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 they are suitable for you:
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.
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).
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 neobanks for savings and deposits and only limit their use to making transactions.
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.
Last update: 24/09/2021