The Business Model of Neobanks: How Do They Make Money?

Neobanks have disrupted the traditional banking industry with their innovative business models. They operate on a fee-based model, charging customers for services such as account maintenance, overdrafts, and international transactions.

Neobanks don't have the same overhead costs as traditional banks, which allows them to offer lower fees and higher interest rates on deposits. This is a key factor in their ability to attract customers.

One way neobanks make money is by offering high-yield savings accounts that earn customers a higher interest rate than traditional banks. For example, some neobanks offer interest rates up to 2% APY, compared to the national average of around 0.09% APY.

Neobanks are digital-only banks that have revolutionized the way people manage their finances. They offer a range of services, including mobile banking apps, online accounts, and fee-free transactions.

These banks operate on a lower cost model than traditional banks, which allows them to pass the savings on to customers. For example, neobank users can enjoy fee-free international transactions and lower interest rates on loans.

Neobanks also often partner with other financial institutions to offer a broader range of services to their customers. This can include investment products, insurance, and credit cards.

A Neobank is a digital-only bank that offers financial services online or through mobile apps.

Neobanks don't have physical branches, which reduces their operating costs and allows them to pass the savings on to customers.

They often partner with traditional banks to provide a wider range of services.

Neobanks typically have lower fees and higher interest rates than traditional banks.

By using digital technology, neobanks can offer more convenient and user-friendly services to their customers.

A bank is a traditional financial institution that offers a range of services, including savings and checking accounts, budgeting tools, and cash advances.

They typically operate through physical branches, which can make it harder for customers to access their services on the go.

Banks are chartered institutions, meaning they have a special license to operate as a bank.

They are subject to regulatory standards and are expected to comply with certain rules and regulations.

Banks often charge higher fees and offer lower interest rates on savings accounts compared to neobanks.

A traditional bank's physical presence can make it harder for customers to access their services, whereas neobanks offer a seamless and user-friendly experience through their digital interfaces.

Neobanks, on the other hand, are digital-first financial entities that operate exclusively through online platforms like mobile apps or websites.

Neobanks can generate revenue through a variety of streams, including subscription fees, transaction fees, interchange fees, and commissions.

One of the primary sources of revenue for neobanks is interchange fees, which are paid by merchants to the card-issuing bank whenever a customer uses their debit or credit card to make a purchase. For example, if a customer spends $100 using their neobank debit card, the merchant might pay $1.50 in interchange fees, with the neobank receiving a fraction of that fee.

Some neobanks also earn revenue from interest income on deposits held by customers, as well as interest on loans. For instance, SoFi, a neobank that offers personal loans, mortgages, and credit cards, earns a significant portion of its revenue from the interest on these loans.

Here are some of the key revenue streams for neobanks:

Online banks are basically the digital platforms of traditional banks, offering services online. They hold a full banking license, which allows them to offer a broader range of services and compete directly with banks.

Some online banks are also referred to as digital banks or challenger banks, but these terms can be used interchangeably, and they typically hold full banking licenses. In the UK, the term "challenger bank" is more common, while in the US, "neobank" is more prevalent.

Online banks provide a range of financial services similar to traditional banks, including checking and savings accounts, debit cards, money transfers, bill payments, and sometimes lending products like personal loans or credit cards. This is because neobanks, which are often confused with online banks, also provide a range of financial services.

Neobanks, on the other hand, may not hold a full banking license and often focus on specific services or markets. However, some jurisdictions have regulations about the name of this type of digital banking institution, such as in Hong Kong, where only licensed virtual banks can call themselves by that term.

Neobanks have disrupted the traditional banking industry by offering a range of innovative revenue streams.

One of the primary sources of revenue for neobanks is interchange fees, which are paid by merchants to the card-issuing bank whenever a customer uses their debit or credit card to make a purchase. This fee is typically around 1.5% of the transaction amount, and a portion of it goes to the neobank.

