The banking industry has seen a significant transformation over the past years. Traditional banking institutions are now competing with startups and challenger banks looking to offer consumers new ways of managing their spending and investments. At the centre of it all, online or mobile banking is increasingly becoming the new norm, representing a shift towards providing consumers with more convenience and faster service.

Is the future of banking 100% digital?

A study on mobile banking by Business Insider showed that 97% of millennial respondents use mobile banking. However, adoption rates are also high for older generations, with 91% of Gen X and 71% of baby boomer respondents also stating the appeal of these new digital banking services. According to Citibank research, one of the key benefits of mobile banking perceived by US consumers in 2018 was a greater awareness of their financial situation.

Beyond the convenience of mobile banking, challenger banks have entered the scene with more attractive offers than their traditional competitors. Indeed, a recent KPMG survey showed that the number one reason for opening an account in a neo-bank in 2019 was the attractive prices. Challenger banks ultimately represent the shift from in-store or phone-based banking to fully online experiences, removing the need to physically go to a bank branch and providing consumers with new data-led insights into their financials.

The rise in popularity and use of challenger banks has resulted in mega-rounds in this space, even during the COVID-19 period. Between February and May 2020, N26 closed a $100 million series D fundraising round at a valuation of $3.5 billion, Starling Bank completed a £60 million round with its existing investors, and Revolut raised $500 million at a $5.5 billion valuation.

Out with the old, in with the new: neo-banks

While many online banks have already become household names, new ones are still emerging. Among them is one of Early Metrics’ rated startups Neon. The Swiss neo-bank holds great promise as it has ranked in the top 10% of all startups rated by Early Metrics. Neon has aggregated services and perks meant to simplify peoples’ everyday banking, at a low cost, and with as little fees as possible: scan payslips, cards and IBANs, recognise where you spend your money thanks to company logos, find key statistics on where you spend your money the most, no longer pay fees for using your card abroad, and the list goes on.

When speaking with Neon CEO Jörg Sandrock about under-addressed issues that fintechs should tackle, he emphasized the importance of investigating all areas where established banks are hindered from delivering optimal solutions, whether it be by providing new and more convenient products or more efficient processes. Ultimately, targeting the pain points of traditional banking is a large part of what neo-banks, Neon included, have been doing to differentiate themselves on the market. Indeed, Jörg stated that traditional Swiss banks are not positioned to offer a pure mobile banking experience and are not able to meet the cost efficiencies challenger banks like Neon can achieve.

Despite Switzerland being known as one of the financial centres of the world, the country has been slow to digitise and transform its banking sector. Within this ecosystem, Neon has been able to establish itself as one of the few players on the market offering an entirely mobile banking experience with such low costs.

The COVID-19 context: challenger banks fare well throughout this crisis

The current pandemic being experienced worldwide has been a wake-up call for many sectors in terms of the importance of digitisation. The sanitary crisis has clearly shown us the importance of providing flexible, convenient and quick online services to consumers.

Financial institutions have implemented numerous changes in response to this crisis, such as higher contactless payment limits or delayed loan repayments. More than ever before, consumers needed to be able to manage all aspects of their financial life online. According to an MX survey conducted in the United States: 59% of people are spending less money than before due to COVID-19, 55% use their mobile app as a primary tool to check their account balance and only 2% are going to their bank’s branch. We asked Jörg how the crisis has impacted Neon thus far:

“At Neon we see three different areas impacted by COVID 19: increasing demand from new clients opening a Neon account, distinct shifts in the payment behaviour of existing clients (fewer cash transactions, more contactless payments, increase in average transaction amount, different shopping behaviour, etc.) and of course different ways of working together within our team and with our several partners.”

The coronavirus crisis and the conversations it has sparked will indubitably provide food for thought to financial institutions worldwide. Challenger banks, which were already well prepared for this type of situation without even knowing it, could likely continue to experience fast growth linked to the currently shifting consumer behaviour.