Neobanks Targeting Niche Customer Segments: A Deep Dive

Neobanks are viewed as a direct challenge to the status quo of the established traditional banks, with its lower cost structure and hyper-personal customer experience. Unlike their traditional counterparts, neobanks aren’t burdened by ancient legacy systems, complicated organizational structures, and heavy regulatory requirements. As wonderful as it sounds with all the advantages and features compared to traditional banking, neobanks face a fair share of difficulties in the market acceptance of its products. Instead of going head-on with traditional banks, most neobanks enter the market by focusing and targeting niche customer segments, specifically millennials who are likely to be keen on the gig economy and tech-savvy. The flexible and inclusive nature of neobanks also enables them to capture the unbanked population, SMEs, and thin-file customers who are often overlooked by the current traditional banking business.

The Gig Economy

The ‘gig economy’ refers to the working culture of freelancers or contractors that have more control and flexibility over their time. With the volume of gig economy growing at an unbelievable rate and is projected to reach $455 billion by the end of 2023, it is a market segment targeted by neobanks that has huge opportunities and upsides. Traditional banking has failed to prepare for the massive growth of the gig economy and has been disappointing for gig workers in terms of the accessibility to financial products and services.

Neobanks, in this case, provide the necessary financial solutions to support the flexible nature of this customer segment. Ease of account opening, instant payment solutions, and alternative methods in assessing creditworthiness for loan services are among other features and advantages that really hooked gig workers up and provided them with satisfactory financial solutions.

Take, for example, a neobank startup located in the United States called Oxygen, which offers unique banking services that encompass flat-fee and zero-interest-rate credit facilities to freelancers. It uses AI-based analysis to determine individual freelancers’ income flow, tracks bills, projects income, and provides access to short-term loans. The bank also provides loan underwriting services to freelancers, abandoning the hassle of visiting a bank and completing tons of paperwork.

Various studies and reports clearly indicate that the gig economy isn’t going to slow down anytime soon. At a macro level, it has amassed immense involvements where a paradigm shift is required to change public perception of gig workers as an employee. Undeniably, gig workers have specific banking needs quicker access to their earnings, alternative loan qualification assessment, and more – neobanks can undoubtedly solve these needs. As the neobanking industry is still developing, it is interesting to see numerous players come up with unique and distinctive services that add value to gig workers.

Unbanked population

‘Unbanked’ is a term that refers to people who lack access to the services of banks or financial institutions. This group of people, who are likely from underdeveloped countries or underprivileged does not have a bank account and lacks access to credit facilities and financial solutions. The financial inclusivity and flexibility nature of neobank can definitely come into play when solving the prevalent unbanked problems. The desire to achieve financial inclusion is shared by every country in the world as unbanked are hindered from participating in the banking services due to its high-cost structure offered by traditional banks that made it financially unviable to offer services to the unbanked population.

In this case, neobanks can target this customer segment with its competitive advantage of being cost-effective and more efficient than traditional bank slaps hefty bank charges and fees on the underbanked, further burdening their financial situation. Neobanks, with its low-margin business, translate into cheaper banking costs for the unbanked, providing incentives and benefits for the unbanked to bank with them. The digital nature of neobanks enables extended reach to people around the world compared to traditional banks, making it easier for them to target this unbanked segment. It’s fascinating to see ways of neobanks targeting the unbanked population, to satisfy financial needs, and create social value in a global context.

New-to-Credit/Thin-File Customers and Students

Thin-file or new-to-credit customers are largely ignored by traditional banks. On the other hand, these thin-files are considered as 'opportunity files' by neobanks. For example, the UK-based Monese focuses on this thin-file customer base and offers to open an account in less than two minutes. For new to credit customers such as students or migrant customer base, this is a great selling point as it removes the hectic process of going through the paperwork of traditional banks.

Small & Medium-Sized Enterprises (SMEs)

Neobanks/digital banks have the potential to create a deep impact in the consumer banking space with their great UI/UX and agile approach to banking. However, these neobanks are a perfect fit for solving financing problems for SMEs. Neobanks have the agility to offer a wide range of services from ground-up capabilities around accounting/tax/payments, etc., or API-driven marketplaces. Easier access to these services enables SMEs to integrate plug-and-play solutions of their choice that were earlier available to larger institutions with a deeper pocket. If we look closely, SME-focused neobanks have started to make an impact, and upcoming neobanks in Asia-Pacific are inclined towards the SME segment. Europe leads the way in the transformation of SME banking through challenger banks, with more than 21 providers enabling SMEs in their banking experience. We can expect more neobanks beginning to provide tailored banking services to this segment in the years to come.

These underserved segments present significant market opportunities for neobanks to plant their roots in the market and grow their customer base further. Growing customer base and making profits are two dimensions that are crucial but not-so-easy to balance. However, we don't see profitability as a concern in the growing and well-funded neobanking segment right now. This means we can witness some interesting neobanking growth stories with a focus on niche customer segments.