Signals: Neobanks are in their Globalization Era

Hey fintech friends,

If you're reading this, you've maybe been asked the question "... What more can fintech do from here?"

This past week felt like one of those news cycles that answered the question head-on: Dave's Q1 results highlighted that demand for early wage access is at an all-time high (and growing!); Synapse's bank partnership saga illustrates how complex– and high-stakes– it is to manage a bank ledger as a non-bank entity, and Roaring Kitty's resurgence on Twitter... DM me if you know what that one means, because I haven't the foggiest.

In India, central bank regulators are grappling with how best to expand UPI usage– while breaking up the payment app duopoly that currently supports 76% of UPI processing volumes. We'll dive into the challenge of building superapps in India, but first...

Just as NuBank became the first western neobank to hit 100 million users across Brazil, Mexico, and Colombia, Monzo announced $190 million in fresh funding to double down on the US market (having launched Monzo US 2 years ago). Monzo’s UK rival Revolut already boasts ~1 million users in the US, and is now setting its sights on expanding to Mexico.

It’s interesting to see how neobanks that have driven such rapid adoption in their home markets are now tackling growth abroad. Sure, international expansion enables neobanks to acquire users in new geographies– but it’s also unlocking new features that can lure new neobanking customer at home.

Specifically, international expansion allows neobanks to more easily deploy:

Global remittances are set to reach $1,031.45 billion in value by 2029. Still, the global average cost of sending a remittance is about 6.18% of a payment's value. Bringing remittance costs down will be a powerful differentiator for expats* sending money to their families– this is a big part of the reason why Revolut is investing $100 million in Mexico expansion, and why NuBank recently released the ability to accept transfers from the US via Whatsapp.

Of course, neobanks operating in different countries still have to facilitate transfers using traditional cross-border structures. Having a presence in both the sender’s and recipient’s home country, though, allows neobanks to bypass certain intermediary banks, streamline compliance, and offer FX at more competitive rates than they would using third party cross-border providers. For users, transferring money also just feels much more intuitive when on the same platform as your recipient.

* Side note: Why do we still refer to migrants from the global south as "immigrants" and from the global north as "expats"? Seems problematic idk?

A number of B2B neobanks already offer multi-currency spending tools as a differentiator for businesses (Airwallex, GoCardless, Volopay…). On the consumer side, neobanks are also leaning into these products as a lure for frequent flyers and (generally) higher-affluent customers. Revolut's travel card perks and NuBank's recently-announced Global Accounts, for two, are only available to users on premium subscriptions; both likely leverage the neobanks’ presence in other countries to alleviate the cost of processing customers’ payments abroad. 

It'll be interesting to see how much traction these features get in the US, where affluent customers are stubbornly tied to legacy card programs, and the biggest neobanks (Chime, Varo, Dave...) are most focused on mass-market adoption. Neobanks accounted for 47% of new checking accounts opened in the US in 2023– up from 36% in 2020– and maybe the Monzos and Revoluts of the world will accelerate this adoption up-market?

In any event– if 2022 marked the "End of the Neobank Era", we should probably rebrand 2024 to "Never Mind, Neobanks Are Global Now". 

In other consumer fintech news, India's central bank is facing a dilemma: On one hand, it wants to continue expanding UPI– a real-time payment rail that has been wildly successful in furthering financial access across the country. On the other, the 2 largest UPI payment apps– PhonePe and Google Pay– handle a combined 87% of payment volumes, and the RBI is concerned that this duopoly stifles competition from smaller players.

In 2020, the RBI tried to spur competition by ordering PhonePe and Google Pay to cap their market share at 30%. India’s central bank soon realized how bad forcing users off these apps would be for overall UPI adoption, so it’s now extended the deadline for this market share cap by another 1-2 years "after concluding that there is no practical solution to address the issue" (per TechCrunch).

This conclusion seems right. 

By design, UPI has to be a high-concentration market: Companies can't legally make a profit on UPI processing, so large payment providers and banks have shied away from marketing these payments to their users. WhatsApp was cleared to offer UPI transfers back in 2020, but poor margins mean that WhatsApp still only accounts for 0.2% of UPI payments. 

The two platforms making the most on UPI– PhonePe and Google Pay– are only able to monetize by cross-selling features like credit and investing. At this point, the only way to feasibly offer UPI in India is to build a similarly sprawling superapp– offering financial management, eCommerce, payments, ridesharing, billpay etc.

India's government has recently cracked down on fintechs like Paytm, and changing regulation is prompting Indian companies originally incorporated in the US to reshore to India. TBD on how international investors will respond to these moves, and whether they'll homegrown superapps ability to flourish long-term.