Unpacking Neobanks for SMEs — Chapter 5 | Pricing Structures
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.
If you haven’t done so, do check out our previous chapters here.
Chapter 5: Pricing Structures
A clear pricing structure goes a long way to making a smooth onboarding. It enables the customer to get the best value for the product they paid for. For neobanks, pricing is not just a tool for customer acquisition, but also monetization.
What does it mean to have price transparency? How do neobanks compare in terms of pricing structures? How should pricing even be determined?
In this chapter, we explore:
- The importance of price transparency
- Pricing structures of SME neobanks
- Pricing as a pathway to profitability
Price Transparency
The common narrative is that traditional banks have opaque pricing, and neobanks represent a clean break from that lack of transparency. Transparency is a value that the neobanking industry seeks to embody and it is no coincidence the word appears in many pricing pages. Here are a few examples.
By touting “transparency”, neobanks are promising a level of openness that excludes unexplained charges. Customers will know exactly what they are paying for.
Conveying transparency starts with the pricing page which should show the full extent of the pricing structure and ask - What is the minimum balance? What is the overdraft fee? How many free payments do I get? How much does it cost to send an international wire transfer?
A quick glance through the pricing page should easily answer these questions. Having simple and clear pricing is important for the customer experience too. Here is a user review on Tide’s pricing page.
“The fee structure is up-front and simple — I really appreciate this. I’ve seen some business accounts where the fee structure is explained in 8 point font over the course of a 10 page PDF.”
Beyond the pricing page, a commitment to transparency means that in practice, there are:
- No more hidden charges appearing for no apparent reason.
- Customizable alerts so that the user is aware of all account activity.
- Clear lists of accessible features for any given pricing tier or level.
At Arival, we believe that transparency should be a core value, rather than a differentiating factor for all neobanks seeking to provide a good user experience. In other words, it should be an industry benchmark.
Pricing Comparison for SME Neobanks
We compiled the pricing of the SME neobanks in our study and laid them out in the graphics below.
*All pricing information were obtained from the neobanks’ websites. We recommend you visit their pricing pages for a more comprehensive breakdown.
Different Pricing Structures explained
Amongst SME neobanks, there are three classifications of pricing structures: Free, Tiered, Flat and Freemium. We compiled a table outlining which pricing structure each SME neobank adheres to.
We will explain how each pricing structure is defined before diving into why neobanks would want to incorporate such a pricing structure, as well as how it affects the customer experience.
Free Pricing
A Free pricing structure is one without any monthly or account opening fees. Depending on the neobank, there may be charges for transfers and other services.
Neobanks with a free pricing structure usually make their money from a mixture of interchange fees, i.e. fees paid by merchants to accept the neobank’s debit cards, interests on deposits and fees from various transactions and miscellaneous services. For example, Transferwise charges £16 for you to obtain bank details to receive foreign currencies. Neat charges 2% on ATM withdrawals and HK$30 for a local transaction.
The hope is that the free pricing pushes customer acquisition to the scale whereupon the neobank can make sufficient money off the fees from their customers’ financial activities. From the user’s point of view, a free pricing structure is essentially “pay for what you use”. As such, different users would differ on their views on the fees since it depends on their usage levels.
Here are some differing reviews we found on Tide and Neat’s free pricing to illustrate this point.
Really user friendly, great app. Fees are minimal. Some awesome features with team cards easy to set up etc.
Neat is great for non traditional banking, especially for startups that can’t easily access traditional banks. The fees are not low but reasonable. Service is good and new features are constantly being introduced.
Fees are extortionate, especially when others offer the same service for a small, fixed monthly fee.
In a digital age, how can a bank charge a fee per transaction? Digital small businesses get receipts into their account every day from multiple sources - from PayPal, to ShopifyPay, and to Stripe. Three incoming transactions a day amounts to 60p a day. That’s almost £20 in fees a month just for receiving money we’ve already paid fees on from payment processors. Then you charge the same for outgoing payments for subscriptions to software and payments to suppliers. My fees amount to almost £50 a month.
Some users would prefer a monthly pricing for a given limit of features because they have a higher usage level, while others might be more drawn to free pricing because they do not engage in as many financial activities.
