Since the first wave of challenger banks arrived around 2015 with basic account offerings, the biggest players branched out into lending, stock trading, savings, and junior accounts. Very few took decisive steps into the insurance market. As they sought competitive advantages, leading neobanks have since expanded their product offerings with insurance and boosted revenues with payment protection.
Neobanks monetize through paid subscriptions similar to traditional SaaS, that generate predictable income streams. Revolut, for instance, offers three plans – standard, premium, and metal. Interchange revenue is money that a card issuer receives when swiping its card. It is paid by the merchant through payment processing fees. The average interchange rate is around 1.25% in Europe. Banking-as-a-Service solutions often take a cut on those percentages.
Interest revenue is earned by a depository institution, investing customer funds in low-risk securities. Neobanks need high volumes before monetizing deposits interest, with yields being near zero depending on market rate. Neobanks often contract directly with merchants to get a higher commission than interchange fees and offer a part as cashback to users. With loans, they leverage user data to better underwrite and offer superior rates than traditional banks.
Digital bank executives have been using different strategies for years, to lure users into premium subscriptions. By offering payment protection (or embedded insurance) at low cost, their aim now is to undercut pricey credit card companies and disrupt the alternative insurance market.
Monese, the London neobank for expats, automatically covers goods bought within the last 3-6 months, for paying subscribers at no extra cost. Banks offering insurance is not new; even neobanks offer coverage for phones or foreign travel. What’s unique with Monese’s policy is it covers items that are lost or damaged when bought on its card. Monese is also offering a form of income insurance to its few million users. In the event of lost income, users can claim up to a limit over 3 months without leaving the app. Currently, 40% of Monese’s users are paying subscribers. The new insurance features are expected to grow that ratio, offering indirect revenue.
Similar to competitors Monzo and Monese, Revolut ventured into InsurTech and recently launched pet insurance, a segment which rapidly grew during the pandemic. Alongside existing offerings of travel insurance and missed event coverage, this augments its financial super-app used by 4 million customers in UK. The main features included are an annual vet cover of up to £10,000 per pet and 24/7 free access to an online vet.
Revolut had earlier teamed up with Chubb to offer purchase protection, refund protection, and ticket cancellation on purchases made with a Revolut card. Per Revolut, its average customer spends 13 days abroad annually and corresponding pay-per-day insurance costs £11.76 a year, lower than alternatives from traditional providers. Users activate the feature themselves and adjust coverages accordingly, e.g. add winter sports cover.
Another partnership is with SNACK by Income, to incorporate lifestyle-based insurance offerings and embed SNACK into Revolut’s Spare Change Round Up feature. Through bite-sized premiums of $0.30-$0.70 linked to daily lifestyle activities such as dining, commuting, spending on Revolut cards, customers purchase insurance products, from accumulated spare change in the Revolut app.
Despite the boost from Covid-19, neobanks have struggled to make a profit in a market that is getting saturated. They have to contend with powerful new entrants like Google and Walmart. So, it’s easy to see why insurance partnerships with neobanks are gaining traction. Insurtechs can rapidly build volume cost-effectively, insurers can boost digital sales, and neobanks can quickly expand coverage to new customer segments and geographies. Opportunities for insurance partnerships with neobanks abound, but hurdles such as regulatory risk can be spoilers. How neobanks perform in the longer run will determine how sustainable these partnerships are.
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