The New World Of Banking Apps: How Neobanks Can Evolve

June 22, 2023
by: Cohen Circle Team

Historically, mobile banking apps (also known as neobanks) such as Chime and Varo have catered to low-account-balance customers. This is fantastic for their customers, as it gives them access to a kind of banking they have been lacking for decades—generally without penalizing overdraft and minimum balance fees.

These banking apps also pioneered early paycheck access, pre-funding direct deposit paychecks before the ACH transaction settles. Big banks have followed suit and are now offering the same services themselves, a good example of neobanks leading the way.

However, neobanks are likely to hit a wall in their profit-creating abilities, as low-account-value customers don’t necessarily have the need for higher-profit-margin services, such as mortgage loans. Below, I’ll go into how banking apps can overcome this challenge, the future of neobanks and how more profits can be derived.

First, The History Of ‘Neobanks’

There has long been an underserved population in the United States largely ignored by the banking system. These consumers have been subject to high fees, a lack of bank branches in their neighborhoods and other practices that have excluded them from mainstream financial institutions.

In a first attempt to fill this gap, some companies started offering prepaid debit cards that people could purchase in stores. These cards also had checks attached to them that allowed people to pay bills. This was the first step in offering banking services to these communities, but it was still limited.

With the fintech revolution of the 2010s came the onset of mobile-first banking. Neobank apps offered a quick bank account signup. These types of apps had no minimum balance or overdraft fees (generally up to a certain amount anyway), and they even offered small interest-free loans that kept people away from predatory payday lenders.

This model attracted millions of customers. Neobanks started generating profits through interchange fees, which were higher for them compared to large banks because of the cap on interchange fees for banks with over $10 billion in assets. The interchange fee business model works up to a certain extent, but problems can arise. One problem is that digital banking attracts higher rates of fraud and disputes. The cost of handling just one of those disputes can wipe out the smaller lifetime value of a low-account-value customer.

How Can The Neobank Model Evolve?

Neobanks first need to consider revenue models beyond just interchange fees. Banks that originate mortgages make much more money than they do on interchange fees. The same is true for credit card and auto loan interest. This is what you build a bank for.

So, how can neobanks get their customers to look to them for these types of services? The answer is by aligning with their customers’ values and lifestyles, which in turn helps them build a closer relationship. Rather than being a one-size-fits-all neobank whose main benefit is being easy to sign up for and having fewer fees, neobanks that morph themselves to fit neatly into their customers’ lives will create more of these kinds of opportunities.

For example, one of our portfolio companies is a banking app for Black and Brown professionals. Instead of an online bank, they aim to create a community and a movement. With that, they will have greater opportunities for offering value-added services to their customers and driving greater profits for the bank.

Another neobank provides value-added services that help seniors manage the assets they’ve accumulated over their lifetimes via its banking app. It offers services such as faster access to Social Security checks and plans in the future to provide frictionless access to senior discounts through its debit card.

Another Opportunity: Neobanking For High-Account-Value Customers

Neobanks have a largely untapped opportunity: high-account-value customers.

Post-SVB collapse, high-net-worth individuals may be more inclined to split their cash deposits across multiple accounts at the FDIC-insured limit of $250,000. If you had, for example, $10 million in cash, this could become difficult to manage. Technology—and neobanking—could solve this.

Imagine a mobile banking interface where all of your accounts were connected across multiple institutions. With the data connectivity that API-based fintech and embedded finance technology enable, this is very doable. Better yet, the solution could be to have one neobanking app that automatically splits your deposits across multiple accounts for you, shows it to you and manages it as if it were a single account.

Another issue is that many large banks don't have a customer service option tailored specifically to high-net-worth people who have complex banking needs. These same neobank solutions that split deposits across multiple accounts could also offer a concierge-like service at scale through the use of AI algorithms and API-based financial data connectivity.

Change Is Coming

Over the next 10-15 years, I expect a wave of entrepreneurs try to solve these three banking industry problems—and change the way we interface with the banking system.

• Driving greater profits in neobanks through value-added services. Neobanks will need to expand into credit offerings to generate revenues beyond interchange fees from debit cards. Creating stronger bonds and brand loyalty with their customers will help them build these revenue streams.

• Creating seamless banking across many accounts. Expect to see API connectivity and embedded finance solutions change the way multi-account banking is done.

• Creating concierge-like banking at scale. Connected financial data fed through smart AI algorithms will offer personalized solutions for more complex banking scenarios. This technology would provide private banking solutions to high-net-worth customers at scale—many of whom feel ignored by large banks.

One thing is certain, change is coming to the banking system. The collapse of SVB and First Republic Bank exposed some areas that are ripe for disruption and opportunity. Watch for the emergence of entrepreneurs attempting to fill those gaps by solving the three problems above.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.

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