Neobanks, Backed by Established Institutions, Challenge Fintechs

In today’s digital age, neobanks, otherwise known as digital banks, have become a prominent reality. These digital banks, some of which are still in their budding stages while others have advanced enough to offer services such as granting car loans straight from a mobile device, have considerably impacted the financial sector.

Unlike Sofipos, popular digital financial companies that operate on a completely virtual model, neobanks are backed by established banking institutions in the country. These include renowned names such as Santander, Banorte, Banregio, and Invex. This backing provides additional credibility and confidence for customers who choose to bank with these digital institutions.

Interestingly, the support from these established banks also offers greater deposit insurance for customers of neobanks compared to popular financial institutions. The deposit insurance provided by Mexican authorities to banking institutions is around 3 million pesos greater than that offered to popular financial institutions, as official figures confirm.

The concept of digital banks is straightforward. They are financial institutions that should ideally offer all the services that a traditional bank does, but in a virtual setting. This includes everything from account opening to loan application. To be recognized as a bank, these digital institutions must obtain a license from the National Banking and Securities Commission (CNBV).

Banregio is considered a pioneer in promoting 100% digital banking. A few years ago, it launched its application, Hey Banco, which started by offering debit and credit cards. The platform has since expanded to include other products such as personal loans and savings tools, offering annual returns of up to 13 percent. Although Hey Banco already has its banking license, company executives anticipate that the separation from Banregio won’t be finalized until 2025.

Similar to Hey Banco’s entry into the market was Brazilian giant Nu. This company made a splash in the Mexican market by offering credit cards. Over time, Nu acquired a Sofipo to expand its product offerings, such as personal loans and savings products, offering annual returns of up to 15 percent.

The rapid growth of Nu in Mexico prompted the company’s directors to apply for a CNBV license to operate as a bank, a process that is currently underway. It’s worth noting that both Nu and Hey Banco operate entirely virtually, without any physical branches.

The significant market penetration achieved by these two institutions has inspired others to follow suit. For instance, Ualá, an Argentinian fintech company, acquired ABC bank; Invex launched its Now platform; and Affirme introduced its digital offering called Billú.

Just last week, the launch of Bineo was announced. Backed by Banorte, Bineo is a digital bank with its own license that currently offers debit accounts and personal loans.

Looking ahead, Spanish financial giant Santander is preparing for its digital bank, Open Bank, to begin operations this year. Open Bank already has its license and is nearing its official market launch.

Unlike Sofipos that offer savings products, licensed banks provide their customers with greater deposit insurance in the event of the financial institution going bankrupt. For banks, this deposit insurance is backed by the Institute for the Protection of Bank Savings (IPAB) and amounts to 400 thousand investment units (Udis), or the equivalent of 3 million 100 thousand pesos.

In contrast, Sofipos are backed by the Fund for the Protection of Popular Financial Companies and the Protection of their Savers (Prosofipo), which offers insurance of 150,700 pesos according to the CNBV.

Different options

BBVA, the bank with the most significant presence in the country, has made it clear that it has no plans to open any additional digital banks. According to Eduardo Osuna Osuna, Vice President and General Director of the institution, its mission for the past few years has been to transition all its services to its digital application.

BBVA does not see the need to apply for a new license and start operations from scratch since doing so would imply additional expenses and splitting investments between two institutions. With the current business model, most of BBVA’s capital injections are allocated towards technology.