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INVESTMENTS: THE GROWING OPPORTUNITY FOR NEOBANKS

March 21, 2022. Erik Hagelin.

Neobanks have successfully disrupted the finance sector by leveraging technology
to improve the customer journey, so they can match the experience delivered by
the latest generation of apps like Amazon and Uber. Research by the Financial
Conduct Authority (FCA) shows that Starling and Monzo, despite only receiving
authorisation in 2016 and 2017 respectively, have already built their share of
the UK personal account market to 8%. This growth has been largely driven by
digitally-savvy younger consumers attracted by their mobile offering.   

The business model of several neobanks originally relied on basic banking
products such as current and savings accounts, lending and money transfers.
However, neobanks have expanded their ranges to include higher-margin offerings-
for instance, Starling’s Personal Finance Marketplace gives customers access to
insurance, mortgages and investments. 

Investments are a particularly attractive proposition due to the sheer size of
the market. According to Boston Consulting Group’s latest Global Asset
Management Report, the asset management industry grew by 11% in 2020 to $103
trillion. Retail investors, who hold $42 trillion of assets under management
(AUM), have led this growth.    


DEMOCRATIZATION OF INVESTMENTS

The democratization of the investment industry is well underway, as demonstrated
in early 2021 by the traders who congregated at Reddit’s WallStreetBets forum
and took on the professionals holding short positions in stocks like Gamestop.  

A survey published in 2020 by financial services solutions provider Broadridge
showed how participation is expanding. The share of the Mass Market- those with
less than $100,000 to invest- grew from 30% in 2017 to 38% in 2020. Meanwhile,
the Mass Affluent and High Net Worth segments stagnated or marginally declined.
Millennials were the fastest-growing cohort, rising from 9% in 2017 to 14% in
2020. Together, Millennials and Generation X accounted for over 40% of the
overall market.   

One of the biggest drivers of this trend has been the lowering and elimination
of trading fees, making the stock market much more accessible to retail
investors. Silicon Valley-based Robinhood- the favoured broker of the
WallStreetsBets traders- was a pioneer, offering commission-free trading on
stocks and exchange traded funds (ETFs) when it launched in 2014. According to
its latest results, Robinhood had 17.3 million monthly active users in December
2021 and $98 billion AUM. UK rival Freetrade is on a similar trajectory, if not
quite as spectacular. Having released its app in 2018, the company revealed in
October 2021 that it had reached one million users.  

The major players were slow to react, but they eventually had to follow suit.
Charles Schwab, among the world’s biggest brokers with nearly 33 million
accounts and just short of $8 trillion AUM (as of December 2021), announced it
would eliminate fees in 2019. Around the same time, Interactive Brokers,
currently with 1.73 million accounts and over $350 billion AUM, launched its
IBKR Lite platform offering free trading on US stocks and ETFs.  


OPPORTUNITY FOR NEOBANKS TO ADD INVESTMENTS

According to research conducted by Bricknode in March 20221, despite the scale
of the opportunity, less than half of European consumer neobanks have introduced
an investment proposition. Only 44% of Europe’s top neobanks offer investments
to their customers, with 54% listing more than one asset class. Funds are the
most common, followed by ETFs, stocks and cryptocurrency.



The neobanks offering investment products have adopted different business
models. Two thirds have partnered with investment and SaaS solutions like
Bricknode Broker, leveraging the underlying infrastructure to go to market
quickly and keep costs to a minimum. One third of neobanks, meanwhile, utilise
proprietary or parent company technology, and notably, most of these were owned
by large incumbent banks. 

To draw a conclusion from this research, neobanks are supporting the further
democratization of investing, but many haven’t tapped into this sizeable income
stream yet. Even among those that have, 46% have scope to increase their
offering from a single asset class. One particular area of growth is sustainable
investing, where Bricknode’s research showed that one quarter of neobanks
provided such an offering. Dutch neobank Bunq launched an ESG product in
February, to be followed shortly by Germany-based Tomorrow.


BARRIERS TO ENTRY

While the opportunity seems enticing, launching an investment proposition isn’t
without challenges.    

Time to market: the timescale involved is typically measured in years. The
software and infrastructure required to manage investments are complex, and
neobanks rarely have the in-house expertise to build it, let alone ensure it
meets regulatory requirements. 

Licensing– Few neobanks secure licenses to carry out investments because of the
demanding application process, timeline and fees.  

Regulatory requirements– Ensuring a fintech stays on the right side of
regulations like the Markets in Financial Instruments Directive (MiFID) requires
significant resources. Failure to do so risks heavy penalties- the US Financial
Industry Regulatory Authority (FINRA) fined Robinhood $70 million in June 2021
for outages and misleading customers when market volatility spiked at the start
of the pandemic.  


BUILD VS PARTNER VS BUY

Neobanks have three options when it comes to adding investments to their product
range.   

Building a solution in–house may grant greater control over design and
implementation, but the time to market is very slow and this demands significant
resources.

Partnering with a third-party investment provider presents a quicker route to
market but less flexibility because neobanks are tied to the partner’s product,
brand and revenue share or commercial agreement. 

Buying a dedicated investment SaaS solution provides the best of both worlds – a
quick route to market and complete flexibility over design, so a neobank can
offer a broad investment proposition and enhance or make changes at any time.
What’s more, owning the solution means the neobank receives all the revenue.



The arguments in favour of buying a SaaS solution were strong enough to persuade
Revolut and Lunar, while Swedish fintechs Alwy and Sigmastocks recently decided
to work with Bricknode.


BROKERAGE AS A SERVICE

Neobanks are perfectly positioned to introduce investments to their product
range, so we expect an increasing number to enter this space. Barriers to entry
exist, but Application Programming Interfaces (APIs) facilitate integration,
allowing neobanks to add the necessary capabilities quickly and easily.  

To learn more about Bricknode’s Brokerage as a Service, arrange a demo today.  

 

--------------------------------------------------------------------------------

1 Research carried out by Bricknode in March 2022 by analysing 81 neobanks with
headquarters in Europe, based on a NeoBanks.app list plus five additional
companies known to Bricknode. Pre-launch, B2B and kids/teenager neobank
companies were excluded from the final analysis, leaving a sample size of 55.
All investment product data including asset classes was sourced from the
neobanks’ own websites or apps. Data pertaining to investment/SaaS partnerships
was sourced from neobanks’ websites and press releases.

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