Fintech revolution: How Europe's neobanks are challenging traditional banks

A neobank is a financial institution that operates solely online without physical offices or branches. It is similar to a regular bank, but with a major online bias, and does not usually provide lending services. Customers interact with a neobank through various online platforms: website, mobile app, online chat or phone support.

The mass adoption of such services began around 2015, and every year, neobanks are gaining a larger share of the financial services market in Europe - by 2024, they account for around 20% of the remittance market. The highest share of neobanks among traditional banks is observed in Denmark (47%), Germany (31%) and Italy (26%).

In 2021, the market for neobanks was estimated to be worth more than €51bn and experts predict that the financial services market will grow by more than 50% annually, reaching the €2.2 trillion mark by 2030.

In this article, we will look at the advantages of neobanks compared to traditional banks in Europe.

Distinguishing features of neobanks from traditional banks

The differentiating features of neobanks from traditional banks are presented in various aspects:

• Remote identification: Most neobanks offer remote identification procedures, most often through uploading photo documents and video selfies. This process is less stringent and more customer-friendly than traditional banks.
• Additional features on a fee-based plan: Some neobanks provide advanced functionality on a fee-based basis, such as joint accounts, budgeting and investment products.
• Help to improve credit history: Neobanks offer customers the opportunity to improve their credit history through special programmes such as instalment or savings accounts.
• Motivational gaming: Some neobanks introduce gaming elements to incentivise customers to actively use their products, such as the opportunity to grow virtual trees or enter lotteries for every money spent.
• Training on complex financial instruments: Some neobanks offer clients rewards for training and quizzes on investment topics, helping to reduce barriers to accessing new financial instruments.
• Step-by-step design and user-friendly interfaces: Neobanks offer user-friendly interfaces and modern forms of communication that make it easier and more enjoyable for customers to interact with products than traditional banks.

Major centres of financial technology excellence in Europe

There are several financial technology centres of excellence in Europe, with research showing that the UK, Germany, France, Italy, Italy and Spain lead the way in terms of the number of users of neobanking services. However, when looking at the number of active EMI (electronic money organisations) in the region, the situation changes: The UK, Lithuania, Malta, Ireland and France stand out. Moreover, the UK and Lithuania account for approximately 65 per cent of the European market.

London is the leader in financial technology in Europe, while Vilnius is unofficially the EU leader in terms of the number of neobanking organisations. This shows that geographical boundaries in the fintech industry are gradually losing their importance as customers increasingly choose financial providers based on quality of service rather than location. It is also worth noting that English has become the dominant language in most apps, personal accounts and support services, removing language barriers for neobanking customers.

The trend of choice of corporate financial service providers is increasingly shifting towards EMIs, which offer competitive terms and conditions compared to traditional banks. In Lithuania, for example, some EMIs provide a wide range of financial services at more favourable terms and conditions. This shift emphasises the growing importance of fintech solutions that transcend geographical boundaries and offer convenience and cost efficiency.

European banks with over 1 million customers are located in the following countries:

• UK (Revolut, Monzo, Curve, Starling Bank, Monese, Tesco Bank);
• Italy (Hype, Fineco, ING, Nexi Pay, Inbank, Mooney);
• Germany (N26, Comdirect, DKB, ING, Vivid);
• France (Lydia, Nickel, Boursorama, Bankin);
• Spain (Imagin, Openbank, Fintonic);
• Netherlands (Bunq);
• Belgium (Wise);
• Ireland (Payoneer);
• Romania (NeoBT).

The study revealed that neobanking financial institutions integrate various payment services into their applications that provide low-cost cross-border transfers with favourable currency conversion.

In addition, a number of European companies offer unique services:

• UK-based Revolut provides the ability to create virtual disposable cards for secure online payments and additionally provides cryptocurrency transactions at favourable rates.
• Starling from the UK offers a geolocation-based money transfer function, similar to AirDrop, that works via Bluetooth.
• Dutch Bunq allows users of its app to be grouped together and perform joint transactions such as fundraising or account sharing.
• Germany's N26 works with customers even if they have a bad credit history.
• Fintonic from Spain offers the ability to link a card to a third-party bank account.
• Paysera from Lithuania offers unique features such as withdrawing cash from shops by generated barcode, buying tickets and investing in precious metals right inside the app.

