Neobanks vs. Challenger Banks

The presence of online banks has been on a steady increase since the dawn of the new millennium.

The attacks on September 11th perpetuated the upturn in online banking, as financial institutions were looking for new ways to move cash and checks that didn’t involve air travel. 

Presently, the figures reported by neobanks and challenger banks are nothing short of astounding.

By 2027, these two classes of banks will be worth over $470 billion USD. 

People often use both of these terms to describe one type of financial institution.

However, doing this is a disservice to the two types of banks, respectively. 

Challenger banks do a great majority of their business online, while neobanks do all of their business exclusively online. 

The main difference is that neobanks lack the presence of a physical location.

Challenger banks do have physical locations, albeit not as numerous as traditional banks.

Let’s examine some of the other contrasting elements of these two banks. 

Differences in Services Offered

Normally, challenger banks offer personal and business accounts.

Their features and banking services are streamlined in an attempt to become friendlier to users on the internet. 

These challenger banks are smaller institutions whose name was derived from their willingness to stand up to the traditional banks.

The smaller, mostly-online based banks started “challenging” the bigger, more traditional banks in the mid-to-late 2010s. 

Challenger banks offered a commitment to technology and customization that had never been seen by traditional banks.

This caused customers and business owners to take their business to these alternative financial institutions. 

Sometimes neobanks offer personal accounts, but typically their core business comes from small-to-medium sized businesses.

Fresh startup businesses make up a good percentage of their customer base also. 

Licenses/Certifications

Even though challenger banks are mostly online-based, they do sport a small number of physical locations that grant them the privilege of operating with a banking license.

Neobanks, on the other hand, do not possess this same license. 

Because of this, challenger banks can offer a full range of financial services to their customers.

These services include credit card and loan options. 

Technically, neobanks can offer these services, but there’s a catch.

They have to be married to a standard financial institution in some way before they’re granted the ability to provide these financial services. 

All of the examples above provide some of the major characteristics of each of these banks, respectively.

To get a better understanding and clearer picture of who these banks are and how they operate, having a list of examples can help.

When it comes to the leaders in neobanking and challenger banks, these are some examples of the biggest players in each industry.

These banks aren’t listed or arranged in any particular order except for their classification as a neobank or challenger bank. 

Neobanks

• Dave
• SoFi
• Chime
• Revolut
• Simple
• Acorns
• MoneyLion
• Varo
• N26

Challenger Banks

• Cogni
• Climate First Bank
• Ando
• Grasshopper Bank
• HMBradley
• Kard
• Letter
• LikeBank
• LevelBank

Pros and Cons of Challenger Banks

Pros

• Challenger bank accounts are quick to use and very easy to set up. These accounts are streamlined for maximum convenience in the internet world. 
• Most challenger banks can have you signed up, approved, and doing business within a matter of fifteen to twenty minutes. 
• The fees involved with challenger banks are substantially lower than those of traditional banks and other institutions.
• Bank licenses allow these challenger banks to provide customers with a full range of financial services. Challenger banks can offer credit cards and loans as part of their membership services. 

Cons

• Many challenger banks still run a credit check for potential customers.
• It’s possible you may not have the same level of protection as you would with a traditional bank. 
• Usually, there is no physical location for you to frequent and see a banker in person. 

Pros and Cons of Neobanks

Pros

• There are fewer rules and no credit checks with neobanks. This usually means the costs and fees associated with neobanks are the cheapest out of all possible financial institutions. 
• Neobanks use data to predict future account activity. This can help with setting up a budget or planning for trends in your business.
•  All of your banking can be done on a smartphone app
• Most neobank platforms have crypto trading and buying as an option. Modern neobanking apps double as cryptocurrency exchanges.

Cons

• If you’re not tech-savvy, neobanks can become confusing to navigate.
• There aren’t as many protective elements or legal remedies if a negative situation occurs.
• There is no physical branch or links within an ATM network. Depositing cash can be difficult.

Takeaways

Challenger banks are quickly blossoming into all-inclusive financial institutions with all the bells and whistles of traditional banks while remaining modern by incorporating tech elements of neobanks.

Although some users may find the lack of physical locations inconvenient, most challenger banks do have cash deposit locations with thousands of options for ATM access. 

On the other hand, neobanks continue to spread their digital wings, offering more SME options and API tools for business owners.

Neobanks can be considered more of a well-rounded financial platform, giving customers the ability to manage stocks and cryptocurrency along with their routine banking activities. 

In terms of longevity and relationship building, challenger banks possess enough of the characteristics of a traditional bank to provide a level of professionalism and security.

Sure, it’s convenient to dabble in crypto and stocks while studying potential trends for your business.

However, one of the main goals of establishing a history with a bank is to grow financially, develop personal relationships with your institution, and capitalize on credit-building options. 

Because of these solid characteristics, challenger banks have the potential to keep gaining steam as reputable financial institutions.

Without banking licenses, protection for your money, and access to credit and loans, it’s hard to look at neobanks as anything other than a commodity at this point, a financial concept built on groundbreaking ideas.

This isn’t to say that neobanks can’t catch fire with a few strong additions to their terms of service.

Besides, any world-renowned business that we use today most likely started with a few good ideas.

Are you looking for a way to kick traditional banking to the curb for the benefit of your business?

Open a business account with Statrys today.