How will the coronavirus pandemic affect neobanks?
To answer that question, Efma's Boris Plantier asked Guillaume Larmaraud, partner at Colombus Consulting in Paris, for his thoughts on how this crisis will affect their growth and other trends in the digital banking space.
Will the Covid19 crisis slow the growth of neobanks and digital banks? Will we see a return of customers to traditional banks?
The Covid19 crisis is impacting the entire banking industry, including online and neobanks. However, the crisis will challenge the freemium strategy of neobanks as their business is basically to attract new clients with low cost offers and then monetize them with additional services. For this reason, neobanks’ business models require important investments and regular fundraising to get new clients. Some neobanks will be challenged and could be sold to incumbent banks or merged with other neobanks.
For clients, the limits of neobanks suddenly appear, for instance professional clients can’t get the « Prêt Garanti par l’Etat » or state loan’s warranty in France because their neobank did not get the credit agreement and are not allowed to offer this credit to their clients. These SMEs can find themselves in a difficult situation without access to the 300€ billion of loans offered by the French government.
Incumbent banks are applying lessons they learned during the previous crisis in 2008 by winning the communication battle with commitments to help their clients with quick answers to loan requests, putting in place robots to suspend debits for loans for clients requesting it, and communicating on dividend suspensions as requested by the European Central Bank. All these actions contribute to creating a positive opinion in the media.
What percentage of individual clients use an online bank?
In the French private individual market, our study conducted in December 2019 with OpinionWay revealed a 4% of market share for neobanks and only 1% for clients using it as their main bank. For online banks it’s 13% of market share and 4% for clients using it as their main bank. Incumbents still get from 96% to 93% (clients using it as their main bank) of market share. Furthermore, in the French market, only 7% of clients changed their main bank in 2019, 7% switching to neobanks, 18% to online banks and 73% to incumbents.
What are the advantages and drawbacks of the lower fees of neobanks?
Neobanks are cheap with some basic services even being free, for instance with Revolut, N26, and Monese. They offer a great user experience with well-designed applications and facilitate budget monitoring. In the current period of Covid19 crisis, some of them are even offering additional discounts such as Revolut or Qonto.
However, not all neobanks obtained their European or credit agreement and the majority are not covered by the FGDR warranty which allows holders a 100,000€ warranty per client and the ability to bank in the French market. In these troubled times it is important information to take into account when choosing your bank. One of the primary benefits of neobanks is the low rate for cash withdrawal or foreign transfers which are less important during a period of quarantine.
What transformations are taking place in retail banking? Will these slow down or accelerate due to the crisis?
The Covid19 crisis is compressing decades of digitization changes into several weeks. All banks are now having to work remotely to keep their business operating as close to normal as possible. It will certainly accelerate changes in the industry. Some clients will get used to transferring and managing their money from their home in quarantine instead of going into their bank branch. It will certainly focus investment on the digital experience of both employees and customers.
What digital offerings can banks deliver in order to stand out?
Customers are expecting new services beyond the traditional services offered in the bank industry. For instance, our study showed that 57% of the French customers expect solutions to get more accurate simulations for their real estate loans.