Revolut, a UK-based neobank, recently announced that they have applied for a banking charter in the US, a few months after they applied for one in their home country. The news is the latest in a string of neobank forays into the domain of traditional banks.

Neobanks attempt to expand

Neobanks like Revolut have historically relied on partnerships with traditional banks in order to operate as a full-fledged bank. Now, they are attempting to free themselves of the need for those partnerships by securing banking licenses. Varo, Brex, and Square have all applied for banking licenses, with Varo actually securing its last year. 

Banking licenses allow fintechs to expand their product lines, specifically their lending and savings products, without cutting in incumbent banks. The application is just the first step in what is typically a years-long process in which the outcome is uncertain. Despite the barriers to securing a license, neobanks evidently find the potential payoff worth it, and you can expect to see more applications pop up in the near future. 

The digital banking landscape

The Digital Banking Platforms category on G2 saw a 132% increase in traffic from March 2020 to February 2021. The increase in traffic highlights the growing need for traditional banks to produce high-quality user experiences for a customer base that is increasingly digital-first or digital-only. 

Neobanks have eaten up some legacy banks’ market share in recent years by providing the types of user experience a tech company focused almost exclusively on the digital sphere can create. If neobanks continue to apply for and secure banking licenses, legacy institutions will begin to see their stranglehold on the market slip away. 

To thwart newly empowered fintechs armed with shiny new banking licenses, incumbents will have to work on their own products’ digital user experiences. There are a few options for them. 

They can lean into strategic partnerships with tech companies capable of delivering neobank-levels of digital-first convenience. They can leverage the variety of banking-as-a-service platforms (Temenos comes to mind as a prominent example) to deliver their products through third-party tech, or they can embark on a more ambitious journey to digital proficiency by purchasing smaller neobanks to capitalize on their prebuilt digital prowess and transition their traditional customers into consuming digital products and services. 

Meanwhile, neobanks will continue to chip away at incumbents’ market share. It’s shaping up to be an interesting battle, and I expect the success or failure of pending license applications to give more structure to it in the near future.