Unpacking Neobanks for SMEs — Chapter 1 | Introduction to the Global Landscape
Unpacking Neobanks for SMEs is an article series by Arival Bank analyzing the SME neobanking landscape from the lens of the user experience journey.
About Arival Bank
Arival Bank is an award-winning digital banking startup for international startups, freelancers and small businesses that are typically underserved by traditional and digital banks. Arival Bank partners with some of the hottest fintechs on the market to deliver a full suite of financial products and tools hand-picked to help you run your business.
Introduction
Over the last few years, a sub-segment of neobanks have arisen out of a mission to better serve small businesses who are historically underbanked.
What are SME neobanks doing well in terms of providing a good user experience? What can be improved? What are the future trends of the space?
To attempt to answer these questions, we at Arival Bank, have decided to undertake a research study. This is so we can better understand the competitive landscape with the goal of using our findings to build the best banking platform there is. Our findings will be published in this article series, starting with this chapter. Each chapter is intended to provide an analysis of one part of the neobanking user journey, using case studies and research to highlight how neobanks can better serve their clients.
Here is a snippet of what will follow this chapter:
Chapter 2 - Onboarding Process
Chapter 4 - 3rd-party Integrations
Chapter 5 - Pricing Structures
Chapter 6 - Story, Mission and Branding
Chapter 1: Introduction to the Global Landscape
The rise of neobanks
First things first, we need to define the term neobank. A neobank is a digital provider of bank-like products without the same physical branch networks as traditional banks. For this article series, we will be focusing on neobanks that offer banking products and services catered towards businesses.
In today’s post-pandemic world, the rise of neobanks have become an important phenomenon for SMEs. According to a survey done by Phase5, 64% of American SMEs are concerned about lasting effects of the Covid-19 crisis on their businesses, and thus have very acute financial concerns from payroll, to paying invoices and loan repayments.
On the Bank On It podcast, Eytan Besoussan, founder of NorthOne Business Banking, said that their user growth skyrocketed in the third quarter of 2020, just after the first Covid lockdowns as thousands upon thousands of small businesses turn to them to meet their banking needs.
As a result, more than ever, businesses are looking for a more reliable banking partner who can provide innovative financial management tools, better customer experiences, and tailored financial products. And this is not just restricted to the USA. SMEs being underserved is a global problem.
There are more than 400 million SMEs globally. According to a paper by the World Bank in 2017, an estimated 55 to 68% of the ones in low income countries are unserved or underserved by traditional financial institutions, while that number is about 16% for developed economies. Consequently, these SMEs lack access to other financial products like credit. The same paper estimates the credit gap for SMEs globally to be upwards of USD1 trillion.
From our own user research, we have thus identified three main reasons as to why SMEs would want to sign up for neobanks.
- Underserved by traditional banks - Traditional banks, compared to the more digitally focused neobanks, are less likely to offer built-in merchant services and tools that small businesses use.
- Better Banking Platforms - Neobanks offer cleaner user interfaces and better user experiences.
- Seamless Onboarding - Opening a neobank account is a less painful process. It can be done in minutes, with less paperwork and in most cases, a dedicated customer support to help you along the way.
And the neobank party is just getting started. SMEs need access to financial products and services, and neobanks are at the forefront of the movement to meet this demand.
Now that we understand the key reasons as to why neobanks are increasingly becoming more popular amongst SMEs, here is an introduction to the notable ones that we will be analyzing across the article series before we do an overview of some of our thoughts and predictions on the industry.
(Note that all information presented is updated as of 20th of November 2020)
Our list of neobanks is by no means exhaustive. We did not include regions such as India and Latin America simply because we wanted to limit the scope of our study. Also, because we chose only the top few neobanks for each geography based on traction and growth, many neobanks will not be included in the study.
Overview of SME neobanking landscape
The market is getting more and more saturated with competition. Take the example of Wise, which emerged in the last year. In their pitch, their core message is that they are offering a better business banking experience for small businesses.
The question begs: Isn’t that just like many other neobanks out there with similar messages? How are they different?
In fact, here are some examples of taglines from business neobanks.
“We are a business bank account that helps small businesses save time and money.”
“We are a digital business bank platform designed to help startups and SMEs save time and money on banking.”
“A modern business account for startups & SMEs.”
