Banks and credit unions face the same challenges every year. Some trends affect almost all financial institutions, including brick-and-mortar banks, unions, and even neobanks.
Bancography provided its annual 52 pages banking industry analysis for 2022. Let’s summarize and analyze the trends that apply to neobank owners.
What Should Neobank Owners Look Out For?
Compared to 2021, the 2022 deposit grew another 12 percent. On average, this is three times the historical norm for deposits. This states that businesses are still more reluctant to invest than before COVID.
Consumer and business owners are piling up more cash in their accounts than before, apparently out of fear that something might happen. However, inflation temps are rising, which means consumers and businesses alike would be forced to use a large portion of their savings to pay bills and utilities.
That said, for 2022, loan to deposit ratios were at 60% at the start of the year. This means excess liquidity.
What Else Causes Excess Liquidity and What Does It Mean?
Excess liquidity occurs in banking when the cash flow exceeds withdrawals and is often the product of declining consumer demands. It can affect neobanks in the same way it affects traditional bricks and mortars and credit unions.
Each central bank has a minimum required liquidity (minimum reserve requirements) that allows commercial banks to operate and be prepared for a crisis if and when it arises. However, when the level of liquidity becomes excess, it means the bank is losing opportunities, not operating functionally in terms of revenue, and not balancing the spreadsheet of its assets, liabilities, credits, and debits.
Sometimes this is much harder to balance than imagined, especially in a constantly changing market, rising and declining consumer demand, and increased interest rates.
As a neobank, excess liquidity can be mitigated by offering more loans to consumers in various forms. There are various ideas for different scenarios to provide loans to:
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To retail clients for personal use.
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To retail clients for a mortgage.
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To business clients.
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Via partners to finance purchases in their networks. (For example, one of the largest networks for re-selling cars in Europe offers financing for every vehicle listed on the website.)
One of the most significant reasons for the current excess liquidity of banks is declined credit card spending during pandemic lows, which still persists in 2022.
A Decline in Physical Branches
Brick and mortar banks are realizing that digital banking platforms and neobanks are on the right path. According to the same report, there has been a net decline of more than 3000 physical bank locations across the United States since 2021.
That means competition might grow on a larger scale for neobanks in the near future. Fintech is looking to join the same market, and some of the traditional brick and mortar banks are stepping up their game.
Other Sources of Income
Since there is a likelihood that more consecutive interest rate rises by the Fed to tackle inflation will occur, it is wise to speculate that consumer spending and borrowing will decrease. If these trends persist, neobanks should also shift their business models toward other means of income, aside from loans, in the near future.
Restructuring business models to reflect the geo-political environment should be a top priority. In a world where spending and borrowing are decreased, people will start tapping into their reserve deposits to meet primary demands.
For that reason, overdraft could become a potential source of revenue for many neobanks. Minor overdraft doesn’t carry a fee as overwhelming as taking out a loan and is more comfortable to pay off for most consumers.
Experts from the report stated that interest in insurance might possibly grow in the upcoming years. For that reason, some banks have acquired insurance agencies to cover that market niche.
Will Credit Card Spending Bounce Back?
Not many neobanks offer credit cards, but some do. Is there a reason to start offering these now?
Credit card spending is also speculated to bounce back relatively soon. Much of the sector relies on income from leisure, hospitality, and travel, which have been unavailable for the past couple of years due to the COVID-19 crisis.
Now that things are finally stabilizing, there is an expectation that credit card spending will bounce back.
Final Words
In a geo-political and economic situation where interest rates and inflation continue to rise, people will cut down on spending and borrowing and stop tapping into their deposits to meet bills on time.
Neobanks must adapt and offer a socially responsible banking business model. Other institutions are pressuring peers not to increase some fees, although borrowing is decreasing. Some banks are looking for other methods like overdraft fees and transaction fees in order to increase revenue.
Serge Beck, CEO & Founder, Optherium Labs
Serge Beck is a serial entrepreneur, venture capitalist, IT specialist, and blockchain ambassador.
Serge has over ten years of experience on Wall Street and over ten years of experience as a venture capitalist.
