July 14, 2022
Part 6: Gap filling
Part six of a six-part series by Silvio Piserchia, Global Segment Lead, Fintech & Digital.
Most neobanks do not start out with the objective of being acquired; they are alternatively known as challenger banks for a reason. Still, the number of merged or acquired fintech companies grew by 68% in 2021 to reach record levels. And acquisition by a traditional bank is testament to a neobank’s perceived worth.
Another emerging testament to the worth of a neobank is its ability to pursue its own mergers and acquisitions. Just a few years ago, that opportunity was largely the preserve of traditional banks. Now neobanks can combine that broader approach with smaller individual investments to fill gaps in financial expertise and technology.
Of the two sides of fintech, gaps on the fin side are often harder to identify than gaps on the tech side. Shortcomings in financial expertise can go unnoticed until a period of otherwise successful growth turns a seemingly minor compliance issue into a major problem that is detrimental to customer retention and upsets regulators.
Distinct pedigrees mean neobanks tend to lack more on the fin side, while traditional banks lack more on the tech side. Although tech shortfalls might be more obvious, the situation does not necessarily favor traditional banks as they struggle to integrate new tech with legacy systems. Meanwhile, neobanks can proactively catch shortfalls in financial expertise early and then continue to grow without hitches.
A deft acquisition
The divestment of underperforming card portfolios is an option for banks wanting to raise capital to invest in other areas, such as technology. A recent flurry of divestments in Asia by traditional banks attracts the attention of neobanks wanting to extend their reach.
The opportunity for the neobanks is not solely contingent on their newfound clout relative to traditional banks. A misjudged acquisition can dilute a brand and prompt consumers to look elsewhere. Alternatively, a well-executed acquisition can address issues that warranted divestment in the first place.
Success has two phases. New portfolios require additional risk management, operational adjustments, and alignment with existing portfolios around a cohesive brand identity. Once those requirements are met, attention turns to internal and external communications to excite and educate consumers and employees.
Read the preceding parts of this series for a look at the five ways neobanks can continue to thrive:
Part 1: Introduction
Part 2: Product line extensions
Part 3: Global expansion
Part 4: Continuous innovation
Part 5: Operational Improvements
Or download the full report: After the findustrial revolution: How neobanks can continue to thrive.