The neo normal: banking for freelancers and startups

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Neobanks that cater to freelancers, startups and micro-businesses are a key banking trend in 2021. Hassan Waqar, Founder and CEO of UK-based MoneeMint, examines the advantages they bring and the potential they hold.

The neobanking sector is known for innovation. But that innovation comes hand-in-hand with diversification. Neobanking is about offering different, as well as new services and experiences.

In 2021, this combination has really taken off in the SME, micro-business, startup, entrepreneur and freelancer market. Many of the advantages that neobanking offers suit this audience perfectly, addressing common pain points experienced with traditional banks and offering more personalised solutions.

Lili, a neobank built specifically to address the needs of freelancers, gig workers and sole traders, secured $55m in Series B funding in May this year. That followed a doubling of the bank’s US customer base in six months, and a 1,500 per cent surge in usage over 12 months.

Similarly, Coconut, a UK-based neobank targeting micro-businesses and sole traders, raised £2.4m through crowdfunding in 2020, beating its target by 350 per cent. And Revolut completed an $800m funding round in July this year, bringing its value to $33bn and making it the most valuable UK tech startup ever.

Why is neobanking thriving?

Neobanking is digital-first, and often digital-only. Its players are fintech-based, and offer apps, software and other technology solutions on mobile and online platforms that streamline banking.

They are also often called ‘challenger banks’ because their defining characteristic is to disrupt the processes and interactions involved in traditional banking. In the main, the products they offer are broadly similar to those of conventional banks. But the ways that customers access and use those products is markedly different, because neobanks leverage the benefits of technology – speed, ease, flexibility, hyper-personalisation – in ways that traditional banking cannot.

Most obviously, neobanks eliminate the need for branches and paperwork that traditional banks use. But the big players now have apps and digital platforms too, so the real difference is in the way they are used. There are two key factors here.

First, traditional banks still have the same processes and procedures behind the scenes. So, even if a customer is using a digital platform with a traditional bank, they still have to deal with the same process.

Second, traditional banks are frequently saddled with extensive legacy IT systems. These take time and money to change, or to converge with newer systems. The big banks simply lack the flexibility to move quickly. They are the proverbial ocean liner that takes an age to change course and, of course, technology is all about exploiting the dynamic pace of change.

These factors then manifest themselves in areas such as account opening and account servicing. At MoneeMint, for example, we can onboard a new customer in under a minute. There is no paperwork, no branch visit – everything is done through the app.

This kind of solution can also apply to onboarding a micro-business or freelance customer. Typically, a traditional bank would want to see your annual income statements, know about your shareholders, understand whether your customers are international or not – all steps that take time, require paperwork, and that can often disqualify you due to the rigidity of the processes involved, especially as these are often designed for ‘bigger’ business customers.

Neobanks can use technology to accelerate and alleviate all this. They apply the same diligence and are regulated by the same independent bodies and authorities, but they move faster and they understand the subtle differences between a startup, freelancer and gig worker. 

Lili Bank defines its customers as people who are “in between a consumer and a business”, and who have specific needs that reflect the changing nature of the economy and work itself.

And UK neobank Tide uses ID verification apps, address verification software and similar to make onboarding a micro-business simple and straightforward. They market their offer as enabling businesses to start banking in free, easy ways, and have already attracted more than 300,000 customers in the UK.

The value of targeting

This targeting of specific customer groups is helping to power the neobanking revolution. It adds another level of appeal to what neobanks offer, because they can tailor and market themselves to niche audiences in ways that big banks never could.

There are neobanks for children, international students, war veterans – all kinds of areas, including those demographics that are ‘underbanked’ by the traditional banks. At MoneeMint, our specialism is servicing the Islamic banking market, and to potentially also grow into the wider ethical banking market in time. For this market, we provide both regular banking needs and also rewards, wealth management and more.

Some challenger banks are appealing to all customers, too. For example, in the US, Chime had an estimated 12 million customers as of February 2021. Similarly, in the UK, banks such as Starling and Monzo are proving incredibly popular, especially among younger demographics. Starling has now opened more than 2 million accounts and won the Best British Bank Award four years in a row since 2018.

Demand for SME and freelance banking

Among these targeted groups, the micro-business market has real potential, and it is clear why it has become such a key trend.

In the US, it is estimated that 40 per cent of workers are now freelance, and that figure is projected to rise to 50 per cent by 2027. This growth has likely been accelerated by the pandemic, as people have sought more flexible roles.

Equally, in Europe, a staggering 99.8 per cent of EU companies are SMEs, according to the European Central Bank. Many of these will be the kind of startup, sole trader and entrepreneur that neobanks appeal to.

That appeal extends beyond the features listed above, related to easier account opening and servicing. Neobanks are now also starting to develop specific features and products designed to help small traders and freelances run their business.

Neobanks are also able to link their offering with the wider universe that business users move in. Revolut enables its users to connect and integrate their Revolut business account to other tools and apps, such as Xero for accounting, Slack for communication and Zapier for automation.

For example, the UK neobank Coconut provides specific accounting features, including VAT and invoicing, that aim to cater to self-employed and freelance workers. Lili provides an ‘assistant’ that analyses a customer’s incomings, expenses and budget in order to predict the tax that may be due in the future. It is also looking to expand into offering invoicing, payment management and credit for its customers.

Neobanks are also able to link their offering with the wider universe that business users move in. Revolut enables its users to connect and integrate their Revolut business account to other tools and apps, such as Xero for accounting, Slack for communication and Zapier for automation.

Where is neobanking going?

Looking ahead, four opportunities stand out. The first is smart, proactive targeting, driven by another edge that neobanks possess: the ability to use data, not just collect it. For example, at MoneeMint we use machine learning to analyse accounts. If a customer starts paying more for, say, insurance or utilities, we can then offer them the chance to shop around for better deals.

This is also a two-way street, as it enables us to design future products and services around what we know our customers are doing. Big banks are unable to target customers with anything like this degree of precision and personalisation.

Second, neobanks will continue to innovate products, including white labelling their technology solutions. An example of this is creating payment cards for companies, so they can pay their employees’ salaries onto cards rather than into bank accounts. In some markets and countries, such as India, this has real potential.

The third opportunity is neobanks going global. Wise (previously TransferWise) is leading the way in operating in multiple territories, and others are following suit. In many ways, it is easier for a neobank to open anywhere, because all its systems and technologies live on the cloud. The only requirements are regulatory approval and licensing.

In addition, neobanks can then easily tailor their offering to the needs and preferences of a local market, because it is about adapting technology, not changing processes.

Finally, a number of neobanks are looking to go public. Wise did so in July this year, with a direct listing on the London Stock Exchange that valued the company at $11bn. Starling Bank is targeting 2022–23 for an IPO. This trend could certainly grow across the sector

What does this mean for traditional banks?

Traditional banks are undoubtedly learning from challenger banks. But, ultimately, they will always be held back by existing processes, legacy systems and the cost and time involved in adapting.

As a result, we will likely see several mergers and acquisitions. Rather than trying to compete directly or catch up, traditional banks are more likely to acquire a neobank outright, indicating further disruption from a national, regional and even global perspective in the months and years to come.