In the simplest terms, a neobank is a technology provider that provides online banking services through a partnership with an established bank.
Features such as Money transfer, Bill payments, Making and Receiving Deposits are standard in a Neo Bank, exactly like a traditional bank. Some of these fintech providers also offer tools to help with budgeting and saving – that help novice users better manage their finances.
The neobanking sector was valued at $34.77 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 47.7% from 2021 to 2028 as per a market analysis report by Grand View Research.
Also known as Challenger Banks, Neo Banks are usually focused on providing a couple of specialized services – spending and savings for example, or insurance deposits.
Mostly, Neo Bank services are made available through Mobile apps by the company, but in many cases web apps also provide access to banking, along with physical debit/credit cards in rare cases.
So, why should you choose a Neo Bank over a traditional bank?
- Easy, early access:
- 24×7 access to services
- No need to visit a branch
- Excellent customer experience overall
- Fully digital, and regulated operation
- Lower fees/No fees: Online only mode of operation saves a ton of money for the neobank operators, hence lesser fees are transferred to the customer, in some cases customers are charged no monthly fee.
Compared to a traditional bank, a $10/m fee translates to $120/yr – which are direct savings if banking with a neobank charging $0/m.
- Advanced Security Features: Neobanks are safe as they still have to abide by the regulators. They have some of the latest security features such as biometric verification, 2FA (2-factor authorization), RBAC (Role-Based Access Control), modern encryption technology among other security measures.
- Better Reporting: NeoBanks provide better reporting to customers on their accounts & finances helping them plan and manage their money more efficiently.
Why you might want to hold off for now?
- Limited customer services: With no branches, expect limited support from the branches. Some banks may provide social media support channels , or online chat options, which can be helpful for basic questions.
It does raise the question of how difficult it can get to claim your account back with a chat support agent, if it has been flagged for fraud wrongly.
- Fewer banking services: Neobanks offer some digital banking services, but many lack broader banking options, such as the ability to send wire transfers or easily accept cash deposits. In addition, they may offer fewer accounts. As mentioned above, a neobank might offer a spending account, but they might not offer certificates of deposit, investment options or loans.
- Unproven history: Neobanks don’t have long track records. Many have opened only within the last few years, and they could fail, like any other startup.
If that happens, consumers typically don’t have to worry about losing their money, because account deposits are usually held at a partner bank.
But dealing with the process of claiming the money or switching to the partner bank could be a hassle.
How are they different from Online-banks?
While neobanks offer banking services, they’re not necessarily the same as an online bank. The latter usually has to be approved by a regulatory authority and offers a range of traditional products, such as checking, savings, CDs, investments and loans.
Some brick-and-mortar banks have online-only divisions that offer a full suite of digital accounts consumers can manage from a computer or smartphone app. Since the accounts are offered by a traditional bank, those divisions could be considered online banks instead of neobanks.
It’s worth noting that many traditional banks offer online access to their regular accounts. But they aren’t online-only. Customers have access to bank branches and accounts tend to have monthly fees and low rates.
How Do Neobanks Make Money?
Neobanks’ business model is different from the traditional banking institutions. A major chunk of their revenue comes from interchange fees paid by merchants when customers purchase goods and services using their debit cards. The interchange percentages can go up to seven times higher than those charged by banks.
Other strategies include freemium pricing strategies, multi-tiered subscriptions, and targeting specific niches.
For example, OnJuno, a Neobank, is aimed at Asian Americans. OnJuno is known for offering an attractive saving rate of 2.15%. The OnJuno founders believe that it will serve the diaspora community in the U.S (typically South Asians and East Asians) which are numbered around 20 million, earning a higher average salary of approximately $50,000 per year, more likely to save plus are tech-savvy. Also, OnJuno is located in India which means costs are lower.
The pandemic has been a catalyst for the digital transformation in the banking sector. Having said that, a lot remains to be seen when it comes to Neobanks. While traditional banks have largely preserved their position, this may be changing as challenger banks are gaining traction.
On a global scale, the growth of Neobanks is an upward trajectory. Thanks to their attractive value propositions such as low rates, personal finance management features, and ease of use, Neobanks will continue to attract customers and investors.