A neobank is simply a bank that operates without any physical branch. It is also known as an “online bank,” an “Internet-only bank,” a “virtual bank,” or a “digital bank.”
A neobank only exists in the virtual realm, much like an e-commerce store like Amazon that does not have brick-and-mortar establishments.
Read More about a “Neobank”
When Was the Term “Neobank” Coined?
The first neobanks comprised fintech companies that challenged traditional banks. The term “neobank,” however, only gained mainstream use in 2017, even though Monzo and Atom Bank have already been in business since 2010.
Two primary types of neobanks exist—those with banking licenses and those that partnered with traditional banks to provide financial services.
How Does a Neobank Work?
While neobanks make money the same way traditional banks do—through lending—the two differ significantly in business models. But since neobanks don’t have physical premises, they can substantially cut down customer fees. They are also more client-centric than traditional banks in that they offer more personalized services backed by advanced technology.
Decisions in neobanks are data-driven. Their digital platforms make it easy to collect and analyze data and understand how customers behave. Their observations allow them to create several client categories rather than merely sticking to one or two types—corporate and personal (for most traditional banks).
Why the Recent Surge in Neobanking?
Neobanks are on the rise because they put customers first. And if there’s one thing that today’s clients look for, it’s convenience.
A study showed that neobank apps have 42% more features compared to those of traditional banks. They also boast of much faster loading times. It also helps that some neobanks offer even more services than their traditional counterparts. Examples include Starling, Revolut, and Monza, which let customers use Bluetooth to find and pay vendors. Other nifty neobank offerings include low or no monthly fees, easy international money transfers, real-time balance viewing, and instant spending notifications.
And since neobanks rely a lot on data for decision-making, they are known for conducting consumer research before rolling out new products. That allows them to address actual consumer needs.
Neobanks versus Challenger Banks: What’s the Difference?
Challenger banks are fintechs that use technology to streamline retail banking. All challenger banks can be considered neobanks as they don’t have physical locations, but not all neobanks can be regarded as challenger banks.
Challenger banks fall under the first category of neobanks—they have banking licenses. These licenses allow them to offer the same traditional banking services but at a more flexible scale. How? They save on operational costs and give customers higher savings interest rates and lower loan interest rates, beating traditional banks’ offerings.
Are Neobanks Here to Stay?
Given the convenience, personalization, and more enticing rates that neobanks offer, many traditional banking clients are shifting to them. Here are a few reasons why:
- Easy account creation: While traditional banks have streamlined their application processes, some remain tedious. Neobanks have addressed this by allowing users to create accounts wherever they are, even on their phone.
- Automatic international payments: Traditional bank customers sometimes need to specifically apply for internationally accepted debit cards that they can use when they travel. Neobank cards are accepted anywhere in the world and always use current exchange rates.
- User-friendly apps and sites: Since neobanks are more tech-savvy than traditional banks, their apps and sites are more user-friendly.
- Smart reports: Neobanks show customer transactions in real-time, so they always know their account balances. Some apps even provide an overview of users’ expenses, along with a savings goal that they can customize to suit their needs, helping them manage their finances.
Given the increased investment in and rapid growth of the new wave of banks, analysts expect the neo- and challenger banking industry revenue to reach US$356 million by 2025. This is probably why traditional banks have started partnering with neobanks so they won’t get left behind.