Neobanks can earn a significant portion of their revenue from interchange fees, as seen in the case of Chime, which generated $950 million in revenue in 2021 from this source alone.

In addition to interchange fees, neobanks can also earn revenue from subscription fees, transaction fees, interchange fees, commissions, and interest income.

Here are some of the key revenue streams for neobanks:

Neobanks can also earn revenue from interest on loans, as seen in the case of SoFi, which earns a significant portion of its revenue from the interest on personal loans, credit lines, and other forms of credit.

Some neobanks offer paid services, such as expedited transfers, wire transfers, or access to certain investment products, which can also contribute to their revenue.

By diversifying their revenue streams, neobanks can reduce their dependence on a single source of income and increase their overall profitability.

Neobanks collaborate with established financial institutions to deliver banking services, with partner banks holding customer deposits and ensuring regulatory compliance. This partnership allows neobanks to focus on customer interactions and digital experiences.

Many neobanks partner with third-party financial service providers, such as insurance companies or investment platforms, to offer additional products or services. These partnerships can generate revenue through referral fees or commissions.

Neobanks often generate additional revenue through partnerships and third-party integrations. By collaborating with fintech companies, payment processors, and other financial service providers, neobanks can offer a broader range of services to their customers.

Revenue opportunities from partnerships include revenue sharing, cross-selling, and customer acquisition. Neobanks can earn a share of the revenue generated by third-party services integrated into their platforms. This might include fees from investment management, insurance premiums, or subscription services.

Some neobanks monetize their technology infrastructure by providing access to their APIs or offering white-label banking solutions to other companies. These services generate revenue through licensing fees or usage charges.

Neobanks generate revenue from fees and services, including account maintenance fees, paid banking services, and premium subscriptions. Some neobanks charge for specific services like expedited transfers, wire transfers, or access to certain investment products.

These fees can vary depending on the neobank's business model and target market, but are often lower than those charged by traditional banks. For example, Revolut, a popular neobank, offers premium accounts with additional features for a monthly subscription fee.

Premium subscriptions can provide a steady stream of revenue for neobanks, as seen with N26 Metal, which offers features like dedicated customer support and free international withdrawals for a subscription fee. To succeed, neobanks need to offer compelling value in their premium accounts and paid services to justify the fees.

By segmenting their customer base, neobanks can tailor their offerings to meet the needs of different groups, from budget-conscious consumers to high-net-worth individuals seeking premium services. Transparency in pricing is also key, as neobanks like Revolut clearly communicate the costs and benefits of paid services to build trust with customers.

Here are some factors driving revenue from account maintenance and paid services:

Neobanks are changing the way we think about banking fees. While many offer free accounts with no monthly fees, some generate revenue by charging for premium services, account maintenance, and other banking-related fees.

These fees can vary depending on the neobank's business model and target market, but they're often lower than those charged by traditional banks. For example, Revolut, a popular neobank based in the UK, offers several account tiers, including a free basic account and premium options with additional features.

Some neobanks charge for specific banking services, like expedited transfers, wire transfers, or access to certain investment products. These fees are typically lower than those charged by traditional banks, but they still contribute to the neobank's overall revenue.

To justify these fees, neobanks need to offer compelling value in their premium accounts and paid services. This might include exclusive features, better customer service, or financial products that are not available in the free account tiers.

Neobanks often emphasize transparency in their pricing, clearly communicating the costs and benefits of paid services. This approach builds trust with customers and can lead to higher adoption rates of premium products.

Here are some key factors driving revenue from account maintenance and paid services:

Overall, neobanks are finding creative ways to generate revenue while still offering competitive pricing and services to their customers.

Subscription services are a key way for neobanks to generate revenue. Some neobanks offer premium or subscription-based accounts that provide additional features or benefits for a monthly fee.

These premium accounts often come with perks such as enhanced customer support, higher transaction limits, or access to premium financial tools and services. Revolut, a popular neobank, offers several account tiers, including a free basic account and premium options with additional features.

