Re‑thinking the banking playbook
When you hear about digital challengers shaking up banking the so‑called “neobanks” it sounds exciting. Sleek apps. No branches. A younger audience. Low fees. But scratch the surface, and you’ll find that even conventional neobanks are fighting for profitability. And when you layer on crypto, things get even more difficult.
Below I’ll walk through: how neobanks make money (and the limits); why crypto‑neobanks face even greater headwinds; and what that means for the future of this sector.
How neobanks generate revenue and where the limits lie
First, let’s define our terms. A neobank is, broadly speaking, a bank‑or‑bank‑like service delivered primarily via digital channels, often without the full branch network of a traditional bank. (Plaid)
Primary revenue streams
- Interchange fees: When a customer uses a debit (or credit) card, the merchant pays a fee and that flows (in part) to the issuing bank/partner. Many neobanks rely heavily on these. (FinTechtris)
- Interest income on deposits: If the neobank (or its banking partner) can take deposits and then lend them out or invest, the spread generates income. (Plaid)
- Service fees, subscriptions, partnerships: Premium accounts, fees for special features, business tools, or cross‑sell services. (Bain)
Why this model is hard to scale
Even though these income lines exist, several structural constraints squeeze profitability:
- Interchange is thin. The merchant pays a fee, but the issuing party shares it (and partnering banks/programs dilute the net). For digital players, the share can be modest. In the US, for example, interchange is typically between 1–3% of transaction volume. (FinTechtris)
- Interchange revenue grows only if card‐spend grows broadly and consistently. Any dip in transactions, or shift away from cards, hurts. (Bain)
- Interest income requires a meaningful balance sheet (deposits + lending). Many neobanks don’t have large loan books or meaningful spreads yet. (Simon-Kucher)
- Customer acquisition cost (CAC) and operating cost (tech, compliance, servicing) remain high. Growth doesn’t automatically equal profitability. (FIS Global)
- Market/financial conditions matter: Low interest rates reduce spread income. Economic downturns reduce spending volume and increase credit risk in lending. (Simon-Kucher)
In short: many neobanks are very good at acquiring customers and offering slick digital experiences, but less good at turning that into stable earnings and profits. One industry report noted: “Initially, less than 5 % of neobanks reached breakeven… The number is improving, but the majority are still unprofitable.” (Simon-Kucher)
Enter Crypto‑Neobanks: Bigger Hopes, Even Bigger Headwinds
Now consider the subset of digital banks that position themselves around crypto: let’s call them crypto‑neobanks. They cater to users with crypto wallets, self‑custody models, trading, DeFi integrations. The idea sounds compelling, but the reality is that they face more acute challenges.
Additional cost burdens and revenue limitations
- Higher customer acquisition / onboarding costs: Attracting crypto‑savvy customers, providing wallet and exchange infrastructure, managing KYC/AML for crypto flows—all raise cost. According to a recent analysis: “Crypto‑native neobanks … face even tougher challenges: lower fees from stable‑coin payments, higher compliance costs, more difficult user onboarding…” (BlockBeats)
- Diminished traditional banking income: Many crypto neobanks operate with self‑custody or non‑deposit models. If deposits are not held in interest‑earning accounts that are then lent out, they lose that traditional bank revenue stream.
- Interchange still matters but may be smaller: While they may issue cards, users might transact less in fiat than in crypto, or may hold crypto assets instead of using debit cards. Thus interchange income is weaker.
- Regulatory & compliance overhead: Crypto adds complexity—wallets, custody, regulatory risk, anti‑money‑laundering oversight. That pushes up cost. (BlockBeats)
- Volatility & risk in crypto flows: If they hold users’ crypto, they may face market risk, custodial risk, and reputational risk. Even if they avoid holding, servicing crypto comes with infrastructure cost.
Revenue‐generating hopes vs practical limitations
Crypto‑neobanks hope to generate revenue by:
- trading or swap fees (crypto buy/sell)
- spread on crypto/fiat conversions
- fees for custody or asset management of crypto
- perhaps lending crypto assets or tokenized assets
But many models remain nascent, and regulation (and market acceptance) is still evolving. As one article summarized:
“The vast majority of internet banks’ income relies on ‘interchange fees’ … Crypto‑native neobanks, despite having DeFi‑native tools, face even tougher challenges…” (Binance)
Hence: the crypto dimension adds excitement, but it doesn’t yet solve the underlying profitability challenge. In many cases, it enlarges the cost side while revenue lines remain immature.
A Closer Comparative Snapshot
Let’s compare the two models side‐by‐side to make the differences clearer.
| Feature | Traditional Neobank | Crypto‑Neobank |
|---|---|---|
| Revenue drivers | Interchange + interest income + service fees | Interchange (maybe) + crypto trading/spread fees + assets on chain |
| Ability to lend (and earn interest income) | Often possible (if chartered) | Frequently limited, particularly in self‑custody or non‑deposit models |
| Customer acquisition cost | High but well understood | Higher due to crypto complexity and regulatory overhead |
| Compliance/regulatory cost | High (banking) | Often even higher (crypto + banking) |
| Revenue margin on cards/interchange | Thin and under pressure | Possibly thinner (less fiat card spend) |
| Risk from market/volatility | Credit risk, deposit risk | Crypto market risk, custody risk, unpredictable regulation |
| Scaling path to profitability | Slower but more classical | More uncertain, revenue streams more nascent |
The picture emerges: while both models face headwinds, crypto‑neobanks are navigating additional layers of complexity. Without a robust foundation of interest income and/or scale interchange revenue, the leap to profitability becomes steeper.
