Changing customer behavior, technological advancements and an evolving regulatory landscape are fueling the rise of digital banking. So-called neobanks or challenger bank are rapidly capturing the market and are now serving a combined customer base of 1 billion people.

The figure showcases the traction neobanks have received and is reflective of the demand for digital, customer-oriented banking and financial services solutions coming from consumers, a new report by banking and payment technology company BPC and strategy consultancy Fincog says.

Within this ecosystem, Europe is among the most advanced digital banking markets in the world, the report says, a development that has been facilitated by supportive regulatory reforms such as the first and second Payment Services Directives (PSD1 and PSD2), as well as licensing regimes such as for electronic money institutions (EMIs).

This conducive regulatory environment has sparked a boom in digital banking services across Europe, which soared from just 57 players in 2014 to 162 in 2022. These numbers imply that the number of digital banks in Europe rose by a compound annual growth rate (CAGR) of 14% between 2014 and 2022.

The growth in popularity of neobanks in Europe is also evidenced by the number of customers these companies have amassed. Data from Fincog show that, as of Q1 2023, the region’s top ten biggest neobanks served a combined 64 million customers. Some research studies estimate that user penetration currently stands at about 7–10% and is expected to hit about 14% by 2027.

Across Europe’s 160+ neobanks, Revolut has emerged into the region’s largest player by customer base, standing far ahead of the pack with a reported 25.5 million customers.

Ranking second is Wise, a foreign exchange fintech company that has expanded its product offering to include personal and business accounts, an investment product, and a savings account. Wise counts 16 million customers.

Next is N26, a German digital bank with eight million customers; Monzo, a UK-based online bank serving seven million customers; and Lydia, a French fintech startup that started out as a payment platform before expanding to accounts, cards, lending, savings and investment, and which BPC/Fincog report says counts 5.5 million customers. Lydia, however, claims seven million users on its website.

Trying times bring about new opportunities

In addition to providing an overview of the current state of digital banking in Europe, the BPC and Fincog report also shares key trends shaping the market and opportunities present in the region for digital banks and businesses alike.

According to the report, the current economic landscape, marked by growing cost of living, ongoing influx of migrants, and disruptions in global supply chains, is introducing several challenges that require effective solutions and innovation from entrepreneurs and businesses.

In times like these, digital banks have an opportunity to support their customers’ financial and mental well-being by providing superior user experiences and product features that improve the way they manage their finances and access financial services.

For migrants, this could be providing flexible and affordable financial solutions like a wallet scheme associated with a bank account, the report says. The solution could enable migrants to receive government subsidies and support, access financial services, and facilitate the integration process.

This wallet solution could be designed with a payment proposition, which could enable migrants to pay for goods and services, both in their host country and in their country of origin. It could also offer money transfer services, a critical offering for overseas workers who often send money back home.

Another recommendation outlined in the report is the opportunity brought about banking-as-a-service (BaaS). By tapping into BaaS, digital banks can develop and expand their portfolio of products and services in a more cost and time-effective manner, the report says. Such offerings provide them with ways to tap into new revenue streams, acquire and retain new customers and ultimately drive-up customer lifetime value at a lower cost.

Finally, the report argues that digital banks should explore new customer segments. Micro, small and medium-sized enterprises (MSMEs), in particular, are a segment that’s been particularly hit by the economic downturn and which represents a significant business opportunity to the banking sector, the report says.

Despite being the backbone of the European economy, 20% of SMEs in the region struggle to gain access to financing, the report says, and with venture capital funding drying up this past year, the situation for many businesses has worsened.

One suggestion is to develop a hybrid channel approach that combines a complete and robust digital proposition for SME clients, including onboarding and servicing via digital channels, with human-led engagements for more complex needs and services, the report says.