Hey there! Welcome to our Fintech Brainfood session, where we dive into the latest trends and insights in the world of fintech. In this post, we'll explore the age-old question: is it better to be a Super App or a Neobank? We'll also examine the banking business model, and how geographies impact the revenue potential of these businesses.

Weekly Rant

The debate about whether to become a Super App or a Neobank has been ongoing for some time. Every fintech company that announces its plans to apply for a charter makes us wonder: do you really want to be a bank? Being a bank means you get to lend, and lending is a great way to make money. However, being a bank also means it's much harder to win at other fintech business models.

PayPal and Square are crushing every earnings season, and while they both have a charter (PayPal in Luxembourg and Square has an Industrial Loan Charter), their primary way of making money is not the same as banks. Where they started gives them a very different set of options to drive revenue.

Then you have companies like Monzo or N26, who went the consumer banking charter route but have taken longer to hit profitability. Getting a license is hard; scaling with it is harder.

The Banking Business Model

The banking business model is based on net interest margin (NIM). To simplify: this is the difference between banks' price for a loan and the price they pay depositors minus costs. Banks can't choose any rate they want either; the rates are set by the central bank base rate.

Since the global financial crisis, interest rates have been low and stayed low. This means the banking business model has been under pressure (and you can see this in their long-term share price).

One of the best ways to survive in a low-priced market is to generate scale. Banks with higher deposit bases have a lower cost of funds because they can use that deposit base to drive better pricing in overnight markets and more.

The Neobank Opportunity

Neobanks, on the other hand, have much lower operating costs without branches and fewer people. They often don't pay heavy marketing costs to get someone to switch direct deposit, so their entire customer acquisition cost (CAC) can be as low as $10 to $20.

In the US, if that customer is reasonably active and makes plenty of transactions in a given year, the Neobank can break even on the interchange fees they receive from Merchants alone. Interest rates in the US are low, meaning lending requires a good deal of scale.

The Neobank Problem

If a Neobank gets a charter, they often have fewer deposits as a base than the megabanks do at the outset. The newly arrived bank has a higher cost of funds than their big rivals, so it may not drive profit from their lending activity as quickly. We've seen this in Europe, with Monzo (with nearly 6m consumers and an average deposit of ~$

The question remains: should fintech companies double down on lending or look towards the Super App strategy? The answer lies in how well the banking business model works in your market.