With the advancement of financial technology, the demand for quicker transfers at lesser costs increased. Traditional banks, unfortunately, were unable to fill the vacuum until it was too late. By then, neobanks sought the opportunity and started providing the same services as banks, but at a cheaper cost and faster than most traditional banks. Common known neobanks are Revolut, Wise, N26, Monzo, Paysera, Monese and many more.
This article will dive into what neobanks are, how they work and whether you should open neobank account:
- What are neobanks?
- Popular neobanks around the globe
- Why neobank?
- How do neobanks make money?
- Should you consider switching to a neobank?
- What you need to watch out for with neobanks?
What are neobanks?
Neobanks are fintech inspired online banks that are heavily focused on digitizing banking services. Unlike traditional banks, they do not have branches for account holders to walk in and strictly offer the services online. They are primarily suitable for tech-savvy people who do not want to deal with the bureaucracies of banking and want to manage their money online. Their services typically include transfers, direct debit, card payments and making deposits. By cutting the need to have physical branches, neobanks can focus their capital more on the services and account holders save more time and money by using the services. Some neobanks are regulated, and some are not. However, many of them are applying for licenses to be regulated by the state and apply the deposit guarantee schemes to account holders' deposits. For example, Wise is now regulated under the Financial Conduct Authority in the UK and has the Electronic Money Institution licence required under Electronic Money Regulations 2011 and Payment Service Regulations 2017.
Neobanks do not necessarily replace traditional banks, as customers tend to keep both for different reasons and use them interchangeably. Becoming a legitimate chartered bank is difficult for many of these neobanks. Hence so many of them work together with existing banks to offer deposit protection guarantees. Some banks allow customers to connect their accounts with their neobank accounts and some neobanks use traditional banks to transfer money (Monzo, for example, uses Natwest). Some neobanks have also started to offer loans to their customers (N26). On the other hand, some traditional banks have started providing similar innovative features to compete for neobanks as they have recognised the demand for online banking, cheaper transfer and managing money on mobile apps.
Neobanks are just as secure as normal banks; however, customers should check if they are regulated or if their deposit is protected under the deposit protection guarantee.
Popular neobanks around the globe
Neobanks continue to be popular around the world, not only in Europe. In 2022, neobanking is expected to generate €1,704,797 million in transaction value. By 2026, the number of users in the neobanking industry is predicted to reach 128.40 million. Some of the most popular neobank examples in Europe are Bunq, Monese, Wise, Monzo, Revolut, Starling Bank, N26, and many more. Most of them provide debit cards. Some of them also have a licence to operate as a traditional bank with a mandatory guarantee, for example, N26.
The United States has the highest neobank-based transaction value globally. Chime holds the highest number of customers.
Asia is not far behind in catching up with the popularity of neobanks. However, neobanks are more of an emerging market due to its unbanked population. Although most big neobanks already offer their services in Asia in their local currencies (Wise and Revolut, for example), Asian countries are also taking advantage of the obvious vacuum in the digital banking industry. Examples of popular neobanks are WalrusTeens from India, WeBank from China, and WeLab from Hong Kong.
Unlike typical banking systems, neobanks operate on a completely distinct and unique business model, making money on the margins of money lending and inflow. Neobanks are customer-focused and offer specialised services backed by technology to their customers. These banks provide convenient, hassle-free services that are available 24 hours a day, seven days a week, with real-time payments, balance checks, and other services. They also provide individualised offers based on your income and spending patterns and have a reduced cost structure because of the lack of physical branches.
Neobank allows access to banking services with the touch of a finger. Because it employs advanced technology such as artificial intelligence (AI), facial recognition, and biometrics, it is relatively safe. Furthermore, because all banking services are linked to a single platform, they can be accessed with a single click.
Customers should consider whether a neobank's value coincides with their own, as well as whether any bonus benefits are available.
Neobanks vs. online banks
Although "neobank" meaning can be confused with "online banks" and they are sometimes used interchangeably, they are not synonymous. Individual FinTech enterprises known as neobanks provide a wide range of financial services, including money transfers, lending, and mobile-first financial solutions. The primary purpose of neobanks is to provide a level of seamless client care that no other traditional bank can match. neobanks are noted for being more inexpensive and speedier than traditional banks.
Traditional banks can offer online banking through their website or a mobile app. They can do basic banking transactions at any time and from any location that suits them. Thanks to internet banking, consumers will no longer need to visit a bank branch to complete their banking operations. As a result, in order to access their online banking services, clients must first sign a contract with a traditional bank. Most traditional banks now offer internet banking for basic services such as transfers, currency exchanges, and bill payments. As fintech becomes increasingly essential, traditional banks compete to release sophisticated apps for everything from establishing new accounts to credit applications to multi-banking.
Pros and cons of neobanks
One of the obvious advantages of neobanks is the convenience of accessing your account online from anywhere, as long as there is an internet connection. You will often get lower fees and better interest rates because of the lower overheads compared to traditional banks, and your money is just as safe as it is with a traditional bank.
The cons are that, as most neobanks do not have a bank charter, they are not considered to be banks. Instead, these businesses usually work with a bank to insure their goods - check with a partner bank to see if a neobank has a mandatory guarantee before signing up. In comparison to regular or internet banks, neobanks often offer fewer services. Not all of them provide the same range of services as a regular bank. These financial institutions are more concerned with checking and savings accounts than with loans.
How do neobanks make money?
Neobanks often operate on a different business model than traditional banks. Interchange fees are paid by merchants when customers use their debit card accounts for a large portion of their revenue. Because they are smaller, neobanks can have a higher interchange percentage than banks.