Tiered and Freemium Pricing
A Tiered pricing structure involves giving the customer multiple subscription options, differentiated by the features included in each.
Compared to a free pricing structure which may charge per transaction or service, subcribing to a membership tier gives you a set amount of “free” transfers alongside other benefits. Differences between the tiers can range from number of free debit cards and sub-accounts to allowance on free payments. For example, Qonto’s Premium account (€99/mth) allows for 500 free SEPA transfers and 5 Mastercard physical cards, compared to its Standard Account (€29/mth) which only allows for 100 free SEPA transfers and 2 Mastercard physical cards.
Neobanks may choose to have a tiered pricing structure in order to cater to different buyer personas. A freelancer will have different banking needs from a small business of 20 employees. The different price points are there to appeal to different types of users.
We have attached a screenshot of Qonto’s pricing page. They have a Solo account that is tailored towards a freelancer’s needs (1 Mastercard, 20 transfers, 1 Member), which has vastly different features from that of a Standard account designed for a small business.
Having a tiered pricing structure completely changes a neobank’s business model. While free pricing is all about achieving scale with customer acquisition, designing a tiered pricing structure involves balancing the cost of providing features with their degree of importance to the target customers. For instance, if the neobank were to provide a set number of free transactions in a tier, they have to choose a number that would appeal to the potential user persona, but not be so high as to incur a loss.
What are the basic features the customer needs to have in their bank account? What are the things that we, as a neobank, could make money from?
These are a few of the many considerations the neobank has to take into account when designing a tiered pricing structure.
A Freemium pricing structure is simply a tiered one with a free option. The free subscription option typically has entry-level access to product features, with restrictions to higher-level features. Revolut Business has a freemium pricing structure, in which features like bulk payments, team member permissions management, exclusive rewards and 24/7 customer support are all unavailable. Holvi limits the invoicing capabilities and number of corporate debit cards for the free account.
The free account is a loss making machine for the neobank. The main purpose of such a structure is incentivizing the free users to upgrade to the paid tiers, in addition to the other concerns of a tiered pricing structure mentioned earlier.
The freemium model works like a funnel. A free bank account is a potent marketing tool and potential customers are enticed with some additional useful features like Holvi’s invoicing tool. Here are some user reviews on Holvi’s free account.
I switched to Holvi because they have a free account. The change was really quick and easy. You get a card. The app is very clear and moves with the times.
I really like how easy it is to use the app. For a start-up like mine the free package is great since I can have a world-class banking experience without breaking my leg in paying for it.
Since the Holvi account is free and offers additional functions (e.g. “automatic” invoicing), I thought: I’ll try it out. My conclusion: very good and recommendable.
The next stage in this funnel is to hook these free users with an awesome user interface and experience, hoping that they would eventually upgrade to a premium account for more comprehensive features.
A lot of thought has to go into designing this freemium funnel. The neobank has to decide what should be free in order to attract new users without incurring too much cost. According to user reviews, Holvi’s free invoicing tool attracted many freelancers and smaller businesses who desperately needed something like it. This has to be balanced with the benefit of upgrading to a higher tier. If the free account is too good a proposition and fulfills all of the user’s banking needs, then the conversion rate to the premium account might be lower. Achieving this delicate balance is key to making a freemium model work.
Flat Pricing
A Flat pricing structure is one with a singular monthly fee for all users. Everyone has the same access to the platform’s features. NorthOne and Wise both price their business banking services at $10/month. As with all other price structures, miscellaneous fees still apply for payments after the monthly limit. For instance, Wise allows 25 free ACH deposits per month, and charges $1 for each one thereafter.
Although a flat pricing makes the price structure very easy to understand, this comes with the drawback of appealing to a narrower set of potential customers. There will be users that do not need most of the features provided and thus feel that the monthly fee is too expensive. On the other end of the scale, there will be those who require more features and are willing to pay more for them.
Let us take the example of Wise, who transitioned from a free pricing structure last year. As expected, there were users who did not like the new flat pricing of $10/month. Here is an example of such a review.
