‘Banking is necessary, banks are not’. This quote from Bill Gates in 1994 predicted the fundamental change the banking industry would go through. Almost three decades later, technological advances have given rise to a new type of bank: neobanks. These banks operate fully digitally, offering customers more efficiency and fewer costs. As neobanks challenge the traditional banking paradigm, the question emerges: does this disruption also signal a move towards greater sustainability in the industry?
The Emergence of Neobanks
The financial industry was hit by a wave of digitalization as a result of the 2007-2008 global financial crisis. On the demand side, customers shifted their preferences from brick-and-mortar banks to digital banks, whilst the availability of big data and technological advances fueled this development from the supply side.
These reciprocal interests ultimately led to what we know as neobanks: banks that make use of modern technology to offer banking services only through a smartphone app and internet-based platform. They are able to beat traditional banks on price, speed and convenience. As a result, the ten largest neobanks in Europe had already amassed 64 million customers in 2023.
A Framework for Sustainable Finance
Sustainable finance is on the horizon, at least from a regulatory perspective. In the EU, sustainable finance plays a key role in delivering the goals set out in the European Green Deal and is essential to upholding EU’s international commitments on climate and sustainability objectives. The goal of sustainable finance is not only about financing what is already sustainable today, but also about transitioning to environment-friendly performance levels over time. In addition, the EU taxonomy strives to provide a clear classification system for a smooth, yet swift, transition to sustainable finance, which is of particular relevance for neobanks when offering financial products. Hence, it is clear that the EU is mapping out an increasing regulatory framework for the financial industry.
Neobanks tend to present themselves as novel banks with improved services, claiming to be ‘the future of banking’. However, does this futuristic take on banking also include an all-important shift towards sustainable finance, as laid out by the EU?
Beating around the Sustainability Bush
Neobanks market themselves as fully aware of the necessary shift towards sustainable finance. The sustainability measures imposed differ, naturally, from neobank to neobank. Some choose to measure their CO2 emissions, impose restrictions on business travels and run donation campaigns to NGO’s that combat climate change. However, efforts like these mirror those undertaken by traditional banks. Hence, they are not disruptive in the industry’s sustainability trajectory.
According to the Greenhouse Gas Protocol (GHG), corporate emissions can be divided into Scope 1, Scope 2 and Scope 3 emissions. Scope 1 refers to emissions from sources owned directly by the company, whereas Scope 2 emissions include electricity purchased by the company. Naturally, neobanks have comparably low Scope 1 and 2 emissions, as their operations are fully digital, yet these are still far from zero.
The real challenge for neobanks lies in addressing Scope 3 emissions, which encompass the indirect emissions resulting from a bank's investments and financed loans. Therefore, it is essential that neobanks address their Scope 3 emissions, which comprise a significant majority—upwards of 95 percent or 97 percent —of their total carbon footprint.
While initiatives such as limiting business travel and contributing to environmental causes are a step in the right direction, they alone cannot mitigate the immense impact of Scope 3 emissions. For a real shift towards sustainable finance to occur, neobanks must confront the elephant in the room: emissions linked to their investments and loans.
Carbon Offset Products as the Solution?
We have seen that the EU is creating a regulatory framework that, albeit rather slowly, demands a shift towards a more sustainable financial industry. Furthermore, neobanks must take the bull by the horns and address their investments and financing strategies in order to effectively challenge the status quo. The question remains if, from a consumer perspective, neobanks are facilitating the transition towards sustainability by aligning their products and offerings with the regulatory push.
Some neobanks decide to offer a ‘Green Plan’, meaning that for every €100 spent by a customer, a tree is planted, contributing to carbon offset. Considering that this plan is the most expensive one this neobank has to offer, it is generally questionable whether the burden of carbon offset should be passed onto customers. Also, this raises issues about the accessibility of such products, as some customers may not be able to afford the additional cost of this ‘green’ plan.
Although plans like these are important in catering to climate-aware customers, they do not directly foster a transition towards sustainable finance as such: the responsibility is shifted from neobanks and the emissions caused by their investments and loans to customers – who must pay a higher price for it. Also, not only do such plans incentivize consumers to maintain their existing spending habits, but planting trees may also be perceived as a form of reward, potentially encouraging further consumption.
The OECD Guidance on Transition Finance sees it as a risk to sustainable finance if companies rely on carbon offsetting, as they may be deterred from reducing their own emissions by counterbalancing those emissions through projects elsewhere. Moreover, carbon markets, which form the basis for carbon offsetting, are heterogenous and lack transparent standards and uniform environmental integrity. Therefore, efforts to reduce a company’s own carbon footprint cannot be replaced with carbon offsetting as such. Hence, regardless of whether neobanks invest in carbon offsetting directly or integrate it in their products as Green Plans, this trend is detrimental to sustainable finance and should not be seen as a step in the right direction.
A Glimmer of Hope
In the ever-changing landscape of neobanks, some have decided to take a leap towards sustainability. The second largest neobank in Europe has, for example, implemented a policy of ‘Socially Responsible Investing’. Under this initiative, the neobank refrains from financing or investing in companies involved in certain sectors, such as mining, fossil fuels, armaments, and tobacco. In addition, the neobank steers clear of companies known for frequent and severe breaches of the Ten Principles of the UN Global Compact. While not investing in destructive sectors is generally welcomed, an active investment policy that encourages investments into sectors directly enabling a sustainable economy would be the next course of action.
Furthermore, there has been an increase in neobanks putting sustainability at their foundation. These neobanks actively invest in environmental investments, such as green bonds and impact-oriented funds. Although the legitimacy of green investments is disputed, it remains evident that some neobanks are committed to a more sustainable trajectory and have decided against the banking status quo.
Also, customers of these neobanks are offered high transparency with regard to the banks’ investments and sustainability initiatives. This is important not only for the prevention of greenwashing, but also builds trust and accountability, which is of great significance in the banking sector. As fees are still low in comparison to traditional banks and the business model therefore remains competitive, sustainable finance is becoming within reach for the general public.
A Lackluster Emergence
While neobanks offer increased efficiency and lower prices, their impact on sustainability within the industry remains a topic of scrutiny. Neobanks continue to defy the status quo by propelling the banking industry into a purely digital one, but their efforts for a transition towards sustainable finance fall short of what can be expected of an emerging, innovative business. Initiatives to address sustainability through measures like Green Plans show that neobanks face significant challenges in shifting the business model into a more sustainable one.
The few neobanks that prioritize sustainability by shifting their investment strategies and holding themselves accountable still remain the exception. This underlines the importance of the ongoing regulatory push by the EU that is exerting pressure on the banking industry as a whole. It has become apparent that for as long as unsustainable finance is not regulated and overcome, it will be capitalized on.