Neobanks have received significant attention and massive investments from venture capital firms. Despite the global economic slowdown, they raised more than $12 Billion in 2021. The number of digital-only banks has risen from 250 in 2020 to 333 in 2021. The whole BFSI industry has undergone a massive transformation in the last two years than in the previous decades combined and will continue to do so. Pandemic presented immense opportunities to the Finance/BFSI industry. On one side, it forced people to stay indoors but, on the other hand, asked banks to rethink their modus operandi. Economic uncertainties, increased competition from digital-only banks, rapidly changing customer requirements, and fast-developing technology completely changed the banking ecosystem, forcing traditional banks to reprioritize their long-term vs. short-term goals.
The 2008 recession gave birth to Aldermore Bank, a technology-driven bank. 2009 saw the inception of Aldermore bank, an SME-focused financial services company that got a banking license by acquiring Ruffler Bank. Though they were the first challenger bank, the media recognized them later in 2015 before First Rand Bank acquired them in 2017. These banks were fintech with banking licenses and provided banking services over the internet. They were called the challenger banks. 2010 gave birth to a new crop of fintech. They called themselves the Neobanks. They focused mainly on the underserved population and provided banking services through licenses from conventional banks. Many traditional banks lacked digital transformation capability due to their inflexible underpinnings. Customers began to incline towards fintech solutions that allowed them to integrate their existing conventional bank accounts and perform all the banking functions in one place. The reason for the astronomical rise of the neobanks is the vast opportunity of the underserved left by traditional banks that were up for grabs during the pandemic. Most of these were freelancers, gig workers, and independent creators. Neobanking is going through a massive transformation. Developed markets such as Europe, the US, and the UK are going through regulatory changes that create a favorable environment for the neobanks. New players are now targeting ultra-niche segments of the market, such as the LGBTQ segment, artisans, and teenagers. Neobanks are adopting leading-edge technologies, thus nudging traditional banks to reinvent themselves to serve the customers better and increase customer retention.