Revisited Neobanks: Has the return of free accounts been reconsidered?
Neobanks Face Challenges in Maintaining Profitability with Free Account Models
Neobanks, known for their digital, mobile-first offerings, have traditionally relied on free basic accounts to attract customers. However, as regulatory demands grow and client expectations rise, maintaining profitability through free account models alone is becoming increasingly challenging [3].
In the UK, neobanks like N26, Holvi, Tide, and Vivid have reintroduced free accounts, streamlining features to the essentials [1]. While this move may attract more customers, it also raises questions about profitability. The pressure to become profitable is higher in the fintech world than before, with job cuts, new funding rounds, and increased fees being common responses [2].
One example comes from Chime, a leading US-based neobank. Despite reaching operating profitability in 2024 due to revenue growth and efficient scaling, Chime still reported net losses to stock compensation expenses [1][2]. This illustrates that scale and operational leverage are crucial for making free or low-cost account models profitable.
The German market poses complications for neobanks, especially in risk management. The regulatory burden increased for neobanks due to scaling, with some, such as Solarisbank, receiving fines and having special examiners sent [1]. The Corona pandemic further complicated matters, leading to fewer customers and investors becoming more cautious with their money [4].
To maintain profitability, neobanks must expand beyond free accounts. Financial industry trends indicate that digital-only platforms offer a competitive edge by avoiding costly physical infrastructure. However, to remain profitable, they must offer premium services, embedded finance solutions, or monetize additional features like preapproved loans or financial advisory [3].
During the first "cheap is cheap" era, Holvi's customer base grew to over 250,000. However, these changes in the market led to a significant decrease in Holvi's customer base [5]. Müller, from one of the neobanks, states that they've learned from the growth phase and now know what's needed for a stable and sustainable free offer [6].
In conclusion, free account models can work profitably for neobanks if they achieve sufficient scale, leverage efficient digital infrastructure, and diversify revenue beyond basic accounts, all while navigating rising regulatory and customer service costs. Neobanks unable to do so risk margin compression in the increasingly competitive market of 2024 [1][2][3]. Deposit interest rates have also risen, allowing many neobanks to finance themselves [7]. The number of company registrations in 2024 increased by 0.2 percent to almost 600,000, according to the Federal Statistical Office [8], indicating a potential increase in the customer base for neobanks in the future.
- To successfully maintain profitability in the face of growing regulatory demands and customer expectations, neobank businesses in the fintech sector need to move beyond free account models by offering premium services, embedded finance solutions, or monetizing additional features.
- Expanding beyond free accounts and utilizing efficient digital infrastructure can help neobanks achieve profitability, enabling them to navigate the competitive market, especially with the potential increase in customer base due to the rise in company registrations in 2024.