Realities from the Field
- A 2022 blog on neobank profitability noted many rely on interchange fees, but still haven’t delivered profit: “Many rely on revenue from interchange fees… but the largest digital banks have yet to make a profit.” (FIS Global)
- Another report: “To turn customer acquisition into revenue, neobanks … have traditionally relied heavily on interchange fees … Although some have scaled up quickly, this business model is under pressure as a route to profitability.” (Bain)
- For crypto‑neobanks: One site stated: “Crypto‑native neobanks … face even tougher challenges: lower fees … higher compliance costs … more difficult user onboarding.” (BlockBeats)
- In fact, many neobanks essentially admitted their revenue per customer remains modest and profitability elusive: “Only a year and a half later … for those outside the small profitable group… the majority are still not profitable.” (Simon-Kucher)
Customer Acquisition + Spend + Usage = Undercurrent of Success
More than revenue streams, profitability ultimately comes down to three linked factors:
- High quality customers: Not just many users, but users who transact frequently, spend via card, hold balances, optionally borrow.
- Strong usage patterns: If a customer only uses the app as a secondary account and spends little, interchange income is minimal.
- Product depth: Lending products (credit cards, loans), payments, invest/trade—all help increase revenue per customer.
When a neobank or crypto‑neobank lacks one or more of these, margin shrinks. For crypto‑neobanks, however, the hurdle is often bigger: the users may trade crypto, but may not be spending via card or holding deposits; or the bank may not offer lending. So the classic profit formula is harder to satisfy.
Interchange Isn’t a Panacea
Let’s dig a little deeper into interchange specifically, because it’s central to many of these models.
- Interchange rates in the US generally run between 1‑3% of a transaction’s value (for many debit/credit card transactions) and are subject to regulation (e.g., the Durbin Amendment limits debit interchange for banks over $10 billion in assets). (FinTechtris)
- For a neobank customer spending, say, $300/month via debit cards, at ~1.5% interchange, that would be about $4.50/month in revenue. Adjust the share they keep and your net might be even less. (FinTechtris)
- That means: you need a large volume of users, or higher spend per user, or ancillary income to make the model attractive. And when you’re paying CAC and ongoing cost, margin is thin.
Because interchange is inherently small per user, especially in markets where card spend is modest or where users are young/low income, relying on interchange alone is a fragile path. And it gets more fragile when your users use crypto instead of standard cards.
Lending (or lack thereof) is a key gap
One of the biggest gaps for many neobanks—and even more so for crypto‑neobanks—is lending.
- Traditional banks have large loan books. They take deposits and lend them out—earning net interest margin (NIM).
- Many neobanks either don’t yet have big lending portfolios, or choose to be “deposit and transact only” players without large-scale credit. Without that, they miss a high‑margin revenue stream. (FIS Global)
- For crypto‑neobanks, if they’re offering self‑custody wallets (meaning the user holds their own assets) or are not taking deposits in the usual sense, then they don’t have that deposit→lend model. That deprives them of a core bank income line.
The absence of meaningful lending means they lean even harder on the weaker income lines (interchange, crypto trading fees) while still incurring full banking/compliance/infrastructure costs.
The Compliance and Infrastructure Cost Burden
Another dimension: cost.
- Digital banking isn’t cheap. You’ve got back‑end tech, customer support, fraud prevention, regulatory compliance, partner banks, risk management.
- For crypto‑neobanks, add the complexity of crypto infrastructure: custody (or non‑custody), wallet management, blockchain‑integration, smart contract risk, crypto KYC/AML, cross‑border flows, token/asset risk.
- One recent article states: “higher compliance costs, more difficult user onboarding” for crypto‑native neobanks. (BlockBeats)
So while the allure is “digital only, low cost”, the reality is that regulatory risk and infrastructure cost are non‑trivial—and when revenue is thin, the margin is very narrow.
Scaling is harder than growth
It’s tempting to think: “Just get more users, scale up, the costs per user fall, margins improve.” But in practice:
- Many neobanks have grown customers but still not turned a profit. The revenue per customer isn’t high enough yet. (Simon-Kucher)
- For crypto‑neobanks, the unit economics may be even weaker: a user who trades a little crypto may not spend via card, may not hold deposits, may not borrow. So their “value” to the business is lower unless additional monetisation is achieved.
- Scaling also means increased risk: larger loan book, larger custodial assets, more regulatory scrutiny, higher stakes. The low‑cost early phase doesn’t always scale linearly.
Thus: growth is necessary, but growth alone isn’t sufficient unless it comes with higher revenue per user and lower incremental cost.
