New digital banking solutions for neobanks and digital banks

The business of banking is changing.

The rise of technology has been a game-changer for all industries. For financial services, the disruption has been particularly notable and has forced the creation of innovative environments to satisfy increasingly demanding customers.

According to a 2021 Gartner report, three key digital banking technology trends have driven this evolution:

People centricity: People are still at the center of all business and need digital banking innovations to function in today’s environment.

Location independence: We see a continuous shift where employees, customers, suppliers and organizational ecosystems physically exist. Location independence requires a technology recalibration to support this new version of business.

Resilient delivery: Whether a pandemic, geopolitical challenge or recession, volatility exists worldwide.

All parts of the banking value chain — products and services — now leverage disruptive digital banking technologies and are increasingly placed in the hands of end customers. And traditional banking behavior is changing regarding user convenience, transparency, pricing and customer service. Under these models, retail and small/medium enterprises (SMEs) primarily deliver banking services online or via other electronic channels rather than physical branches.

The future of digital banking is likely to bring significant growth with the creation of digital banks backed by traditional financial institutions and neobanks (digital financial institutions) operating with or without banking licenses.

We expect the global neo- and challenger-bank-platforms market to grow from USD 47 billion in 2021 to USD 2.05 trillion by 2030, at an annual average rate (CAGR) of 53.4%.

Neobanks versus digital banks

Even though both are based on a mobile banking approach with an emphasis on digital banking innovation, neobanks and digital banks are not the same.

Digital banks are often an extension of physical banks, and the services offered are equally comprehensive. But unlike conventional banking, anyone can use digital banking services anytime, anywhere, with a stable internet connection. On the other hand, neobanks are financial service providers with no physical branches, offering services solely through digital banking platform solutions and apps. Most neobanks operate without a bank license and count on bank partners to provide licensed services.

Neobanks without a banking license (e.g., Chime financial technology company) usually work with a partner bank to provide licensed services. The tools may include transactional analysis, budget management and automated notifications. However, some of the most popular neobanks (e.g., N26, Monzo, Revolut) function with their banking license and can provide fully fledged digital banking services, including checking accounts, prepaid services, debit and credit cards, currency exchanges, cryptocurrency, money transfer, retail, savings accounts and so on.

Since neobanks emerged a decade ago, they have become increasingly popular and have enjoyed a surge in customer acquisition. But despite having experienced successful growth, most neobanks are still in a precarious economic position. This situation stems directly from their difficulty with converting gains into substantial profits. Their key challenges are:

• High customer acquisition cost (CAC): Due to the tactics that neobanks use to attract new customers, such as free services and lower fees
• Low customer lifetime value (LTV): By definition, neobanks that generate revenue from lower debit-card interchanges have an LTV
• Big tech takeover: Companies like Google and Apple have recently entered the field, offering the same digital financial services with similar benefits

For neobanks to move from growth to profitability, they need to focus on their value propositions, providing customers with best-in-class financial products and services. Neobanks must avoid becoming slaves to technology, i.e., ensure their central banking systems remain agile enough to embed digital banking innovation and deploy new products quickly to stay competitive.

Banking as-a-Service for neobanks

Banking as-a-Service (BaaS or SaaS cloud banking platform) is a system that allows non-bank businesses to embed financial services into their products. For example, companies that are not licensed banks may offer loans or payment services to customers by integrating the best digital banking solutions into their systems. To make this possible, banks create their own platforms or work with third-party providers offering BaaS solutions.

At Luxoft, we worked with our clients and partners to build an ecosystem of solutions that can cover the end-to-end business processes of neobanks and digital banks.

How Trading as-a-Service unlocks opportunities for digital banking innovation

Capital market services are often central to the digital bank’s broader product offering and are a great way to monetize lending activity. These services are crucial for maintaining the bank’s relevance to more sophisticated corporations and investors. However, lacking client bases makes it difficult to have a credible route to achieve scale and create profitability challenges.

On the other hand, because they’re smaller, digital banks cannot easily match larger traditional banks’ level of investment in innovative digital banking solutions and channels. Competitively, digital banks may need more expertise and market presence to price certain products, such as emerging market currency pairs and rate options. As a result, they often suffer from lower profitability relative to larger banks.

Trading as-a-Service is an end-to-end solution that combines execution with front-end and back-end services. Broadening product capabilities, improving front-end digital capabilities and reducing costs across sales, trading, market data, operations, risk and technology can increase the bottom line.

Trading Systems as-a-Service is rapidly changing the way banks manage their applications. Here are just some of the reasons why:

• Reduced complexity: By transferring ownership of their systems to a reliable third party and consuming it as a service, digital banks can rid themselves of the maintenance and management issues diverting their attention. This means they can focus on building and expanding their business while reducing capital expenditure to a minimum
• Faster time to market: The initial investment is usually quite expensive for a bank to establish a DevOps framework or an automation framework around complex front-to-risk-to-back-office platforms. But today, it can be delivered as a native feature of an as-a-Service solution
• Improved security: All the major cloud-based digital banking solutions have built strong best practices around data access and security layers. By leveraging these built-in features, the as-a-Service solutions will provide banks with high-level security standards at no additional cost
• Enabling data access and insight: A bank’s data is typically spread across different systems. So, it’s not easy to generate end-to-end reports or to have a holistic view of the business. By consolidating platforms with an as-a-Service solution, banks concentrate their data into a unified cloud architecture, allowing better and more secure access
• Cost reduction and transparency: The many benefits help banks lower the cost of running systems and operations. But more importantly, they provide cost transparency, so banks know what they're paying for and can scale up or down to meet business needs

Luxoft provides a fully hosted and managed digital banking platform solution built on four pillars: Treasury as-a-Service, strategic functional roadmap, retention, API and ecosystem.

Luxoft provides end-to-end infrastructure management, as well as run-and-change services. We remain the bank’s primary contact, giving access to an ecosystem of partner solutions and bespoke engineering capabilities.

Get in touch

If you’d like to learn more about how the business of digital banking technology is changing and how Luxoft can help you make the most of the ensuing opportunities, visit luxoft.com/industries/capital-markets or contact one of our expert consultants at financialservices@luxoft.com