The neobanking industry was first introduced less than a decade ago. Since then it has experienced tremendous growth, both in terms of features and climbing adoption rates. Largely funded by venture capital and investors, most neobanks focus on growth in the beginning.
However, once a large customer base is accumulated, some of the neobanks struggle to transition into getting tangible profits and not just an accumulation of users. So, how can you focus on profitability after you’ve experienced some growth as a neobank?
The Freemium Business Model Can Get Better
The freemium business model that most neobanks utilize was specially designed to capture a wide audience and quickly gather a user base. On the other hand, it isn’t very profitable and can prove to be a hindrance to further growth – most neobanks earn less than $30 per user annually. The main reason for that is the high costs of maintaining multiple systems with a low average yearly profit per freemium user.
On the other hand, banking-as-a-service solutions provide neobanks with a business model which squeezes in almost twice in profit per user on an annual basis. With $4.20 monthly revenue per user, Optherium’s digital banking business model is more than self-sufficient, and a lot of neobanks can learn from it or implement it for themselves.
Other Approaches
The freemium business model is more than an understandable choice for the beginning of the growth life cycle of every neobank. In the future, some might decide to steer away after they’ve gathered a user base, while some might not. But, surely there are other solutions than changing the business model altogether. For example, neobanks can:
- Start offering business products to SMEs: business banking, budgeting, accounting, etc.
- Sign partnerships in order to give out loans and profit from overdrafts and mortgages.
- Promote premium accounts in their monthly services. Add more features and aim to get more than 10% of their user base subscribed as premiums.
- Charge commissions for more than a few uses of a free feature like trading shares on a marketplace.
How to Make Users Subscribe to Premium?
Typically, showing the user all costs from commissions and charges is not a common practice in banking. However, when trying to upsell, let’s say, a 10$ subscription per month, it can be a very good instrument in the hands of the digital marketeer.
Imagine someone has been on vacation and used the foreign exchange within your mobile app 10 times while also using foreign POS and multiple other services that they wouldn’t normally use. If a message pops up telling them to activate the premium account for two months for free in order to lose all of these charges, they most likely will. This is especially the case if these charges were higher than the initial $10 per month. Of course, that needs to be A/B tested for your specific user base.
Putting a feature behind a paywall is something that can drive people to subscribe to premium as well. Let’s say you have a feature that you have researched and think every user would want it. Now, instead of giving it for free, you can simply give every user a few free months of premium, so they have some trial access to the feature to test it out.
Later, a large portion of these users will continue their subscriptions.
Offer Adequate and Tailored Services
In order to be profitable as a neobank, you must first and foremost know your audience. A great example here is how Revolut offers great FX deals to everyone, which is one of its main focuses. However, Americans rarely travel outside of the country, and this feature is not as profitable there as it has been in Europe.
For that reason, one must first survey and research the audience they’re trying to profit from with certain features before trying to apply features or methods that have worked for an entirely different audience before.
There’s more than one way to determine what brings in customers in a certain geographical region. The first of which is to check what all your competitors in that region are doing and how they’re responding to the customers’ demands.
Balance Acquisition Cost and Revenue Per User
Two of the most important metrics in neobanking are acquisition costs per user and revenue per user on an annual basis. With the help of revenue per user, you can calculate an average lifetime value. According to Optherium’s research, the neobanking users on their platform have an average lifetime value of $3000 and an average revenue per year of $50.40. As a rule of thumb, you want to have an acquisition cost of fewer than three years’ average revenue per user. So, anything below $150 in terms of acquisition would break even in less than three years, which for a Fintech startup is amazing news.
Constant optimization of either of those is always recommended for any business in the Fintech industry.
Final Words
Neobanks have gone through a lot in the past decade. With an amazingly quick start and continuous growth, their free services and innovative features have captured the attention of millions of people across the world. But, is it finally time for neobanks to turn profitable?
No business can simply focus on growth and turn its back on revenue and profit. With the few simple tips mentioned in this article, neobanks can turn their business model around.
Serge Beck is a serial entrepreneur, venture capitalist, IT specialist and blockchain ambassador.
The neobanking industry was first introduced less than a decade ago. Since then it has experienced tremendous growth, both in terms of features and climbing adoption rates. Largely funded by venture capital and investors, most neobanks focus on growth in the beginning.
However, once a large customer base is accumulated, some of the neobanks struggle to transition into getting tangible profits and not just an accumulation of users. So, how can you focus on profitability after you’ve experienced some growth as a neobank?
The Freemium Business Model Can Get Better
The freemium business model that most neobanks utilize was specially designed to capture a wide audience and quickly gather a user base. On the other hand, it isn’t very profitable and can prove to be a hindrance to further growth – most neobanks earn less than $30 per user annually. The main reason for that is the high costs of maintaining multiple systems with a low average yearly profit per freemium user.
On the other hand, banking-as-a-service solutions provide neobanks with a business model which squeezes in almost twice in profit per user on an annual basis. With $4.20 monthly revenue per user, Optherium’s digital banking business model is more than self-sufficient, and a lot of neobanks can learn from it or implement it for themselves.
Other Approaches
The freemium business model is more than an understandable choice for the beginning of the growth life cycle of every neobank. In the future, some might decide to steer away after they’ve gathered a user base, while some might not. But, surely there are other solutions than changing the business model altogether. For example, neobanks can:
- Start offering business products to SMEs: business banking, budgeting, accounting, etc.
- Sign partnerships in order to give out loans and profit from overdrafts and mortgages.
- Promote premium accounts in their monthly services. Add more features and aim to get more than 10% of their user base subscribed as premiums.
- Charge commissions for more than a few uses of a free feature like trading shares on a marketplace.
How to Make Users Subscribe to Premium?
Typically, showing the user all costs from commissions and charges is not a common practice in banking. However, when trying to upsell, let’s say, a 10$ subscription per month, it can be a very good instrument in the hands of the digital marketeer.
Imagine someone has been on vacation and used the foreign exchange within your mobile app 10 times while also using foreign POS and multiple other services that they wouldn’t normally use. If a message pops up telling them to activate the premium account for two months for free in order to lose all of these charges, they most likely will. This is especially the case if these charges were higher than the initial $10 per month. Of course, that needs to be A/B tested for your specific user base.
Putting a feature behind a paywall is something that can drive people to subscribe to premium as well. Let’s say you have a feature that you have researched and think every user would want it. Now, instead of giving it for free, you can simply give every user a few free months of premium, so they have some trial access to the feature to test it out.
Later, a large portion of these users will continue their subscriptions.
Offer Adequate and Tailored Services
In order to be profitable as a neobank, you must first and foremost know your audience. A great example here is how Revolut offers great FX deals to everyone, which is one of its main focuses. However, Americans rarely travel outside of the country, and this feature is not as profitable there as it has been in Europe.
For that reason, one must first survey and research the audience they’re trying to profit from with certain features before trying to apply features or methods that have worked for an entirely different audience before.
There’s more than one way to determine what brings in customers in a certain geographical region. The first of which is to check what all your competitors in that region are doing and how they’re responding to the customers’ demands.
Balance Acquisition Cost and Revenue Per User
Two of the most important metrics in neobanking are acquisition costs per user and revenue per user on an annual basis. With the help of revenue per user, you can calculate an average lifetime value. According to Optherium’s research, the neobanking users on their platform have an average lifetime value of $3000 and an average revenue per year of $50.40. As a rule of thumb, you want to have an acquisition cost of fewer than three years’ average revenue per user. So, anything below $150 in terms of acquisition would break even in less than three years, which for a Fintech startup is amazing news.
Constant optimization of either of those is always recommended for any business in the Fintech industry.
Final Words
Neobanks have gone through a lot in the past decade. With an amazingly quick start and continuous growth, their free services and innovative features have captured the attention of millions of people across the world. But, is it finally time for neobanks to turn profitable?
No business can simply focus on growth and turn its back on revenue and profit. With the few simple tips mentioned in this article, neobanks can turn their business model around.
Serge Beck is a serial entrepreneur, venture capitalist, IT specialist and blockchain ambassador.