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Data for today’s episode is provided by Mercator Advisory Group’s Report: A Maturing U.S. Neo-Bank Market: Growing Pains and Opportunities
Five Key Segments of Digital Banking:
Neo-banks operate within a diverse ecosystem of digital banking solutions, which can be broken into five key categories:
- Full service online banks. These are financial institutions that specialize in online financial services and offer a full range of deposit and loan products.
- Premium deposit harvesters. Lenders gathering premium deposits online focus primarily on collecting deposits and making loans, while placing little emphasis on transaction accounts.
- Brokerage and insurance-owned online banks. The vast majority of deposits with these institutions are in non-transaction accounts.
- Online divisions of diversified banks. Online divisions of diversified banks employ a differentiated brand to focus on digital innovation and user experience.
- Fintech and bank partners. Within the realm of digital banking institutions, fintechs or neo-banks can be understood as technology firms that provide innovative banking solutions.
About Report
Since their inception, neo-banks have attracted large customer bases and significant venture capital backing. Their approach to the business of banking is markedly different than traditional financial institutions, and some are rightfully wary of the threat they represent. Still, neo-banks themselves face numerous challenges—regulatory, financial, and otherwise. Mercator Advisory Group’s latest research report, A Maturing U.S. Neo-Bank Market: Growing Pains and Opportunities, discusses the neo-bank market in the U.S. and predicts what the future may hold for these companies. “The future is uncertain for neo-banks. Powerful new entrants are seeking a share of the neo-bank market. Venmo—owned by PayPal—is increasingly pursuing banking functions, and Walmart has expressed its intent to expand into the market as well. More important, neo-banks will need to find their own pathways to profitability. With their emphasis on limited fees and focus on bank accounts and debit products, neo-banks, for the most part, are not generating large profits,” comments Laura Handly, market research analyst at Mercator Advisory Group and author of the report.