This is an excerpt from a story delivered exclusively to Business Insider Intelligence Fintech Briefing subscribers. To receive the full story plus other insights each morning, click here.
The first half of 2019 is proving to be a lucrative one for neobanks, which raised $2.5 billion this year through the end of July across 55 deals, reports Business Insider citing CB Insights data.
For context, the previous record yearly investment secured by these upstarts was in 2018, when they raised $2.3 billion. Notably, the data excludes Chinese companies like Alibaba’s Alipay and Tencent’s banking operations.
Here’s what it means: Latin American and European neobanks are leading the field when it comes to funding — and they’re poised to succeed further as they gain a foothold globally, sparking further investment in the space.
- In June and July of this year alone, neobanks secured close to $1 billion in funding. For context, the $997 million raised by these startups in the first two months of Q3 is higher than in the previous six full quarters, going back to Q1 2018. And year-over-year, this figure is already more than double the $442 million raised across the whole of Q3 2018. This record level of funding is evidenced by the fact that July’s $400 million Series F round for Brazil’s Nubank alone represents more than 90% of the total raised in Q3 of 2018.
- In addition to Nubank, European — and specifically UK — neobanks have been largely responsible for this year’s record raise. Among UK players, OakNorth, the small- and medium-sized business- (SMB) focused lender, has closed a mega $440 billion round, peer Monzo has nabbed a £113 million ($147 million) Series F, and Starling has secured a sizable $97 million so far this year. Additionally, N26, the German neobank that recently expanded to the US, raised $470 million in an extended Series D round this year. The $1.2 billion these four European players raised accounts for close to half (48%) of the total raised by neobanks in the seven months ending in July.
- These impressive funding figures are likely partially due to the traction these players have secured among consumers. For instance, Nubank’s success in Brazil has been such that it’s now the fifth-biggest credit card issuer in the country, per Bloomberg, and the sixth-biggest financial institution (FI) by customers; in total, the neobank has now attracted 12 million customers across its range of products. And this is a similar story across the sector more broadly: Of the 25 fintechs that have amassed over a million customers globally, excluding China and India, 28%, or seven, are neobanks.
- And we’re seeing neobanks gain traction in new markets as well.Nubank is expanding to Mexico and Argentina, and, given the similarity in market conditions with Brazil, it’s likely poised for success in these markets too. Neobanks in markets like Australia also seem set to flourish in the coming years. Just last week, Judoraised AU$400 million ($272 million) to bring its total equity raised to AU$540 million ($365 million) — marking the largest individual private funding for an Australian startup. This suggests that, while early neobanks are securing the lion’s share of funding, there’s an increasingly wider geographical distribution of large funding rounds for these players, which in turn is likely to drive more upstarts to enter the space in their respective markets.
The bigger picture: Armed with huge stockpiles of cash, we anticipate neobanks will increasingly broaden their services — and that could see them begin to threaten their incumbent peers in earnest.
Despite their success in acquiring customers, neobanks still have work to do to convince their users to completely jettison traditional lenders in favor of their services. The UK is a case in point: Despite millions of customers having opened an account with these startups, the majority don’t use neobanks as primary account providers.
To this end, only 12% of those who’ve opened an account with a digital-only bank in the country say they’ve closed their conventional bank accounts and moved wholly to online banks, per Finder.com data. This reticence from customers likely stems from a lack of trust in these providers.
However, as neobanks get bigger and their offerings become wider, there’s scope for them to position themselves as genuine alternatives.Going back to the UK, the likes of Monzo are authorized banks, which means customers have the same level of protection for their deposits as they would with established lenders.
As more customers become aware of these players, and these firms expand their offerings to include services like credit and lending products in turn, we could see more customers view them in the same light as incumbents when it comes to trusting them with their money. Indeed, incumbents are increasingly attuned to this threat: 30% of banks view neobanks as their biggest disruptive threat, per Fraedom data cited by Business Insider.
Interested in getting the full story? Here are three ways to get access:
- Sign up for the Fintech Briefing to get it delivered to your inbox 6x a week. >> Get Started
- Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Fintech Briefing, plus more than 250 other expertly researched reports. As an added bonus, you’ll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now
- Current subscribers can read the full briefing here.
- NatWest is piloting a voice banking feature with Google Assistant
- Apple Card is reportedly approving customers with low credit scores to cast as wide a net as possible
- LendInvest has secured a $242-million funding line from National Australia Bank