Neobanks vs Traditional banks
WHAT IS A NEOBANK?
Neobanks are digital-only banks that don't have any physical branches. Essentially, they operate exclusively online or through mobile apps, allowing customers to manage their money conveniently from their smartphones or computers. Neobanks are a logical step of leveraging technology to modernize the banking experience so that each customer can benefit from it. Thus, we as customers can utilize traditional services like savings accounts, payments, and even investments using modern tools provided by the fintech industry. What distinguishes neobanks from traditional brick-and-mortar banks are user-friendly interfaces, lower fees, and a more agile approach, all of them promising convenience and better user experience.
However, most neobanks do not have a banking license and cannot operate stand-alone — most neobanks partner with licensed banks to provide financial services. Here is a more detailed differentiation between the two types of banks.
Even though neobanks typically don’t offer lending capabilities, such as for mortgages, car loans, or even traditional credit cards, they still can provide unique services that appeal to certain customer segments. That is often their specialty - the specific niche group they fit in perfectly. Let’s look at some specific target groups and how Neobanks adjust their business models accordingly:
Challenger banks: Challenger banks are neobanks that offer a full range of banking services, including checking and savings accounts, loans, and credit cards. They typically target consumers who are looking for a more affordable and innovative alternative to traditional banks. Examples of challenger banks are Chime, N26, Revolut, Monzo and Starling Bank.
Niche neobanks: Niche neobanks focus on a specific customer segment, product or service. For example, some niche neobanks target millennials, Gen Z, or small businesses. Others focus on specific products, such as loans, credit cards, or investment services. Niche neobanks are Credit Karma (loans), Stash (investments), Aspiration (sustainability-focused banking).
Embedded finance neobanks: Embedded finance neobanks partner with non-financial companies to offer financial services to their customers. For example, an embedded finance neobank might partner with a ride-sharing company to offer its drivers instant loans. Good examples of those are Klarna (buy now, pay later) and Affirm (point-of-sale financing, Stripe (payment processing).
If we need to categorize Neobanks in terms of the target customer segment, we can distinguish between those focusing on individuals, SMEs or specific industries,. Let's explore some common types of neobanks offering tailored solutions to meet the diverse needs of their target group:
Neobanks for Individuals: These neobanks focus on providing convenient and customer-centric banking services to individual consumers. They offer features like easy account setup, budgeting tools, automated savings, and personalized financial insights.
Neobanks for SMEs: Neobanks are also revolutionizing banking for small and medium-sized enterprises. SME neobanks provide specialized financial services tailored to the unique requirements of small businesses. These services may include seamless payment processing, invoicing, expense management, simplified lending, and real-time financial analytics. Thus, SME neobanks empower entrepreneurs to focus on growing their businesses while leaving the banking complexities to the experts.
Neobanks for Specific Industries: Some neobanks target specific industries, such as freelancers, gig economy workers, or international travellers. These neobanks design their services to address these niche customer segments' specific financial needs and pain points.
Different neobanks offer a wide range of financial services, including:
High-yield savings accounts
Free peer-to-peer money transfers
Early access to paychecks
Alternative ways to build credit
Financial education tools
Investments, stocks, cryptocurrency
As neobanking continues to reshape the banking landscape, customers are benefiting from enhanced convenience, personalized experiences, and innovative financial solutions. Whether it's individuals seeking seamless banking experiences or SMEs looking for specialized services, neobanks are paving the way for a digital banking revolution.
Some Disadvantages of Neobanks Each type of neobank has its unique advantages and disadvantages. For example, challenger banks offer a full range of services, but they may not be as well-established as traditional banks. Niche neobanks may be more innovative, but they may not offer all of the services that consumers need. Embedded finance neobanks are convenient, but they may not be as regulated as traditional banks. When choosing a neobank, it is important to consider your individual needs and preferences. If you are looking for a full range of banking services, a challenger bank may be a good option. If you are looking for a specific product or service, a niche neobank may be a better choice. If you are looking for convenience, an embedded finance neobank may be the best option for you. Money guarantee Many customers are curious about the safety of their funds in a neobank, questioning whether there are regulations in place to safeguard their deposits. