or Spotify, you start free, but you pay for extra features later.

3.Lending and Credit

Lending is where huge profits come in. Some neo banks give overdrafts, credit cards, or loans. They earn money from the interest they charge on these. They pay you a lower interest rate for your deposits and lend it out at a higher rate and keep the difference. As neo-banks grow, lending will become an even bigger part of their income.

4.Partner Deals and Marketplaces

Neo banks also earn by partnering with other companies. For example, they may let you buy insurance or invest in stocks through their app. They get a commission when you buy these services. It also helps neo-banks earn more money without having too many costs.

5.B2B Services

Some neo-banks earn money by offering Banking-as-a-Service (BaaS) to other companies. They provide the tools, security, and technology for other startups or businesses that want to offer banking services without building everything themselves. It's like renting out their banking system to others, which brings in extra money.

Are Neo-Banks Profitable?

So, are neo-banks making profits? Well, it depends. Some are profitable, while many still spend a lot to grow fast. For example, Revolut made its first full-year profit in 2023, with over $26 million in net income. But many other neo-banks are still spending investors’ money to get bigger.

Getting new customers costs a lot, and there is a lot of competition. Many neo banks care more about growing their user base than making profits right away. A Simon-Kucher report says only about 5% of neo banks worldwide are profitable today. But this will change as they find more ways to earn money and grow.

The Challenges Neo Banks Face

Neo banking is not always easy. Following all the banking rules is hard work. Traditional banks have done this for decades, but many neo-banks are still learning how to handle complex regulations. There are also problems with fraud and cyber attacks.

Trust is very important. If a neo bank has a data breach, it can lose customers quickly. Another problem is customer loyalty. Since changing banks can be done with a few taps, neo-banks should keep themselves updated with advanced apps and services.

Why Neo Banks Will Keep Up

Even with these challenges, the growth of neo-banks will continue. Younger generations like Millennials and Gen Z want easy, clear, and fair banking. Neo banks offer exactly that.

Did you know? About 75% of Gen Z and Millennials prefer managing their money through their smartphones. And 50% of people around the world say they'd switch to a digital-only bank if it gives them better features.

In countries where many people don't have bank accounts, neo-banks help include more people in the financial system through mobile-first services.
 

The Future of Neo Banking

In the coming years, you'll see many technological and other advancements that may provide a bright future for the neo-banking industry. Such as,

o More partnerships between neo banks and old banks by combining trust with new technology.
o Neo banks concentrate on small businesses and gig workers.
o More embedded finance, where banking services are built into other everyday apps.
o Smarter use of AI and data to give you personalized services and protect you from fraud.

Final Thoughts

'People need banking, not banks.' Just like this, neo-banks have created a modern way of banking as digital, simple, and concentrated on the customer. They make money through interchange fees, subscriptions, lending, partnerships, and B2B services. If you are a business owner or a fintech entrepreneur, watch this space and build the next neo-bank that people want by contacting an industry-leading neo-banking solutions provider.