SIPHO NGWENYA: Can SA embrace the neobanking revolution?

A neobank is a bank that operates exclusively online without traditional physical branches. According to US software technology company Alkami Technology, 22% of US consumers aged 21-26, 21% aged 27-41 and 22% aged 42-56 use neobanking as their primary transaction account. The age group 21-26 prefers neobanking for managing finances on smartphones, and those aged 27-41 and 42-56 want to spend less on transactional fees.

According to US financial services company Plaid, global neobank users totalled 146.4-million in 2021 and it is estimated that they will be worth more than $350m by 2026, with the user adoption rate increasing from 15.5% in 2023 to 22.8% in 2028.

Brazil is home to the largest proportion of the population with neobank account holders (43% of the country’s total population). This is due to improving financial services for those who were previously overcharged and underserved by traditional banks.

Neobanks offer services similar to traditional banks, but at lower customer costs. In total, the financial services neobanks offer include transaction and high yield savings accounts, free peer-to-peer money transfers and alternative ways to build credit accounts.

There are different types of neobanks, including full stack, front-end and hybrid neobanks. Full stack neobanks operate with a full banking licence and an example is Varo Bank (US). Front-end neobanks need to partner with a traditional bank to offer financial services, and mainly focus on developing the “front-end” technical and user interface side of the applications, with their bank partnerships being centred on regulatory and legal compliance. Examples include Chime (US) and Moven (US).

Hybrid neobanks incorporate DeFi (decentralised finance) into their operations. Examples include Bank Zero and TymeBank (SA), and Revolut (UK). In general, neobanks generate revenue through interchange fees paid by merchants when customers make purchases using their debit cards.

In December SA ranked ninth globally in terms of percentage of total population with a neobank account (15% of the population). Factors that have contributed to the rise of neobanking in SA include more affordable rates and fees, ease of account creation, minimal documentation required when opening an account, and financial inclusion for low-income earners.

Neobanks in SA include Bettr, Spot Money, Be Mobile Africa, Discovery Bank, WorldRemit and Xhuma. TymeBank is the country’s largest neobank with more than 8.5-million customers since its launch in February 2019. The bank has no monthly banking fees, a pay-as-you-use pricing structure, and in most cases transaction costs are 30%-50% lower than what customers would pay at traditional banks.

Through a distribution partnership with Pick n Pay, Boxer and TFG stores, TymeBank has more than 1,000 kiosks and 15,000 retail points across retail stores nationwide. In January the bank reported that its model helps recruit up to 150,000 new customers each month.

In the same month, the bank announced that it had reached profitability for the first time, and in so doing became the first African neobank to do so. It also turned a profit within a shorter time frame than Nubank (Brazil) and Monzo (US), which took eight and seven years respectively.

In terms of operations, neobanks encounter difficulties despite the benefits they provide. These challenges include a lack of trust from customers within the digital financial services space. According to Visa Navigate, not all low-income earners have banked online because of concerns over fraud and a lack of familiarity.

Compliance is another challenge neobanks deal with as SA does not have regulations facilitating the adoption of open banking. To overcome this challenge pure neobanks have had to take measures such as participating in pilot projects initiated by industry bodies or government agencies to test and refine open banking approaches.

Another challenge neobanks encounter is turning a profit. According to TymeBank, less than 5% of all neobanks worldwide have reached profitability. This highlights the difficulty for neobanks to achieve long-term financial sustainability.

To overcome some of these challenges, strategies neobanks can implement to gain traction in SA’s market include targeting a specific customer base such as young adults (Gen Zers and millennials), offering student accounts and budgeting tools and providing flexible, on-demand financial services tailored to gig workers’ income fluctuations.

Partnerships with mobile network operators (offering bundled mobile and banking services) and retailers (integrating financial services) can be beneficial for expanding customer reach and accessing new customer segments. Offering personalised solutions can also be beneficial for neobanks as these banks are able to access financial insights such as analysis of consumer spending habits and offer tailored investment recommendations.

Launched in 2021, Discovery bank’s “Discovery Miles” programme allows users to earn rewards for savings and investing, linking financial decisions with consumers lifestyle goals. This is one way the neobank has personalised solutions and increased its customer base.

SA’s neobank users are expected to total 19.5-million in 2027, which will be driven by continued demand for mobile-first banking and focus on the underserved population. This growth in neobanking will attract more neobanks to enter the market, leading to increased competition and innovation in product offerings, features and customer service. This will benefit users with more choices, better deals and improved banking experiences. 

• Ngwenya is with strategic research and advisory consultancy Birguid.