What in the world is a Neobank?

Contents

    The word ‘neo’ means ‘new,’ and thus ‘NeoBank’ means ‘new bank.’

    But what does this actually mean?

    In the modern world that we live in today, the word ‘new’ is commonly associated with technology.

    NeoBanks are no exception to this claim, as they are banks that operate 100% digitally through leveraging technologies such as the internet or cloud computing.

    This in turn has allowed them to become rather competitive compared to traditional banks, leading to the alternative name: “challenger banks.”

    What services do Neobanks offer?

    Some examples of the offerings of a NeoBank are as follows:

    • Opening a checking or savings account
    • Loans other money lending services
    • Transfers to individuals or companies
    • Investing and insurance

    Different NeoBanks may also offer other services depending on their target demographic - NeoBanks may specifically target entrepreneurs or businesses for example.

    An example would be a NeoBank for immigrants, a specific niche in which people have struggled to open a traditional bank account once they land in a new territory.

    Remitly, a Seattle based startup, raised over $135 million to fund their new service called “Passbook,” which primarily targets immigrants. Or what about a NeoBank for teens?

    Walrus is another great example of a NeoBank filling in a specific niche that traditional banks tend to stay away from. 

    As you have most likely picked up on by now, NeoBanks, unlike traditional banks, are fully digital.

    Being fully digital means that no physical bank branches are required and operation can take place on a global or multinational scale with far less of a capital requirement.

    This is how NeoBanks can effectively target niches as they do not have the same restrictions that a traditional bank would have. 

    Neobanks, Digital Banks, and Traditional Banks

    Those who have heard of ‘digital banks’ may now be wondering what the difference between digital banks and NeoBanks is.

    Digital banks are a type of fintech, which just like the term ‘NeoBank,’ is a combination of two words: ‘financial’ and ‘technology.’

    Digital banks offer very similar services to NeoBanks in that they allow users to deposit, withdraw, transfer, borrow, and perform all sorts of other banking-related tasks with their money.

    Furthermore, they tend to also target specific niches such as small businesses.

    So what exactly is the difference between NeoBanks and digital banks? 

    NeoBanks are said to be independent, not being associated with a traditional bank, whereas digital banks tend to exist as a branch or root of a larger (traditional) bank. 

    neobanks vs traditional banks

    Fig 1: Venn Diagram - Source: The Nielsen Company (US), LLC

    The Benefits of a NeoBank

    The independence factor can be highly relevant to some, as not being associated with an existing bank gives NeoBanks a lot of flexibility.

    Granted, NeoBanks must still follow banking and MSO (Money Service Operator) regulations, which are dependent on the region in which they operate, they have much more flexibility - which leads to many benefits. Consider the following:

    Ideals and Ethics

    Most, if not all, banks are businesses.

    At the end of the day, the aim is generally to make a profit off of the services that they provide.

    Granted, most NeoBanks likely share this objective, the difference is they do not have to. 

    Insha is a German NeoBank that aims to put morals and principles, according to their website “Insha is the mobile banking service that puts moral values first,” and that “It’s a service for everyone who cares about what is done with their money.”

    They create innovative services, allowing users to perform tasks such as donate to a charity of their choice, track their spending as well as other morally grounded actions - all while providing traditional bank services as well, which would otherwise not be possible if they weren’t a NeoBank.

    If you are someone who puts morals and values first, NeoBanks may therefore be an interesting consideration for you.

    Customer Orientation

    NeoBanks are said to be “all about the UI/UX design.”  In other words, they emphasize the design and feel of their platforms.

    Traditional or legacy banking platforms are said to look outdated and can be fairly counterintuitive.

    Aiming to be the new era of banking led NeoBanks to do the complete opposite and create easy-to-use and highly intuitive systems so that banking becomes quick and easy. 

    If you would like to try out a well-designed banking system, most NeoBanks will be perfect for you.

    Cost-Effectiveness

    As NeoBanks are completely digital, this allows them to have a more cost-effective business model compared to traditional banks, which have to cover labor and other operational costs as they have physical branches.

    In turn, NeoBanks are able to charge very low or even no monthly fees at all - take Revolut as an example: their starting price is 0 Euros.

    If price is an important consideration for you, then NeoBanks may be a very effective banking solution for you.

    Convenience

    One of the main features of NeoBanks is that they are completely digital, and as mentioned, require a mobile phone or another device to be accessed.

    This means that you can perform banking-related tasks practically anywhere without having to go to a physical branch.

    Furthermore, if you have any issues related to banking, it is fairly easy to contact a representative from a NeoBank, as communication is also completely digital.

    Issues can thus be resolved much faster, and with far less effort from the user.

    NeoBanks can be highly advantageous for travelers or digital nomads. 

    Drawbacks of a NeoBank

    Although NeoBanks come with an extensive amount of benefits compared to traditional banks, there are also numerous downsides:

    Security Issues

    There are three main cybersecurity threats that NeoBank and other types of digital bank users face: social engineering, malware, and phishing/pharming.

    These are threats designed to access a user’s personal information, funds within their bank account, or any other potentially harmful activities.

    One of the most deceptive security threats is phishing - when a fake or “spoof” website is created under the same or a nearly identical name to the original website with the intent of stealing login information. 

    A user may be sent a link to a fake NeoBank website (that looks identical to the real one), then prompted to provide their login information. The user may then enter details such as their banking usernames, passwords, PINs, and so on.

    The scariest part is that there isn’t much that NeoBanks can do on their side - as the main solution is educating their client base about these threats. 

    Heavy reliance on technology leads to an increase in technological threats, of which there is an abundance.

    Though the likelihood of your banking details being stolen is very small, it is still possible and more likely to happen in comparison to using a traditional bank.

    Before using a NeoBank, you must also consider these potential threats.

    No Physical Branches

    As NeoBanks do nearly all of their banking activities online, if a client would like to speak to a representative they must do so via email or other messaging systems.

    Compared to going into a physical bank and speaking face to face with an employee, online messaging can result in longer resolution times for issues - which is especially true for more complex transactions.

    It is much easier to have a five-minute conversation than to speak over a long email chain. 

    If you plan to make more complex, large, or important transactions, perhaps opening a traditional bank could be much safer.

    Uncertain Future

    NeoBanks have made known the many flaws of traditional banking in the span of a few years, catered to niches untouched or avoided by big banks, and have managed to accelerate the acceleration of growth of the digital banking industry in the span of a few years.

    However, traditional banks are also hopping onto the digital banking bandwagon, starting their own branches or sub-brands.

    Examples of this are TMRW, which is a digital bank made by Singaporean multinational bank UOB, or Finn by JP Morgan Chase.

    Digital banks backed by massive traditional banks, compared to NeoBanks, likely stand a better chance to develop a better product (as they would have access to far more capital).

    Further consideration of the specific niches targeted by NeoBanks also raises concerns about future growth potential.

    Will NeoBanks be able to compete with digital banks backed by the big banks? 

    By choosing to use NeoBanks in the long term, you may be betting against traditional banks - which is another consideration to base your decision on.

    Are NeoBanks for me?

    If you are part of a niche that is currently avoided by traditional banks, the answer is an easy ‘yes.’

    If you’re a fan of the other features such as UI/UX, low fees, possible ethical considerations, then the answer is less certain as you must consider whether they are worth the increased potential risk.

    Furthermore, if you are planning to create a long-term banking account, then you must be aware of the uncertain future of NeoBanks.

    However, at the end of the day, there’s no harm in opening a digital bank account (unless of course, your personal data gets stolen!), consider trying out various digital banking platforms and NeoBanks to see if they are in line with your preferences, as the choice is highly dependent on you. 

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