So what does this all mean for the industry?
The upshot: both traditional neobanks and crypto‑neobanks face a basic structural challenge. But crypto‑neobanks face steeper slopes.
For investors and operators
- A model built solely on interchange fees is fragile. If spending dips, or regulation changes (e.g., lower interchange caps), the business is vulnerable.
- Pathways to profitability must include diversified income: lending, subscription services, premium features, partnerships. As some reports note, neobanks need to look beyond interchange. (Bain)
- For crypto‑neobanks, building a business model with sustainable revenue beyond “crypto novelty” is crucial. Without meaningful deposit/lending infrastructure or high‑volume card usage, they risk being stuck in low‑margin land.
- Compliance and regulatory cost will not fade away—in fact, it may grow as the business scales and as regulators focus more on fintech & crypto.
- User acquisition is just the start. Retention, usage intensity, and monetisation matter.
For customers and market watchers
- Use of digital banks is growing rapidly, and the digital‑only model remains compelling. But “digital banking” does not automatically mean “profitable banking”.
- If you’re evaluating a neobank or crypto‑bank, it’s worth checking: How is this institution monetising users? What are its major revenue streams? Does it have meaningful lending or deposit margin?
- Regulators and incumbents are adapting. If interchange regulation changes (for example, tighter limits) the economics could shift rapidly.
Case in point: A benchmark of performance
Let’s reference some real‑world metrics to ground this discussion.
A recent industry study noted:
“Less than 5 % of neobanks were profitable initially… though revenues grew 43 % and average per‑client revenue rose from US$69 to US$75, still leaving ample room for further growth.” (Simon-Kucher)
Meanwhile, for crypto‐native players:
“Crypto‑native neobanks … have an edge in offering on‑chain products … but they face lower fees from stable‑coin payments, higher compliance costs, more difficult user onboarding, and fierce competition once traditional banks also embrace crypto.” (BlockBeats)
So the numbers bear out: growth in users + revenue is happening, but profit remains elusive for many. And when you overlay the crypto dimension you amplify the challenge.
Strategic take‑aways for success
Given all the above, what should a digital bank (traditional or crypto) focus on if it wants to move toward profitability? Here are several strategic pointers:
- Monetise usage, not just sign‑ups
Recruiting users is one thing. Getting them to use the debit/credit card, to hold balances, to borrow is another. Higher usage = higher interchange + potential for lending income. - Build a lending or interest‑earning engine (if possible)
The deposit → lend → interest‑income model is still one of the most stable banks’ revenue legs. If you can’t lend, you need to compensate elsewhere. - Diversify income lines
Relying purely on interchange is risky. Consider premium services, subscriptions, asset management, business banking, partnerships, cross‑sell. Reports recommend this as a path for neobanks. (Bain) - Align cost structure with scale
High fixed cost (compliance, tech) means you need scale. Until then, be lean. Monitor CAC, churn, cost per user. - Differentiate the offering
Especially in crypto‑neobanking, differentiation matters. Simply offering standard banking + crypto wallet may not be enough. Unique value‑add services, stickier features, network effects help. - Regulatory and risk readiness
Especially for crypto players: custody risk, regulatory changes, AML/KYC demands. Risk is higher and could erode trust or impose cost. - Plan for volatility and contingency
Card‑spend can fall, crypto markets can tumble, regulation can bite. Having buffers, diversified revenue, contingency plans is prudent.
The Imperfect Revolution
Digital banking—and by extension crypto‐enabled banking—is unquestionably interesting and full of potential. But the narrative that neobanks will “easily” replace traditional banks or that crypto‐neobanks will unlock effortless profits is too optimistic.
Here’s the honest bottom‑line:
- Many neobanks still struggle because unit economics are weak. Spending per user is low, interchange small, lending absent or modest.
- Crypto‑neobanks layer on additional complexity and risk: compliance, custody, nascent revenue streams, and often a lack of traditional bank‑balance sheet advantages.
- For either type to succeed, they must evolve beyond simple digital replacement of banking services. They need more intense usage, more monetisation, and more diversified income streams.
- Until those ingredients are in place, the story will broadly remain: “Great growth, weak profits.”
In other words: digital banking is not “cheap banking”, and crypto‑banking is not “banking with no banks.” The profit model still matters.
Sources:
- “Interchange: Core Revenue Driver for FinTech’s Neobanks” (FintechTris) (FinTechtris)
- “Neobanks: Does popularity point to profitability?” (FIS Global)
- “As funding dries up, can neobanks diversify their revenue streams?” (Bain) (Bain)
- “What is a Neobank? How fintech is transforming banking” (Plaid) (Plaid)
- “How do neobanks make money and who can analyse and improve it?” (Markswebb)
- “Profits at the End of the Tunnel” (Simon‑Kucher) (Simon-Kucher)
- “Profit Trap Facing Crypto Internet Banks” (BlockBeats) (BlockBeats)
- “Crypto Neobanks: Bridging DeFi and Everyday Finance” (Markets.com) (markets.com)
