Before speaking about the future of the neobanks, including neobanks in Kazakhstan, it is worth understanding what this term means in principle, and how the neobank differs from the traditional bank. The term "neobank" first appeared in 2016 in a financial report by Spain's BBVA (one of the largest banks, with stakes in financial institutions in more than thirty countries). Neobanks are financial institutions that provide basic financial services but do not have physical branches. All transactions are done in a mobile app. If a person has a smartphone, he or she can access financial services as quickly and easily as ordering a delivery - in a couple of clicks.

Neobanks vs traditional banks

Neobanks and traditional banks are two different entities. One of the main differences is the limited user experience. For example, neobanks do not have a SWIFT transfer service. This operation implies a relationship with a national bank, with a correspondent bank, compliance with regulatory requirements in terms of assets and liabilities, AML, compliance. Opening an account directly with a BONY or Raiffeisen bank is difficult. And a neobank simply cannot physically do it, otherwise it would immediately become traditional.

How neobanks work

To begin with, a neobank is first and foremost a marketing and product-focused organization with a heavy UI/UX focus that has a classic bank with all the necessary licenses under the hood.

Its main task is to keep a balance between dynamic growth and profitability. How to achieve it?

Neobanks have a small set of services. They all start with the traditional transactional business. There are, for example, profit-sharing (profit distribution in certain proportions between program participants, ed.) with a traditional bank, the earnings come at the expense of interchange (the commission that banks pay each other for non-cash payments, ed.). Also many of them work with cryptocurrency, one way to profit from commissions.

The next logical step is to make a profit. No neobank will become profitable until it finds other types of income - interest from lending activities, for example. Neobanks can't work with credit services right away; you have to get a separate license to do that. And this, including the issue of dealing with credit risks, is a separate science. Here neobanks have two ways - to quickly learn how to manage loan portfolios and take all the risks or enter into a partnership with one of the traditional banks, which will undertake the risks and share the profits from the loans.

What's in store for neobanks in 2023

In 2022, many banks (and there are 291 in the world) failed to reach a profitable level, so the plan for the next year is to make a profit at any cost. In order to do so, it is necessary to review not only the products offered to customers and customer support policies, but also the entire marketing strategy and prepare to regulate all processes.

In 2023, we will be hearing more and more about neobanks issuing their own credit products - mortgages, car loans. This is what the evolution of neobanks looks like, which could become a real ecosystem by 2025.

What the banks should focus on:

• developing credit products and going into harder and more complex stories;
• creating products for small and medium-sized businesses;
• enhancing the appeal to users, with cashback;
• expanding investment and insurance products.

Neobanks grow at different rates. For some, success is when growth is slow and steady; for others, it is when it is aggressive and fast. The strategy of the neobanks is clear: scaling, entering other markets, attraction and segmentation of clients. New neobanks will go through the stages of the "old guys" and some may leave the market. But no unexpected changes are expected.

As for competition, the stage will remain the same - the first four banks in each country will compete with the second four - each region has its own leaders in the number of users and profitability. In one year, it is unlikely to appear neobank, which will move all of the first four in one market. A lot of energy, time, and a lot of microprocesses have to be spent on this. Good user experience alone won't get you so far.  

Neobanks in Kazakhstan

The emergence of neobanks in Kazakhstan is a logical step in the development of the banking sector. 41% of the population lives in regions remote from the nearest bank branches. Of course, it was necessary to develop easy access to financial operations for them.

In Kazakhstan, the classic neobanks that we have just talked about do not exist. This is because there is no PSD2 (Payment Services Directive) and GDPR (General Data Protection Regulation). From the point of view of Kazakh legislation, neobanks are analogous to traditional credit institutions. The issue of access to banking information has been discussed for a year, and the National Bank is developing standards for fintech banks. Kazakhstan has yet to go the way that Europe and America have already gone. It is very difficult to regulate the market with common rules that would satisfy the interests of all participants in Open Banking, and this includes the regulator, banks, aggregator-integrators, fintechs and clients.

Many things are still in their infancy.

However, there are the first shoots. Among the famous ones are Simply from Beeline and OGO Finance from Kcell.

Simply from Beeline achieved direct receipt of BIN and the ability to issue a Visa card without the principal's bank. That is, they do not depend on Kazakh banks and work on Ukrainian processing, but under the hood of telecom - fintech organization, the system they have built through electronic purses. This can be called a decent rudiment of neobank. They don't  have a credit license yet, they have MPS transfer limits, and their whole business is built on transactions. And, in general, they are constrained by the framework of electronic payment rules. At the same time, they have made good growth - in six months they attracted 650,000 users.

Kcell's OGO Finance is a telecom based on Jusan Bank. This is the kind of colab where a telecom fronts a bank in its system and simply issues a Jusan card, painted in Kcell colors, giving access to the operator's subscriber account. But telecoms also have a place on the online banking development map. A large array of data will allow big techs to actively participate in the development of the sector.

In Kazakhstan, 2023 could be a pilot year for neobanks. As soon as the National Bank issues rules for this market, it will be possible to make niche products, issue cards with bonuses for: office workers, small and medium businesses, gamers. All these niches are empty, they can be occupied and get hundreds of thousands of customers.

Who is definitely worth paying attention to now, who has the foundation for growth in the neobanks are payment organizations such as CloudPayments, Freedom Pay, ProcessingKZ and others. In terms of Open API they are as prepared as possible.

There are many of them, they are already integrated into banks' processors, and they know how to move money from point A to point B. These companies are quite tech-savvy, and many of them are already building their acquiring centers to work directly with MasterCard and Visa. They can go about the same route as Plaid, which has integrated many APIs in various U.S. states and now provides access to 11,000 financial institutions with all the financial transactions they need.

Payment institutions can become issuers of these cards and become a neobank in its classic sense as soon as the regulator is ready for this market. First, they will become a kind of aggregators, onboard startups and, as part of the EPI (European Payments Initiative), issue cards and provide banking services. And then they will follow the same evolutionary path - from transactions to credit products.

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