Embedded Finance. Scarlett Sieber

that neobanks did not actually gain significant traction compared with bank competitors. Shevlin said:

      I would argue they didn't gain traction, but the gap that they perceived, one perception was right and one was wrong. The wrong perception they had was that consumers didn't want to do business face-to-face, person-to-person. The gap that they were correct in was that there's a way to reduce the cost of the delivery of financial services by not going through the branches.

      In other words, digital works, but not because customers don't want to see other humans. Where neobanks succeed, according to Shevlin, is in serving specific niches, such as Aspiration, which serves environmentally conscious customers, or Panacea, which serves physicians starting out in the field.

      The neobanks were being formed after years of studying the industry, using contemporary technology and in some cases, operating with updated business models. But neobanks are not necessarily vertically integrated companies that own every piece of the technology stack. They often rely on partnerships with other technology companies that specialize in particular products, and often have banks at the bottom of the stack. Using bank licenses has been an important early step in both Europe and the US. Some of these companies have ultimately gone on to acquire their own banking licenses.

Despite initial traction and a lot of venture funding into the early neobanks, few have gained the traction significant enough to seriously challenge banks, let alone the megabanks with millions of users. The landscape has shifted a bit in recent years and today, neobanks such as Chime (US, valued at $35 billion), NuBank (Brazil, valued at $41.5 billion at the time of their NYSE IPO), Revolut (World, valued at $33 billion), and Tinkoff (Russia, valued at $22.5 billion) are gaining serious traction and, in general, the industry defines them as successful. Each neobank listed above uses varying models to arrive at relatively full feature sets for their customers.

      What did those successful neobanks do differently? When asked about NuBank, Chris Skinner, author, commentator and founder of The Finanser blog, believes they have been particularly successful because they reached out for financial inclusion while many banks in the region still do not understand what it means. Financial inclusion in its most simple form is offering banking services to people who cannot afford it. Some 20% of NuBank's customers are individuals who couldn't access banks before. Many neobanks currently try to compete with traditional banks in a similar way. In today's world, the customer needs digital connectivity. Bunq, Starling, and Tinkoff are a few examples of neobanks who understand this concept and are successful in creating digital connectivity to customers who have not been served before.

      While, in general, the neobanks have started with one specific product offering, some have done well in expanding their product suites in a compelling way which in turn increases touchpoints with their customers, customer lifetime value, and the total addressable market. This larger movement has become known as the rebundling of the bank and now is being referred to as Super Apps.

What is the difference between the rebundled bank that is digital first versus the traditional players? Customer segmentation. Many neobanks started their journey by catering to specific segments of the population, such as millennials or travelers. Even more specialization is popping up around the globe supporting the theory of specialization and deep knowledge of core customers as a potential winning strategy.

      With neobanks’ digital-first (or digital-only) offerings, banking services can be delivered à la carte and on-demand, and can happen in any context. Companies, such as Monese for migrants and Daylight for LGBTQ+ consumers, are addressing specific problems for their communities, and building products that make sense.

      At the same time, other neobanks who started off with a specialization are now expanding from their initial highly targeted customer base to a much broader one to achieve scale and hit growth targets. Revolut, who initially targeted mostly travelers, broadened their financial services offering beyond multi-currency accounts and cheap FX toward investments, crypto, and savings, and even launched a SME offering, to maintain its growth rate and increase its total addressable market. Tinkoff similarly started off by offering simple credit products before becoming a Super App touching most segments of the Russian population, and plans to expand to the Philippines.

BEHAVIORAL SHIFTS ACROSS GENERATIONS

Embedded finance is an improvement upon fintech, because companies who are already successfully employing embedded finance already start with a significant customer base. Throughout its history, despite all the headlines and money pouring into the space, fintech has struggled with customer acquisition, which represents one of every fintech company's greatest costs. Part of this has to do with low virality of fintech apps compared to social and other types of apps. How many times a day do you scroll your social feeds, whether it be Facebook, Twitter, TikTok, or Snapchat? What about your banking app? When you do open your banking app, how long are you engaged for? You might tell a friend about a new social network because you want them to join and having them on the platform with you enhances your experience. But, you don't tell your friend about a hot new lending app that will help consolidate your credit card debt, because talking about debt or even wealth can be awkward and uncomfortable and there typically isn't an opportunity for you and your friend to connect and collaborate on the app.

      The exception is with peer-to-peer apps, in which you need the person on the other end of the transaction to be part of your network. Another exception is investing and cryptocurrency services, in which people enjoy sharing expertise, and information can be shared without sharing dollar amounts.

      There are signs that Gen Z consumers will show greater openness about money and have a greater comfort level sharing personal details, but it is still early in their financial lives. This is certainly true of platforms like TikTok with the craze of “FinTok” and “Finfluencers” including Queenie Tan who, as of January 2022, has nearly 120,000 followers, and Andres Garza, also known as @capital_inteligente, as of January 2022, who has nearly 1,000,000 followers. They openly talk about once taboo topics and make the concepts of financial literacy cool and relatable.

We saw this movement of open sharing for younger generations with the peer-to-peer payments app Venmo, owned by PayPal. Venmo was an early experimenter in making its interactions shareable, encouraging users to invite their friends from other social platforms and making payments fun by adding emojis as descriptions for transactions. It has since made privacy more of a default, but part of the app's original value proposition was showing friends where and how you were spending your money. P2P companies like Venmo are still growing. To quantify the scale of a company like Venmo, Venmo did 2.6 billion transactions worth $159 billion in 2020, 56% higher than the previous year.¹²

      Case Study: Tinkoff

Tinkoff Bank's story is unique. It was launched in 2006, before the new wave of neobanks. At the time, founder Oleg Tinkov had spent some time in the US and was amazed by the amount of mail he used to get offering him applications for credit cards. When looking at the number of credit cards per capita, there were two or three credit cards in the US and a fraction of that in Russia. Willing to seize this opportunity, he bought a bank in Russia and launched Tinkoff Bank. The beginnings of Tinkoff were dedicated to selling credit cards by mail, which was a tough process that required important optimizations, including tests of font, signature position, etc., to maximize customer conversions. It created the mindset of test and learn within Tinkoff and laid the basis for continued data analytics within the company. In 2007–2008, the financial crisis hit which led Tinkoff to change its funding model, move most of its activities online, and start taking deposits.

      Over the next several years, a growing customer base started demanding more and more services from Tinkoff, which pushed the bank to launch a full product suite, including credit cards, personal loans, point-of-sale loans, and eventually secured products like home equity loans and car loans. On the transactional side, Tinkoff launched a debit card, the largest retail brokerage platform in the market with 70% of all active customers in Russia, and an insurance business focused primarily on car insurance. It also moved into the B2B space