Afshan Dadan & Samridhi Singh
Neobanks’ New Normal: Dissecting the Failures and Setbacks
The emergence, growth, and profitability of neobanks have always been a topic of discourse in the fintech sector. At WhiteSight, we’ve implored this curiosity by exploring the many themes around the neobanking ‘neo’velty. Whether it be climbing the hierarchy of their investment galore, following their SuperApp quest, or highlighting the exponential momentum in the space, the new battleground of neobanks has always kept us wondering about what’s cooking behind the scenes.
2021 was a prolific year for neobanks. Several of them raised massive rounds of funding, became unicorns and decacorns, and expanded their global footprints. 2022 is proving to be a really challenging year for the sector. Intense scrutiny of regulators, a challenging economic environment, diminished funding & valuations, and growing fraud incidents have resulted in a sink or swim moment for neobanks. In this blog, we aim to analyse some of the past failures and setbacks in the sector to draw lessons from. We look at these incidents through the lens of four main perspectives:
Shutdown: Cessation of operational activities due to fleeting measures to develop a sustainable revenue stream, inability to raise further funding, and M&A fallouts.
Country Exit: Departure due to rising economic uncertainties (Brexit, Pandemic, economic slowdowns) in the operative market with a renewed focus on exploiting new plausible development opportunities in the home country.
Licence Application Withdrawn: Withdrawal of licence applications owing to unlikely scenarios of procuring licence approvals or emerging unfavourable business realities.
Business Pivot: Shift in business focus to lucrative projects of alternate industry segments following the greener pastures opportunities present in the segment.
White Flags Across The Globe
Despite gaining rapid traction and positive response for their offerings, numerous neo experiments have had brief moments in the sun across various geographies, each leaving a trail of their subjective reasonings to learn lessons from.
The pandemic and mercurial market conditions contributed to dark clouds in managing the vision of accessible, alternative banking for developed economies. US-based Denizen, launched in 2018 with the aim to be a true global, borderless account, closed its operations only a year later after struggling to achieve the scale required to sustain operations. US neobank Moven saw a similar fate – having to close all accounts in its consumer unit due to funding that fell through thanks to the COVID crisis. In the UK, popular players such as Royal Bank of Scotland’s Bó and Monzo also faced significant pressure moments, where Bó shut down just six months after launching owing to sunken profits, and Monzo withdrew its US banking licence application after regulatory discussions went downhill.
Other regions have had their fair share of setbacks, with Xinja and Volt in Australia announcing their closure in 2020 and 2022, respectively, after losing their fundraising momentum; India’s Yelo suspending its operations for not finding the correct product-market fit in 2021, and online bank Zuno, in 2017, leaving Slovakia and the Czech Republic to remove duplicates from the market. All these moves have triggered discussions among netizens about the potential future of the neobanking landscape. While some have managed to tackle most hurdles, many are still finding their way.
Deep-Diving Into Turbulent Waters
While different neobanking categories in the ecosystem came to face unique casualties in their quest to deliver an innovative business proposition, these can broadly be classified into failures (complete shutdowns) and setbacks (as a consequence of license application withdrawals, business pivots, or country exits).
Licenced Challenger Banks
License from regulatory authorities enables neobanks to improve their cost efficiency by gathering consumer deposits & using payment rails. It also helps them unlock new revenue streams by expanding their credit and distribution product offerings. Volt was the first neobank in Australia to obtain the full ADI licence in 2019, followed by Xinja. With attractive interest rates on deposits, they gained plenty of traction. Xinja even experimented with 'Dabble,' a stock trading platform that failed to get approval from APRA. While APRA had their doubts, the banks were unable to bounce back due to their inability to raise funding rounds while struggling to develop a sustainable revenue spurt.
As FinTechs came up with innovative solutions to satisfy consumer needs, not everyone wanted to secure a banking licence. In such cases, neobanks partnered with incumbent banks or Banking-as-a-Service providers to deliver their services.
The US saw a majority of independent neobanks struggling to survive the storm. Simple and Azlo, which worked under the BBVA umbrella, shut down their respective operations in 2021 following BBVA’s acquisition by PNC bank. The same year, FTC shut down Beam Financials due to non-compliance issues with the former’s rules and regulations.
In India, with 4 million downloads on the app, Yelo Bank ceased its operations due to its inability to achieve a better product-market fit and eventually got acquired by a competitor. The high cash burns with little or no revenue streams caused the company to rely only on external funding. UK-based Loot, which started in 2014 and operated through an e-money license, also had to finally close in 2019 despite 250,000 accounts actively using their services. Another UK firm that closed its B2C banking arm was Dozens, following the increased operational costs and shifted to the B2B arena.
Most of these banks could make their name in the market by providing competitive interest on deposits. Still, their liquidity remained tight as they saw themselves tumbling down the ladder with no one funding their cash burns.
Digital Bank Subsidiaries
In the last couple of years, traditional banks have tried their luck with neobanking experiments. Finn, launched by JPMorgan & Chase as a digital alternative to Chase Bank accounts, worked on the backend infrastructure provided by its parent. Its services were not entirely online and created more of an unnecessary distraction. In 2019, Finn was finally shut down, and in 2022, learning from its mistakes, Morgan launched 'Chase,' a digital alternative that has since gained noticeable traction in the UK.
Soon Bank, another digital subsidiary with parent bank Axa Banque in France, struggled to cover grounds with its presence. With 30,000 customers onboarded, it finally ended up closing its operations in 2017 to focus on its primary online banking platform.
Stumbling Setbacks and Exciting Evolutions
Licenced Challenger Banks
Several UK and European neobanks have tried to replicate their success in the home market by expanding to new geographies. These expansion experiments also are littered with setbacks and clawbacks. In 2022, Starling Bank withdrew its license from Ireland's banking market, claiming it wanted to focus on growing its SaaS subsidiary – Engine by Starling. In 2021, another UK challenger bank, Monzo, halted its expansion activities by abandoning its US banking license. German licensed challenger bank N26 also stuttered in its expansion quest. In 2020, it decided to close the UK operations in 2022 because of Brexit uncertainties, and in 2022, it chose to close down US operations to focus on home operations in Europe. Another German-licensed bank, Fidor Bank, shut down its UK operations in 2019, blaming the Brexit-related uncertainties prohibiting its ability to passport its European licence to the UK.
In 2021, Brex, an SME-focused neobank in the US, withdrew its applications to form an Industrial Loan Company (ILC), claiming that it wanted to modify and strengthen the application and resubmit it at a later date. In 2022, Brex also moved away from serving general small businesses to refocus its platform on serving startups. In 2021, another SME-focused neobank – Wise (rebranded to Solid) – pivoted from a neobanking setup to an embedded business banking platform. Its main target segment is the marketplaces and e-commerce platforms, enabling them to launch embedded banking products for its business customers.
New Outlook for Neobanks
The financial industry as a whole is currently undergoing a strenuous time. The pandemic’s collateral damages, tightening regulatory monitoring, and perhaps even a disbalance in meeting the market expectations through business models are just a few of the many reasons why such catastrophes have recently risen. Nevertheless, there’s certainly a break in the clouds with how the sector can take forward lessons from the misgivings of their peers. The quest to balance growth, profitability and compliance is a treacherous one, but then that’s what will be critical for the future of neobanks and who survives or succumbs!