Neobanks Can Reduce Losses by Fighting Chargebacks
Chargeback defense is not a topic that gets discussed often in the neobank space, but Justt has seen increasing interest from industry players in its chargeback mitigation solution. In this article, you'll learn about neobanks’ business model, why it leaves them exposed to chargebacks and what they can do about it.
What is a neobank?
The past decade has witnessed the rise of the neobanks – challenger banks that are online-only as compared with the branch model of traditional banks. Neobanks focus on a simple and smooth user experience (UX) that speaks to the digital natives of the millennial generation in the West and the underbanked in the developing world who are reliant entirely on mobile phone access for banking. Gone are the cumbersome paperwork and convoluted website design of traditional banks.
This positive UX has translated into accelerating growth in recent years with the number of neobanks having more than quadrupled from 60 in 2018 to 256 in 2020. Along with the increase in the number of neobanks, the number of users has continued to grow and is expected to reach 98 million by 2024, according to Business Insider Intelligence. However, this rapid growth in customer base has yet to translate into profitability.
Life-time value vs. customer acquisition cost
Neobanks typically offer fee-free current accounts and other financial incentives to encourage users to sign up. They make their money from things like interchange fees – that is the fee paid by retailers when a debit or credit card issued by the bank is used. The amount of revenue this generates is quite low, currently averaging $18 (15 euros) per customer per year.
On the other side of the equation, neobanks are constantly focused on growing their customer base through advertising and special offers. The average customer acquisition cost (CAC) of neobanks is around $35 (30 euros). Subtracting the CAC from the life-time value (LTV) of the customer results in a negative value, meaning that the neobanks are on average losing money per customer they serve.
Chargebacks on bank top ups
Addressing this money losing proposition will require neobanks to control operational costs as well as develop opportunities for new revenue streams. One operational cost not adequately addressed by most neobanks right now is chargebacks. Most neobank accounts today are secondary bank accounts that customers can fund by topping up with a debit card. Sometimes, after a customer has topped up their account, they file a chargeback claiming fraud.
These cases of friendly fraud are costly for the bank. Not only must the bank reverse the payment into the customer’s account, but it must also pay a chargeback fee that is anywhere from $15 to $50. This can double to quadruple the average yearly loss neobank’s experience per customer and push even profit running neobanks into the red! What’s worse, some customers will request multiple chargebacks. In addition, when the chargebacks are for new account openings, they effectively mean the bank has wasted its investment in customer acquisition to boot.
Chargeback mitigation service
A chargeback mitigation solution can help neobanks with this payment reversal problem. Justt provides a tailored payment dispute solution that combines technology with human-powered know-how to achieve the highest success rates in the industry. Justt has already worked with one of the world’s leading challenger banks to design a chargeback fighting solution perfect for the neobank space. Neobanks can use Justt’s hands-free solution to reduce chargebacks while refocusing their attention on ways to increase customer LTV.
Take control of your chargeback problem.
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Neobank FAQs
Neobanks are online-only fintech companies that were founded in the past decade or so to compete with traditional banks that maintain a physical presence with a branch network.
Neobanks must deal with a variety of regulations like country-specific Know Your Customer laws, data protection and data privacy rules and online security and risk-based authentication regulations like the EU’s PSD2. However, neobanks may operate without a full banking license. This may impact the level of deposit insurance of accounts held at the neobank.
Neobanks usually have a counter-fraud, fraud prevention or trust and safety team and a variety of software tools to identify and fight fraud attempts. They will typically reimburse customers when fraud has occurred unless the customer showed serious negligence in keeping their account information secure.
A variety of online fraud tactics exist, including phishing, smishing (i.e. SMS phishing) and clone websites. They generally involve stealing your account details and password and then draining it of money.
Neobanks are generally as secure as traditional banks, as long as they are FDIC insured. The Federal Deposit Insurance Corporation insures bank deposits up to $250,000 in case the bank is declared insolvent or ceases to function for any other reason. In terms of cybersecurity, it’s hard to make a general statement that applies to all neobanks. The reality may vary significantly on case by case basis.
Most neobanks are not chartered, and, therefore, rely on partnerships with chartered banks to insure their deposits with the Federal Deposit Insurance Corporation. Check to see if there is an FDIC logo on the neobank’s website to be sure.
