By Roisin Levine, Head of Partnerships – Wise Platform

Over the last decade, neobanks have reshaped the global financial landscape, disrupting the market and creating a fresh banking experience for current and future generations of tech-savvy customers. Yet, thanks to their relatively new position as major industry players, challenger banks have been among the hardest hit by the recent economic downturn.

A recent study by consulting firm Simon Kucher revealed that less than 5% of neobanks are currently breaking even and fintech fundraising in the most recent quarter dropped 21%. In many ways, this is no surprise – when risk becomes less exciting and more dangerous, markets favour what is known, established, and stable. A host of companies that have been driven primarily by fast-paced innovation, try-and-test models and the consistent fervour of startups are a less convincing sell for suddenly cautious investors.

This appears to signal danger for challenger banks struggling to achieve profitability. Marketing budgets are being reduced, many are retreating into a conservation mindset and a number are being acquired by incumbent banks as their valuations drop. But the economic downturn might instead offer a window of opportunity for challenger banks to emerge from the crisis with new services and an expanded offer.

The question of how neobanks can continue to do what they do best – innovate, grow, and reshape banking for their customers – may find its answer in a very simple solution: partnerships. Partnerships with fintechs and tier 1 banks across the sector spur innovation, drive customer growth and retention, and open up new revenue streams quickly, efficiently, and seamlessly.

A familiar feature in the banking industry today, partnerships allow companies to focus on their core offer while expanding what they can provide to customers, which in turn grows and retains their customer base. These can still be thought of as a ‘nice to have’ – a great way to innovate without ensuing years of development costs and growing pains; but integrations, embedded finance and partnerships are becoming increasingly necessary for neobanks to survive.

This is in part due to the demand from customers for a one-stop-shop – a single place where they can keep tabs on their finances without getting bogged down by extensive processes or the hassle of frequenting a local branch. Customer growth and retention relies on providing multiple services seamlessly, which is where partnerships come in.

Creating the infrastructure for a new service internally is of course an option, but given constraints on spending and capacity within neobanks, it might not be a feasible one. Integrations, on the other hand, are simple, relatively cheap, and far quicker to implement.

To differentiate from other challenger and tier 1 banks, neobanks might look at a whole host of potential solutions that help them break into new market segments and play the long game of customer acquisition. For example, In a 2021 study, Wise found that 34% of small business owners are unhappy with the cost of sending money abroad using their domestic bank. That’s a huge number of SMBs – and customers – ready to seek out alternative providers who provide cheaper, faster and more convenient international payment options. A neobank could answer this need via smart partnerships. The rise of digital nomads and remote work options is creating a culture of living, working, and travelling abroad, meaning solutions that allow individuals and businesses to pay and spend abroad will only become more important over time.

But it doesn’t have to be an entirely new service offering either – integrations can also revolutionise existing processes to make them more seamless, less time-consuming, and therefore more enjoyable for customers. This might entail a partnership that looks to speed up two factor authentication via a company such as Twilio. Berlin-based neobank N26 recently launched a partnership with Stripe to power their payments and make onboarding easier. All of these are examples of simple integrations that drive user growth by creating a frictionless onboarding experience.

It’s all very well to suggest that these integrations will create a long-term benefit for neobanks, but what about the short term? By spurring innovation and driving customer retention, partnerships also increase profitability. A smooth onboarding experience leads to less potential customers falling at the final hurdle only to look elsewhere for a simpler option, and might encourage them to use the service more if they had a positive initial experience. Additional services such as convenient and cheap FX payments open up a whole new revenue stream for neobanks that, to date, may have focused primarily on their domestic markets.

There’s no sugarcoating that neobanks, fintechs, and, let’s face it, all financial services organisations, are operating in a harsh environment. It’s all about finding what puts your company ahead of the curve and allows opportunities for growth in spite of that pressure that will be the difference between sink or swim.

We have only scratched the surface of what neobanks are able to achieve. The future will arrive regardless of a downturn or recession, and when it does, there will be an even greater demand from consumers to have intuitive, innovative and most importantly, simple, ways to manage their money in all scenarios. In fact, even as the economy flounders, having full control over our finances and keeping things simple and streamlined will be extremely desirable.

So, when the economy starts to recover, the challenger banks most likely to thrive will be those that can provide the most value and flexibility to customers to control their money all in one place. Partnerships with all sorts of fintech providers allow neobanks to break through market competition, drive profitability and deliver enhanced value for customers. Embedding new offers for your customers over an API integration is so simple, and yet it opens up a world of possibilities.

Despite a challenging landscape, the value and potential of neobanks is unchanged. Now more than ever we need access to the exponential innovation that is offered by these companies, and through partnerships, we can continue to drive the sector forward and create financial services fit for the future.

About the Author:

Roisin Levine is Head of UK and European Partnerships at Wise Platform. Previously Head of Banks at Flux, she is also a 3 x Women in Fintech Rising Star. Roisin also hosts Wise Platform’s upcoming video miniseries: “How We’re Fixing”, where she talks to leaders from across the sector about how they’re solving pain points for customers and changing the future of finance. You can find her on Twitter @roisinlevine.