The neobanking sector is undergoing significant changes where priorities are being shifted from rapid expansion to profitability. New data from Simon-Kucher indicate that the strategy has so far paid off, with an increasing number of neobanks reaching profitability and industry revenues growing by about 43% over the past 18 months, a new report by the global consultancy shows.

The data were shared in a newly released report titled “The Future of Neobanking – Profits at the End of the Tunnel”. The document delves into the evolving neobanking landscape, emphasizing that amid a trying funding environment, neobanks are changing their strategies and focusing on financial performances, a shift that has had a positive impact on the sector.

Data from the report reveal that over the past year and a half, the neobanking sector has recorded strong growth. Among the largest industry players, 20 neobanks are now hosting 10 million or more clients, while 39 boast over 5 million customers. Several of these neobanks are now among the top 5 or 10 of the largest banks in their respective country, increasingly stepping on the toes of incumbent banks.

Globally, neobanks continue to gain traction with the total number of clients crossing the one billion market during the studied period. As of October 2023, the neobanking sector served roughly 1.1 billion clients globally, a figure which represents an impressive increase of more than 30% in the past 18 months.

Digital banks in Asia-Pacific (APAC) and Africa are catching up quickly, the report notes, owing to these markets’ large populations and significant number of underbanked clients. In South Africa, for example, TymeBank has racked up more than 8 million customers since its launch in February 2019 and is now adding an average of 200,000 customers a month; in Indonesia, Bank Jago grew from 3.5 million to 7.5 million clients in one year; and in the Philippines, Rizal Commercial Banking Corporation’s new mobile banking app DiskarTech reached 1 million clients in just 38 days after launch.

Neobanking revenues are also soaring. Over the past 18 months, average revenues per client increased from US$69 to US$75, representing a nearly 50% increase.

Global neobanking leaders

Delving deeper into profitability in the neobanking sector, the Simon-Kucher report shares findings of a new analysis of players’ key growth metrics and financial performances.

The Simon-Kucher Neobanking Profitability Matrix, which distinguishes the neobanks that achieved customer growth with a clear lens on profitability, reveals that only 6 neobanks of the 33 global leading neobanks selected for the analysis are positioned in the “Better Growth” quadrant. The category features digital banks that have posted positive earnings before interest and taxes (EBIT) while growing above peer average.

These 6 neobanks are the only ones of the group that are turning a profit, and comprise Nubank from Brazil, Bank Jago from the Philippines, Kakao Bank from South Korea, and Starling Bank, Wise and Revolut, all headquartered in the UK.

These industry leaders are outperforming competitors, and have relied on a strategy involving six core principles and areas of focus, the report notes. First, they have all managed to diversify revenue streams and expanded beyond account fees or transactional revenues. Starling Bank, for example, made almost 80% of its 2022 revenue pool from interest-linked business, it notes. On the contrary, about 50% of the remaining neobanks are yet to seriously offer credit to their clients.

In addition, these six neobanks are relying on a hyper-localized approach, embracing a sharp regional focus that has allowed them to develop a deep understanding of customer needs, regulatory advantages and an edge over global competitors. Relevant examples include Nubank, which spent its first six years of existence focused on excelling in its home country of Brazil where it now serves 80 million customers, and Kakao Bank, which grew rapidly in its domestic market for several years before recently announcing international expansion plans.

Another point highlighted in the report is these neobanks’ ingenuity and their use of cutting-edge technologies.

Starling Bank, meanwhile, launched its banking-as-a-service (BaaS) offering Engine in 2022, providing banks and financial institutions around the world the ability to create new propositions or brands using its core technology; and MoneyLion integrated earlier this year Even Financial, an award-winning embedded finance platform for enterprise businesses.

These leading neobanks are also launching products on a loop and gradually increasing the value-add for their customers. Revolut, for example, now offers more than 20 products, including pioneer features like “Stays” or “Experiences”, which allow customers to book accommodations and travel tours; and Mashreq Neo, a smartphone banking app by incumbent bank Mashreq Bank, has partnered with the Indian Federal Bank to offer digital non-resident account opening in the United Arab Emirates (UAE).

Finally, the last differentiator outlined in the Simon-Kucher report that’s perhaps the most important one is the existence of a sound monetization model. This involves seeking a “product-market-pricing” fit; identifying customer segments that are currently lacking access to specific financial services; leveraging the power of bundling to add more value to customers; and developing an appropriate pricing strategy that resonates with the individualities of each customer.

After years of rapid growth and funding frenzy, the neobanking sector has now entered a new era that’s marked by a deceleration in the number of newly established neobanks and early signs of consolidation.

Data from Simon-Kucher show that the number of live neobanks has remained nearly constant at around 400 over the past year or so. The consultancy identified only 36 new players entering the market during the last 18 months.

Other players meanwhile are exploring the benefits of joining forces through mergers. Examples include the acquisition of Penta by Qonto in the European small and medium-sized enterprise (SME) space, as well as the reported discussions between UK digital bank Monzo and Nordic lender Lunar.

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