Neobanks: their role during the war

He who spends in a bank all day has no time to use banking services.

These words of John Rockefeller, famous American businessman and philanthropist, best describe the importance of neobanks in modern-day life. Neobanks—being branchless institutions—offer fast and convenient banking services that are provided online only. Neo-banks have challenged the traditional banking system with all its branches, piles of documents, cash desks, queues, and many other hassles, which turn the receipt of banking services into quite a tiresome experience for customers. This is why neobanks are often called challenger banks.

Great Britain was first to see neobanks entering the banking arena. The spread of the Internet in the 1990–2000s and the commitment to make people's lives easier contributed to the development of online banking solutions.

Global demand for neobanks surged on the back of COVID-19 pandemic, which brought the need to receive services remotely.

Numerous studies have been carried out to compare neobanks with traditional banks. However, such comparison was relevant for prewar times, when the major focus was on digitization and innovation as opportunities to save time on banking matters and free up time for other aspects of life.

It is time to rethink this focus. Digitization and innovation are still a priority; however, the circumstances have changed – the wartime put other neobanks’ advantages into the spotlight. Now we seek that a bank can offer such options as «money jars» for the needs of the Armed Forces of Ukraine, fast and convenient donations, uninterrupted operation amid air alarms, transfers from shelters, quick investment products, etc.

Our banking system has splendidly demonstrated its capacity to resist unprecedented challenges in these hard times. Though traditional Internet banking enables quick accumulation and transfer of funds, neobanks may still put much to the table, inasmuch as they are, in the first place, fintech companies with a developed IT infrastructure and, therefore, able to quickly cater to the evolving customer needs, launch new products, and improve service standards. By offering all these, neobanks can spur traditional banks to improve their customer experience.

Why is the development of neobanks so important?

We all are longing for the victory, recovery and development of our country, as well as for the influx of new investments.

Currently, there are up to 10 neobanks operating in Ukraine, while they count several hundreds across the world. With economic recovery in store for our country, new banking market players may be the driving force of important changes.

As an important part of fintech, the retail segment should also pick up momentum. Postal operators, retail chains, and other companies in this segment can contribute to the development of neobanking and at the same time improve their consumer experiences using new fintech solutions.

Modern financial services are among the goals set by the NBU in its new institutional strategy – «Financial Fortress of Ukraine».

This goal is planned to be achieve through the implementation of a series of initiatives focused on technology, digitalization, and cyber security. The strategy notes that the war has boosted the demand for and the development of technologies for the provision of online financial services. An essential prerequisite for successful implementation of such technologies is broadband Internet and wide coverage. From our own experience and the experience of the Ukrainians who moved to other countries at the beginning of the invasion, we can safely say that the Internet service delivery is up to scratch. However, there are a number of issues with the Internet coverage and some other areas for improvement.

What should be done to develop neobanking in Ukraine

1. Regulatory simplification

In Ukraine, all neobanks work in tandem with traditional banks that operate under banking licenses. Such cooperation occurs in other countries as well. This shows that a new neobank considering to enter into the Ukrainian market should find a reliable partner bank., such cooperation may come as a restraining factor for fintech startups because the implementation of fast IT solutions may become an extremely difficult challenge.

In some countries, it is common practice when neobanks obtain a full banking license, which allows them to independently provide a full range of banking services.

In order to develop neobanking in Ukraine, the regulator should consider granting neobanks with special banking licenses, with some restrictions though, at the start of their operation.

Some regulatory steps towards developing fintech innovations have already been taken. Thus, in March 2023, the NBU launched a special platform, so-called «regulatory sandbox». Not only this mechanism enables the regulator’s interaction with innovative companies but also allows the introduction of a special operation regime for financial companies and payment companies as well as the testing of new services in an isolated environment without the risk of violating the law.

At the next step, the regulation should be simplified for fintech companies, which will be able to successfully test their solutions on the platform.

2. Increasing the financial literacy of the population

Needless to say that the promotion of financial literacy of the population is now incomparable with the importance to the country of providing the army with new weapons for victory. However, the financial literacy of the population is also a powerful factor underlying the adoption of new financial technologies.

The abovementioned NBU’s strategy defines financial literacy of the population and entrepreneurs as one of the strategic initiatives aimed to ensure that the financial system is contributing to the restoration of the country.

For this initiative to be put into practice, it is necessary to approve and implement the nationwide financial literacy strategy. This journey actually started back in 2019, with the NBU presenting its vision of the strategy. Financial stability has become a greater concern now compared to 2019. Though today there is no publicly available information on whether the national strategy has been approved or not, certain measures are obviously being taken to promote financial literacy. For example, my son, a six-grade schoolboy, has a Financial Literacy course at school – long journeys begin with such small but important steps. Also, there are certain initiatives aimed at raising the public’s awareness of the security rules for non-cash and online payments, among which are the all-Ukrainian information campaign #ShakhrayGoodbye. Another useful source I could recommend for upgrading your financial literacy is the Harazd (Okay) website. It’s great to have such things springing up, but now we have to deepen and scale them.

Financial literacy will improve people’s wellbeing, make them wealthier, which, in turn, gives Ukraine more resources and motivation to win.

3. Expansion of customer segments

Neobanks currently operating in Ukraine serve individuals. Offering digital and fast solutions for legal entities is what can help new players to gain a place in the sun.

This may well be expected that «old-school» companies—those which have neither automated processes or solutions nor switched to electronic document management—will remain the domain of traditional banks, whereas forward-looking businesses already enjoying the benefits of automation and digitization are more likely to appreciate services of neobanks.

Although large business may have less trust in neobanks, the latter may also be more comfortable serving small and medium-sized businesses until the neobank culture is well rooted in the business landscape. Neobanks may be attractive for startups, which often need tailor-made services for the development of their business.

4. Seeking new niches

Globally, some neobanks apply a customized approach to cater the needs of various professions and categories, including doctors, taxi drivers, musicians, young families, teenagers, etc., while others specialize in commercial real estate lending for small and medium-sized businesses and in consumer deposits at competitive rates.

In Ukraine, the development of military industry will propel the development of many other industries. The banking industry will not be an exception. Military-neobanking could become the niche where new banking startups will be created to offer specific banking products such as transaction services, day-to-say banking for the military, special lending programs for manufacturers of military goods and a profitable cashback for volunteers purchasing them.

Such neobanks can serve as platforms for collecting targeted funds and servicing specific military projects.

By all means, the development of neobanks in the world and in Ukraine in particular may be recalibrated by the global recession and the war. However, with adaptability as a distinguishing feature of fintechs and resilience as a distinguishing feature of Ukraine, we hope we have many new and highly-efficient solutions in store, and the experience we gain during the war will help us build a sustainable financial system.

The article was co-authored with Anastasia Chutka, Tax & Legal Senior Consultant at Deloitte Ukraine

Source: Banker.UA