Premium accounts can be a game-changer for customers who need more advanced banking services. For example, Revolut's premium accounts provide benefits like higher ATM withdrawal limits, free international money transfers, and travel insurance.

Some neobanks charge for specific banking services, in addition to account maintenance fees. These fees are typically lower than those charged by traditional banks, but they still contribute to the neobank's overall revenue.

To make premium subscriptions appealing, neobanks need to offer compelling value. This might include exclusive features, better customer service, or financial products that are not available in the free account tiers. Neobanks can segment their customer base to tailor their offerings to meet the needs of different groups.

Here are some key factors driving revenue from premium subscriptions:

By offering premium subscriptions, neobanks can provide more value to their customers while generating a steady stream of revenue.

Neobanks can generate revenue from foreign exchange fees, which are charged for international money transfers or purchases made in foreign currencies.

These fees are a significant source of income for neobanks, particularly for those that cater to frequent travelers, expatriates, or international businesses.

TransferWise (now Wise) is a great example of a neobank that has built a profitable business by specializing in low-cost international money transfers and charging a small fee for currency conversion.

Wise's fees are significantly lower than those charged by traditional banks, making it an attractive option for customers looking for cost-effective solutions for international payments and transfers.

High transaction volumes can lead to substantial revenue from FX fees, as seen with neobanks that cater to frequent travelers or international businesses.

By offering competitive FX rates and lower fees than traditional banks, neobanks can attract customers and generate revenue from FX fees.

Neobanks with a global customer base can generate revenue from FX fees across multiple currencies and markets, further enhancing their profitability.

Here are some key factors that contribute to the revenue potential from FX fees:

Neobanks have disrupted the traditional banking model, offering low-cost services and innovative features. They've managed to attract a large customer base, with some neobanks boasting over 10 million customers.

One key advantage of neobanks is their ability to maintain low overhead costs, which is achieved through a digital-only approach. This means no need for physical branches or large staffs.

Their business models are diverse, with some neobanks generating revenue through interchange fees, while others rely on interest income from deposits. For instance, N26 earns revenue from interchange fees on debit card transactions.

As the neobanking landscape continues to evolve, we can expect to see more innovative products and services emerge.

Traditional banks have a complex revenue model that includes interest on loans, which accounts for a significant portion of their income. They also earn revenue from fees and service charges, such as account maintenance and overdraft fees.

Banks invest customer deposits in various financial instruments, like government bonds and corporate bonds, to generate additional income. This income is a key part of their revenue stream.

Traditional banks often charge higher fees for foreign exchange and international money transfers, which contributes to their revenue. These fees can add up quickly, especially for frequent travelers or businesses that need to make international transactions.

Here's a breakdown of the main sources of revenue for traditional banks:

In contrast, neobanks have lower operating costs and can pass those savings on to customers in the form of lower fees and higher interest rates. This makes them an attractive option for people who want to save money on banking fees.

Neobanks must continue to innovate and offer unique services to differentiate themselves from traditional banks and other fintech competitors. This is crucial for their long-term success.

As neobanks expand into new geographic regions and target new customer segments, they have the potential to increase their revenue and achieve greater profitability. Expansion into new markets can be a key factor in their growth.

Strategic partnerships with other fintech companies, payment networks, and traditional banks can help neobanks expand their offerings and reach more customers. This can be a game-changer for their business.

To achieve profitability, neobanks need to think critically about their segments, sources of revenue, expenses, partner networks, and user communities. They should look beyond interchange and seek opportunities to cross-sell products.

Neobanks have developed a different approach to generating revenue, focusing on innovative products and services that cater to customer demands. This approach has enabled them to achieve profitability and rapid growth.

Some notable examples of neobanks achieving profitability include Revolut, which recorded £638 million in revenue in its first profitable year, 2021, and Starling Bank, which achieved neobank profitability in 2022 with a £142 million revenue.