There's also significant disagreement over how much money challenger banks make from out-of-network ATM usage. In a recent piece, Axios speculated that Chime's source of income could be up to 20%. In reaction to the allegations, Chime stated that this form of revenue accounts for a "tiny percentage" of overall company revenue, and that they have 38,000 fee-free ATMs around the country.
Over the last decade, venture capitalists have also poured money into neobanks. Chime alone raised $485 million in 2020 more than doubling their valuation.
However, not all challenger banks are success stories, and some doubters are sceptical of the exorbitant valuations. Some early European darlings, such as Monzo, were severely harmed by the epidemic and its impact on consumer spending. Xinja, an Australian neobank, went bankrupt last year, citing the COVID-19 issue and consequent cash shortages.
BBVA recently announced the closure of two of its challenger bank acquisitions in the United States: Simple, which began in 2009, and Azlo, a fee-free small business bank. Some of the popular neobanks have yet to profit. Revolut, while their revenue increased by 34% their losses increased by 57%. The "strategic decision" demonstrates how precarious certain neobanks' long-term growth prospects are.
Should you consider switching to a neobank?
Having an account with a neobank could be for you if you prefer to manage your financial matters online without seeking additional external time-consuming support. Opening an account is free and easy, and almost all services are low cost or free. They are also more convenient to use on mobile apps and does not require an in-branch schedule to access their services.
Neobank services cost lower than traditional banks for having an account and making international transactions. This is especially necessary for many customers who want to send money outside their borders cheaply for any reason - to pay bills, send money to families or even make cross-border investments.
Neobanks are particularly useful for people who want to have a virtual local IBAN account without being in the country - meaning that a resident of one country can have a bank account in another country. As most neobanks are based in Europe, crossborder IBAN ownership is common. This extends to some non-Europeans who can convert currencies before using the local IBAN (Wise Multicurrency, for example).
How to open an account at neobank?
Neobank account opening is almost the same across different platforms. All of them require customers to open an account digitally with their personal information. Most of the neobanks have an FAQ where they explain ton how to start a neobank account. But before you open an account with any neobank, shop around and choose the platform that best meets your requirements. Look for online reviews and see the satisfaction rate. You can even evaluate various possibilities because each has its own set of advantages and rewards.
You may want to open a personal account or a neobank business account.
Opening an account does not take very long. However, you will be asked to verify your identity through ID verification and personal information like name, address, email, and phone number. Some platforms may require additional information to comply with regulatory requirements. Almost all accounts have two-factor authentication to verify information and login.
What you need to watch out for with neobanks?
Although neobanks have made a lot of things easier, they have also made a lot of things a lot more complicated and difficult for people, especially those who are not tech savvy or elderly. The following are some of the things you should watch out for before you create an account with a neobank.
Complying with KYC and AML measures
Granted, with digitisation comes more online security and some of the financial regulations implemented to achieve it can be daunting for many customers. KYC and AML measures are absolutely mandatory for financial institutions to implement since they deal with money. KYC stands for Know-your-customer, while AML stands for Anti-money laundering. These two support each other in terms of implementation. Neobanks will implement KYC by asking customers for all sorts of IDs and documents to verify their online accounts. AML is implemented when customers are making transactions, and neobanks do a background check behind the transaction to ensure that the transaction is not breaking any financial laws.
The issue is, while AML is regulated and has specific laws on how to implement it, KYC does not. Each state has their own methods of implementing KYC, and as such, customers will need to go the extra mile to get their accounts verified. For example, some neobanks are satisfied with a driver's licence as a form of ID, while others do not. Such a lack of standardisation will exhaust customers and will deter them from using a neobank. Consequently, this could prevent customers from their final financial goal, which could have been achieved through the neobank (for e.g. crossborder investing through neobank).
While a lot of customers find online services, some may prefer more personal touch to them, which is where a lot of customers may find their support limited. Most neobanks implement chatbots to deal with routine questions. However, it lacks when the question is very subjective. Also, support may be delayed when the matter is urgent (e.g. account is frozen or fraud-related matters).
You may find your bank account blocked and the most common reasons cited are non-compliance with KYC or security issues. Whatever the reason - it can be very frustrating for account holders, especially when further support is limited. Lots of customers rely on neobanks for deposits and savings, and having their access blocked to their own money can leave a bitter experience. Revolut was one such infamous example when they faced a lawsuit for blocking Romanian accounts. Recently, Chime's customers are facing a similar issue where accounts are being closed without notification and deposits are not being returned. Such incidents deter people from relying on neobank savings account and only limit their use to making transactions.
Neobanks are expected to grow their customer base even further and at the same time, traditional banks will also catch up to the conveniences that neobanks are providing. Regardless, you may still want to use a neobank with or without a traditional bank account on the side. Before you decide to open an account with neobank, understand what they are and how they work. Evaluate both the advantages and disadvantages of opening a neobank account and not just stick to your online bank. Analyse who it is that the neobanks are charging to make their money and why you should or should not switch to a neobank. If you decide to open an account with them, understand the risks that may come with it.
Neobanks can act as an additional tool aside from traditional banks to manage money more swiftly and efficiently. As a virtual account, neobanks can solve many of the barriers traditional banks possess, such as high costs and digital limitations. However, most banks are catching up to these shortcomings. On the other hand, neobanks pose their own sets of challenges. A lot of the issues are novel with no precedent to rely on for solutions. As such, customers will continue to face these new challenges until regulators and banking experts understand the nature of neobanks completely and provide grounded solutions.