They were perfect… then … they announced that they were going to start charging $10.00 a month because they were going Premium… I did not want “Premium” but they literally forced everyone by calling their app Premium with no added services. Very disappointed…
Still, Wise must have calculated that there would be customers dropping out due to the change in pricing and decided it was still worth going ahead with it.
The Flat pricing structure can essentially be thought of as a single tier pricing. The neobank has their target buyer persona in mind and wants to focus all its resources on developing the best banking experience for that persona. Not having other pricing tiers allow the neobank to streamline its costs of servicing, and focus on the narrower range of customers they want banking with them. It then comes down to what the price point should be to appeal to those customers while making a profit.
For Wise and NorthOne, it seems that sweet spot is $10/month.
The Death of Free/Freemium Pricing
More than half of the neobanks in our study have a free or freemium pricing structure. These pricing structures entice customers, helping the neobank achieve massive scale quickly in the hope that customers acquired from the low pricing will continue depositing more money and transact more.
We believe this is not financially sustainable in the long run.
Even if the neobank is attracting plenty of new users with a decent conversion rate to paid accounts, it might not remain so in the long run. This is because conversion rates rarely hold steady over time. Early adopters of the product are less price-sensitive than others, and thus more likely to upgrade. This means that value proposition of a neobank business account is very compelling to them. As the user base expands, there will be more users who are more price-sensitive or see less value in the product. As such, conversion rates from free to paid accounts will tend to decrease over time.
Free and Freemium models place a huge emphasis on customer acquisition. We recognise that the neobank might incur low marginal costs per new free user, but those costs are not zero. Server space and customer support have to be allocated to servicing these free users.
We believe that pricing should not be just a tool for customer acquisition, but for monetization as well. Neobanks should not be losing money per customer due to low pricing.
Tinkoff Bank is a prime example of a profitable neobank. They starting making profit 18 months after receiving investment in 2007, and made more than $500 million in 2019. According to this interview with its CEO Oliver Hughes, Tinkoff Bank operates with a NPV (Net Present Value) based approach. They treat every customer onboarded as a mini investment decision, taking into account the cost of servicing before incorporating a 30% hurdle rate, i.e. minimum rate of return. Scaling this NPV model to millions of customers allows Tinkoff Bank to constantly make a profit year after year.
The fragility of free/freemium pricing structures hold especially true in today’s economic climate. As mentioned before, neobanks with such pricing structures rely more on transaction fees, return on deposits and interchange fees in order to make a profit. The current pandemic crisis has led to a decrease in financial activity. This means that there are less deposits, transaction and interchange fees, exposing cracks in the bottom line of these neobanks.
Conclusion: How neobanks should price their products
The key to pricing well is to cater to the product’s user base and present a solid value proposition. If the product is genuinely solving a problem, customers should not hesitate to pay for it.
Let us take the example of Bankera which has different tiers of pricing for different types of businesses. Higher risk businesses like crypto-related ones are more likely to be rejected by banks or even other digital banks, meaning that they are willing to pay a premium for banking services. Bankera’s aggressive pricing reflects this.
We mentioned in Chapter 1 that the largest opportunities in the neobanking space lie in defining specific sub-segments amongst the underserved business population, and targeting them. It all starts with conducting user research on this sub-segments and understanding what they want out of a business account. Pricing can then be structured to appeal to these buyer personas.
We are not saying that all neobanks should follow Tinkoff Bank’s approach. Rather, we are saying that it is more about delivering the best value for the customer while making profit sustainably than making pricing as low as possible to undercut the competition and grow the user base. A good pricing structure should be an anti-churn device.
There is no one type of pricing structure that reigns supreme over the others. Tiered pricing appeals to multiple buyer personas while flat pricing can be successful if there is a narrowly defined target market. Pricing structures should be reviewed and updated regularly, taking into account the evolution of user behavior.
We hope you learned more about the ins and outs of pricing for SME neobanks. At Arival, we are wracking our brains, making spreadsheets and conducting user research to craft the best pricing structure for our customers. We strongly believe that a premium pricing should follow a premium product! If you have any great ideas about cool features that will add value, we want to hear about it! Contact us at support@arivalbank.com.
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.
