Oct 18, 2021
We have all seen a rapid evolution of technology over the past decade, especially in the world of finance. With financial technology solutions entering the mainstream, it doesn’t come as a surprise that banks and other traditional financial institutions have integrated artificial intelligence, automation, metadata, and other forms of technologies into their systems as well. However, while these solutions are enabling banks and financial institutions to be more efficient, many factors in the traditional system still hinder both individuals and enterprises from completely achieving financial security and inclusion.
This is where neobanks come into play. Neobanks operate the same way as any conventional bank would except they don’t have a physical branch nor the same manual and lengthy processes when offering financial products and services. Without a physical location, neobanks are able to lower fees and save on banking and maintenance costs.
Moreover, with technology as the main driver of their operations, neobanks are able to accelerate previously tedious banking processes such as opening an account, transferring money abroad, and more. For example, in an experiment that Built for Mars’ founder Peter Ramsey conducted in 2020, it only took him two working days to open a fully functioning bank account with Starling Bank and Monzo—much faster compared to opening an account at a traditional bank, which took him anywhere between 7 and 36 working days.
As of December 2020, there are about 256 neobanks worldwide. Banks such as Revolut, Monzo, and Chime have already made a name for themselves in the banking sector and are now each valued in billions. But as with any industry with high competition, some neobanks are at risk of failing in profitability. In an effort to remain afloat and create an edge against their competitors, some neobanks are reviewing their pricing strategy, expanding their existing services, or servicing niche markets that the traditional banking system has not addressed before.
One of the niche markets that neobanks are now venturing into is the $100 billion creator economy, which is composed of over 50 million content creators worldwide as of 2020. Contrary to popular belief, the creator economy isn’t a complete utopia for both part-time and full-time content creators. Both new and veteran influencers alike have reported one consistent problem: getting paid on time and even getting paid at all.
To resolve this, digital banking apps in the United States and the United Kingdom are now helping content creators get paid with the wage they were promised. These apps are made to free content creators from the traditional banking system, which doesn’t completely understand how this new industry generates money. These solutions also generate alternative data that can help content creators access financial products like credit and loans. Such is the case of XPO, a digital banking app designed to pay content creators within 24 hours of completing a job and collect data to predict the future earnings of creators and give them access to credit and other banking facilities. Swedish-US startup Willa works in a similar fashion; the only difference is that they charge a 2.9% fee for each invoice and operate their own automated credit-collection system.
As embedded scoring provider credolab pointed out in its new ebook, the digital-first philosophy of neo or challenger banks gives them an advantage over traditional banks because they can analyse and act on data more swiftly than incumbents. Without data, neobanks will fail to capture spending and cross-sell additional products and instead increase fees that may generate distrust among customers. Without alternative data, creators that are most likely “thin files” with credit bureaus may be penalised and their application for a loan rejected.
Considering that most content creators belong to the Millennial and Gen Z generations, they have fewer opportunities to bump up their credit scores or build a credit report at all, hindering them from making large-scale investments if they plan to reap the results of their hard work. Therefore, neobanks, Early Wage Access providers, and other fintech solutions that leverage alternate data present great opportunities for financial security among content creators.
“The creator economy is going to change the way that a significant proportion of the population behaves, and is going to be one of the key trends over coming years…This means big changes in economic behaviour, in both earning and spending, which opens up massive opportunities to redefine things like business banking, lending, creditworthiness, and investing.” - Harley Green, Blue Wire Capital.
Digital banks such as Daylight and Purple have also turned to different niches to address several pain points of the traditional banking system. The former, for instance, specifically caters to the LGBTQIA+ community through their debit card and mobile banking app, which allows users to sign up with their preferred name, a progressive step towards inclusion as traditional banks still require customers to use their legal names when opening an account or making transactions.
The startup also fosters an online community where app users can connect with their peers, consult with LGBTQIA+ financial coaches, and gain money management tips specific to their community’s needs such as the costs of transitioning or starting a family. Since Daylight just launched in December 2020, they have yet to offer business accounts for LGBTQIA+ friendly and allied businesses but are still open to doing so in the future.
Purple, on the other hand, employs banking and debit card services from The Bancorp Bank, Member FDIC, to support as many as 60 million people with disabilities. One of its core services is maintaining disability benefits for PWDs because the traditional banking system in certain US states removes their benefits if their assets exceed $2,000. Ultimately, Purple aims to empower PWDs to achieve financial inclusion and independence.
These digital banking apps and service providers show that there is now a neobank for almost everything. As competition rises in the finance sector, neobanks and digital banks continue to become more specialised, allowing previously unbanked people to finally become financially included.
“[Neobanks] have two core competencies: data and user acquisition. Neobanks are here to stay—especially if they focus on niches. They can acquire customers more cheaply and strategically and get top-tier customers for the right products because they have better data." - Joe Floyd, Emergence Capital.
The battle to bank the creator economy, as well as other groups unprioritised by the traditional banking system, has just started and it’s showing great potential at promoting financial inclusion. This shows that neobanks, EWA providers, and other fintech providers are emerging as king as they cater to more unique niche markets and evolve their products and services to be more inclusive—something that the traditional banking system can learn a thing or two from.