It is getting harder and harder to differentiate one neobank from another in terms of their focus and message. That is why our subsequent articles on analyzing different parts of the user experience become more important, because the business of offering business banking accounts is getting commoditized.
Other than trying to edge the multitude of competition by offering incrementally better user experiences, we predict there are three ways in which neobanks, including ourselves, will try to differentiate themselves.
- Segmentation, i.e. targeting niche underbanked sub-segments and catering to their specific needs. Examples include crypto-businesses, gig economy workers, money service businesses.
- International coverage to reach other geographies.
- Pursue their own banking licenses. Currently, most neobanks have to partner with traditional banks in order to use their licenses to offer business banking products.
Future Trend #1: Segmentation
The opportunity of “serving the underserved SMEs” is fast dissipating with the saturation of more competition. We believe that further opportunities lie in defining specific sub-segments amongst the underserved business population, and targeting them. Here is a quadrant mapping out how the neobanks compare with each other in terms of geographical reach and degree of customer segmentation.
Regarding the quadrant, I can show examples of how the decision to place the neobanks was made.
- NorthOne is able to onboard sole proprietors while Mercury does not. Therefore, on the x-axis of Customer Segmentation, Mercury is placed to the left of NorthOne.
- Wise does not onboard directors who do not live in the US, while NorthOne does. Therefore, NorthOne places higher than Wise on the y-axis of Geographical Reach.
Already, we see some degree of segmentation. Neat targets traders that operate within the Europe-China corridor, and Bankera has the allure of being crypto-friendly.
However, there are definitely many other sub-segments lying out there in the blue ocean. For example, according to the latest statistics by Twitch, the video streaming giant, there are 7.46 million active streamers on the site as of September 2020. Other underserved segments include charities, money service businesses and gig-economy workers. Many of them could use a bank account tailored towards their needs.
Future Trend #2: International Coverage
From the quadrant, we see that most neobanks have a local or regional focus with regards to the small business clients they are targeting. In our sample, only Bankera and Transferwise have a truly international focus, with only Neat and Arival coming close. If you are a business with multiple entities across different geographies, and seeking to have a bank account that can collate all of their finances, your choices would be few and far between at the moment. Thus, in this aspect, we predict that there will be a trend of neobanks rushing to fill the needs of international SMEs by expanding their geographical coverage.
Future Trend #3: Pursuit of Banking Licenses
Because partner banks are the ones who hold the license, neobanks would not be able to control the types of customers they can onboard. This means they would then not able to fully determine their own product offerings and commercial terms as well. This problem extends to the user experience too. Since neobanks typically cannot control how their partner banks’ compliance teams conduct their checks, this leads to a lack of transparency over the amount of time taken to open accounts. Therefore, neobanks without their own banking license lack autonomy over most aspects of their onboarding processes.
Even getting up and running with a banking partner is a tediously long process because of reasons like passing due diligence and technical integration. To summarize, it is simply not optimal for neobanks to partner with a traditional bank at least for the long term. Hence, we predict that the pursuit of banking licenses will be a trend for neobanks seeking to have more autonomy, given the uptick in fintech-friendly regulatory environment.
Conclusion
As neobanks seek to differentiate themselves, the biggest opportunities lie in international expansion, obtaining a banking license, and targeting niche sub-segments. The market is already shifting towards these trends. Revolut Business has recently announced that it is launching in USA. We have already witnessed the first fintechs obtaining their banking licenses in Varo and Square. We at Arival are actively pursuing our own banking licenses in different geographies as well. A new neobank, Lili, has emerged with a banking product specifically catered towards freelancers.
However, amidst this sea of opportunities, neobanks have to remember that providing the best user experience and serving the customer’s needs comes first.
And that is the focus of our upcoming chapters. Specifically, we will be looking at different points across the user journey: Onboarding, Customer Support and Integrations; before moving to Pricing and the neobanks’ Branding. This is so that we can understand how neobanks are doing across these different parts of their customers’ experience, as well as identify further opportunities for improvement.
All of these fit into our vision at Arival Bank. We are on a mission to build the best digital bank for underserved sub-segments that are disconnected from the banking system. If international coverage and segmentation will be the hot trends for the industry, then we will be its future.
Stay tuned for the next chapter, where we take a closer look at the Onboarding Processes of notable neobanks focusing on SMEs.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official views of any of the featured companies. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Assumptions made within any analysis are not reflective of the position of any featured company, but are instead observations made by the author.