Bottom line

Neobanks, which play an important role in today's financial industry, offer customers new and innovative approaches to financial services that are different from traditional banking models. The study found that they not only provide convenient and accessible financial services through online platforms, but also integrate unique functionalities that make them appealing to a wide range of users.

The differentiating features of neobanks from traditional banks are presented in various aspects, ranging from convenient remote customer identification to game mechanics that motivate active use of financial products. Neobanks also offer innovative services such as virtual cards, geolocation-based transfers and the ability to bring users together for joint transactions.

Today's financial technology leaders in Europe - London and Vilnius - demonstrate that geographical boundaries no longer play such an important role in the choice of financial providers. Customers are increasingly inclined to value service quality above a company's location. This trend emphasises the growing importance of fintech solutions that can overcome geographical limitations and offer convenience and efficiency in the global financial services market.

In addition, neobanking financial organisations in Europe provide a wide range of unique services, from virtual cards to innovative methods of cash withdrawal in shops. These services demonstrate the constant endeavour of neobanks to innovate and meet the needs of the modern customer.

As such, neobanks continue to play an important role in changing the financial industry and providing customers with unique and innovative financial solutions. With their continued development and expanded functionality, we can expect their influence on the financial services market to continue to grow in the future.

FAQ

Q: What is a neobank?
A: A neobank is a type of digital bank that has no physical branches and exists solely in an online format. Such banks offer traditional banking services such as account opening, transfers and card issuance, but do so exclusively through mobile apps and web platforms.

Neobanks continue to gain popularity due to their ability to offer convenient, fast and innovative financial services. They are changing the traditional view of banking and creating new opportunities for customers around the world.

Q: What are the advantages of neobanks over traditional banks?
A: Here are the main advantages of neobanks:

• Convenience and accessibility: Neobanks offer round-the-clock services through mobile apps and web platforms. This means that customers can carry out their financial transactions anytime and anywhere without visiting physical branches.
• Low or no fees: The lack of physical branches and reduced operational costs allow neobanks to offer services with low or no fees. This can include lower fees for account maintenance, transfers and other transactions.
• Quicker account opening and maintenance: The process of opening a neobank account often takes just a few minutes and can be done entirely online. Account management is also simplified through intuitive interfaces.
• Innovative financial products: Neobanks are often at the forefront of innovation, offering products and services that may not be available from traditional banks. These may include unique savings instruments, investment platforms, cryptocurrency services and more.
• Personalised approach: Neobanks often use data to provide personalised guidance and advice on managing finances, which can help customers take better control of their money and achieve financial goals.
• High level of security: Using the latest encryption and security technology, neobanks provide a high level of protection for customer data and funds. This can include multi-factor authentication, biometric verification and ongoing monitoring to prevent fraud.
• Focus on customer experience: Neobanks aim to offer an exceptional customer experience by focusing on design, usability and quality of service. This means that customers often receive a faster and more enjoyable experience compared to traditional banks.

Q: Which country in Europe has the most neobanks?

A: In Europe, the country with the most neobanks is the UK. London is often referred to as the fintech capital of Europe and is where many well-known neobanks such as Revolut, Monzo and Starling Bank originated and developed. The region is favourable for fintech development due to legislation that supports innovation, a large pool of tech and finance talent, and an active capital market. The UK attracts startups from all over the world, offering them a favourable environment for growth and development.

Lithuania is also a prominent player in the European fintech space and has a significant number of neobanks. The country has become attractive to fintech companies due to its progressive regulation, innovative government and ambition to become the leading fintech centre in the region. Lithuania offers simplified licensing procedures for banks and e-money institutions, making it attractive to neobanks and other fintech startups looking to operate in the European Union. The Bank of Lithuania has introduced a special "regulated sandbox" that allows new fintech companies to test their products and services in a controlled environment before fully entering the market. This not only lowers barriers to entry for new players, but also promotes innovation in the financial sector. In addition, Lithuania attracts foreign fintech companies due to its strategic location, skilled professionals and relatively low operating costs. As a result, the country has become one of the leading fintech centres in Europe, attracting neobanks and other innovative financial startups from around the world.