/ Digital Banking: How Online Banks and Neobanks are Changing the Future of Finance

Online banking and neobanks are actively transforming the banking sector, facing both benefits and constraints in their operations. They are making a significant impact on the market, innovating and utilising new technologies such as artificial intelligence and blockchain, which promises to change the future of banking. In this article, we look at the key trends that will shape banks in 2024 and beyond.

The emergence and development of online banks and neobanks

Online banks and neobanks have become important players in the financial market, especially in France, where more than a third of new bank accounts are opened with these digital institutions. Although most of them have not yet managed to achieve financial sustainability, they are actively utilising the opportunities offered by technologies such as artificial intelligence and blockchain to improve their services and attract customers. The first online banks emerged around twenty years ago as subsidiaries of large traditional banks looking to dematerialise their services and reduce costs.

Non-banks started their development in the 2010s, focusing on new payment solutions and open banking. Unlike online banks, they often offer a narrower range of services, focusing on payments, international transfers and account management. Despite the name, not all neobanks hold a banking licence and their offerings are usually less extensive than traditional online banks, but they make up for this with convenience and low fees.

Changing customer expectations and increased competition

The emergence of online banks and neobanks reflects a shift in consumer preferences. Universal banks offer a full range of services, competing with traditional banks, while neobanks focus on convenience and cost-effective solutions. They attract customers with low costs, simple transactions and user-friendly interfaces.

Competition is intensifying with the emergence of fintech companies and technology giants such as Google, Apple and Amazon (GAFAM) introducing their financial services. These players offer alternative solutions, including crowdfunding and payment systems, pushing digital banks to innovate and improve their offerings.

Advantages of online banks

Online banks and neobanks offer many advantages that make them attractive to users:

• Simplicity and time-saving: Opening an account and accessing banking services is possible through a website or mobile app without having to visit a branch;
• User-friendly interfaces: Digital technology makes it possible to offer ergonomic and easy-to-use interfaces for account management;
• Low fees: Online banks often offer free account opening, referral bonuses and lower service and overdraft fees;
• Investment solutions: Some banks offer access to favourable savings products and reduced fees for stock market transactions.

Disadvantages of online banks

Despite the advantages, online banks also have their limitations that can affect the choice of customers:

• Lack of human contact: Difficulties in getting face-to-face counselling and slow chat support can make it difficult to manage an account;
• Problems with depositing funds: Online banks usually do not provide the option to deposit cash or cheques, which creates inconvenience and additional costs;
• Limited services: Not all traditional banking services, such as ATM access and mortgages, are available with online banks, limiting their functionality.

Increased competition with traditional banks

Digital banks and neobanks continue to increase their market share and impact the revenues of traditional banks. Here are the key aspects of their development:

• Market share of online banks and neobanks: Between 2018 and 2020, the number of digital banks' customers doubled from 8 million to 16 million, strengthening their position in the French market. By 2020, around 35% of new current accounts were opened with digital players. This trend shows the effectiveness of their strategies and the shift of customers towards multifunctionality.
• Impact on traditional banks' revenues: Most online banks and neobanks are still unprofitable despite their growing market share. In 2020, the 15 largest players in the sector had a combined net loss of €441 million, meaning they lose an average of €57 per customer.   Revenue growth is limited by high costs of acquiring new customers and management costs.
• Digitalisation of banking services and development of new offerings: Digital banks continue to develop innovations in payments and lending, including virtual cards, cashback and microloans. These services help improve the customer experience and offer customers more control over their finances.
• Personalised services: Online banks are using technology to analyse data to offer personalised financial solutions. This allows them to better respond to customer needs and offer insurance and investment products tailored to their goals and preferences.

Future trends in online banking and neo-banking

Online banks and neobanks are actively adopting modern technologies to improve services and increase access to financial services. Key development trends include:

• Artificial Intelligence: AI improves banking products and processes, analyses data to predict customer needs and provides personalised support. It also enhances security by helping detect fraud.
• Blockchain: Blockchain provides security and transparency in transactions and reduces the time and cost of payment processing. Smart contracts automate processes and create new opportunities for online banking.
• Inclusive Finance: Online banks and neobanks are making financial services more accessible by offering low-cost solutions to those previously excluded from the traditional banking system by harnessing the power of digital technology.
• Outlook 2024: Online banks and neobanks will continue to grow, but their pace depends on their ability to adapt to economic challenges and control operating costs. Success will be determined by innovation and effective cost management.

Conclusion

Online banks and neobanks continue to transform the banking sector with innovative solutions and convenient services. However, they need to overcome current economic challenges and optimise costs to achieve sustainable profitability. The future of these digital players depends on their ability to adapt and adopt the latest technologies.