The smartphone is becoming the banking tool of choice for many. © Keystone / Christian Beutler
New digital banks are popping up in Switzerland without a single branch or counter. One of them, Zurich-based Neon, is staking its success on doing more with less and has attracted 30,000 customers.
The digital bank is not present at the prestigious Paradeplatz in the heart of Zurich, the symbolic heartland of Swiss banking. Neon is instead located on the outskirts of the city, and no works of art, stylish furniture or marble floors adorn its offices. The interior is a simple and open plan with minimal furnishings. It’s a typical venue for a start-up that focuses its efforts entirely on product development.
Neo-banks communicate with their customers purely via digital channels. At Neon, when opening an account via the smartphone app, customers are asked to submit a photo of an official ID and the data is checked by via a video call or the digital identification procedure approved by the Swiss Financial Market Authority (Finma).
The customer then receives a debit card for purchases in Switzerland or abroad and has a bank account that allows for credits (such as salary) to be paid in and payments to be made at home and abroad.
Neo-banks like Neon are gaining market shares in the banking sector as they offer more innovative solutions for online payments than traditional banks, generally with fewer fees. They also integrate contactless payment services such as Samsung Pay more easily into their apps.
“We saw a gap in the Swiss market, so we decided to give up our jobs and start our own company,” says Jörg Sandrock, CEO and co-founder of Neon.
He is one of four young former financial advisors who launched the start-up. After an initial test phase, the company officially launched a banking app in March 2019 that has now attracted 30,000 customers.
Few fees
Most traditional banks charge an annual fee of CHF50-CHF100 ($55-$110) for a standard credit card, in addition to between 1.5% and 2.5% for each payment with a further surcharge of around 2% on the exchange rate on foreign payments. If money is withdrawn from an ATM, a commission of CHF10 is often charged.
Cheaper and more transparent fees are part of the reason for the rapid success of neo-banks in many European countries, including Switzerland, in recent years.
Last year, the British digital bank Revolut shook the Swiss banking sector when it announced it had won 250,000 customers in Switzerland with almost no advertising. The Revolut app has now been downloaded 300,000 times – a number that many Swiss banks can only hope for with their own apps.
The success of these neo-banks – also known as “mobile”, “smartphone” or “challenger banks” – points to a change in the banking industry. For many financial services, the physical proximity of a bank to its customers or direct relationships with advisors is becoming less important.
Internet shopping has also become more popular, particularly during the coronavirus crisis. New online payments players have emerged, including the internet giants who are increasingly interested in developing new financial services.
The monetary policy of the central banks, which is based on zero or very low interest rates, has also drastically reduced the profit margins of traditional banks. About 20 years ago, banks began charging higher fees and transaction commissions, causing many customers to look for alternatives.
Little pressure to innovate
The Swiss Bankers Association recently underlined in a statement the importance of digitising financial services, emphasising the progress that Swiss banks have made in this area.
Many banks are closing their branches or converting them into pure advice centres, focusing on digital offerings. So far, however, e-banking offers such as apps have not proven attractive enough to lure many digital natives. Only one traditional bank, Cler, has developed an app comparable to what neo-banks offer, according to a comparison done by Swiss Public Television.
Did Swiss banks miss an opportunity? “I don’t think so, but maybe they were a bit paralysed by their cumbersome organisational structure,” says Neon’s Sandrock. “Perhaps there was less pressure to be different in Switzerland than in other countries.”
Sandrock notes that in Spain, after the 2008 financial crisis, some banks were forced to adopt a new strategy to survive. In England, competition has been so strong for years that banks have also been forced to innovate to attract new customers.
Overall, though, neo-banks have failed to cast a sizeable shadow over the traditional banking sector and its scope. New foreign providers such as Revolut or Transferwise (with whom Neon has a partnership) offer credit cards and international payment services, but little else. And Neo banks’ profits are incomparable to those coming from the asset management services that have made the Swiss financial centre rich. But traditional banks are nervous about the rapid growth of “challenger” banks in an increasingly open and competitive market.
Cooperation with partners
Neon is convinced it can make waves in the financial market. According to a 2019 study by the online comparison portal Moneyland, Neon scored better marks than foreign competitors and traditional Swiss banks when comparing prices for services, commissions, exchange rates and the cost of using credit cards.
But Neon is unable to provide a number of banking services, such as securities trading or mortgage loans, because it does not have its own banking license. Instead, it works with Hypothekarbank Lenzburg which manages its customer accounts.
The bank’s boss says this is intentional.
“What sets us apart from a traditional bank is the fact that we don’t want to develop and offer every financial product,” says Sandrock. “We work with specialised partners in areas that we don’t cover ourselves.”
“I believe this to be the future of the banking business as it will be increasingly difficult to generate profits from developing every product independently.”
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