Neobanks — digital-only banks that aren’t saddled by traditional banking technology and costly networks of physical branches — have been working to redefine retail banking in major markets around the world. Driven by innovation-friendly regulatory reforms, these companies have especially gained traction in Europe over the last three years.
While the US is home to some of the earliest neobanks, including Simple and Moven, its neobank ecosystem has lagged behind its European counterpart. This has largely been the result of high regulatory barriers to entry, including an onerous regulatory regime that's made it hard to obtain a banking license, and the entrenched position incumbents hold in the financial lives of US consumers.
However, recent developments suggest these startups are finally poised for the spotlight in the US. Most notably, in a landmark decision, mobile-only bank Varo Money received preliminary banking license approval in 2018, indicating that regulation may be slowly loosening to accommodate these digital startups. Meanwhile, foreign entrants have announced plans to pitch their tents in the country, and incumbent lenders have started to roll out their own stand-alone digital outfits.
Three distinct influences are responsible for creating the fertile ground for this evolution: regulation, shifting consumer attitudes, and the activity of incumbent banks. In addition to Varo Money's charter approval and its implications, US consumers are becoming more tech-savvy, while their gripes with traditional financial institutions are growing. This is setting the stage for digital-only players to more easily scoop up customers as the regulatory environment becomes more favorable.
US neobanks have two options for launching their services: pursuing their own license or partnering with an incumbent bank. Up to this point, most have chosen the latter option, with the notable exception of Varo. Some of these players include Chime and Aspiration. Crucially, the agility and lean operating models of these startups allow them to roll out services fast, enabling them to be more responsive to consumer demands and shifting attitudes.
Foreign neobanks now headed to the US include Germany’s N26 and UK-based Revolut. Both are slated to roll out services in the first quarter of 2019. Additionally, UK-based Monzo and Israel-based Pepper are reportedly prepping for launches in the country. These startups bring with them extensive experience and demonstrated success in their home [...]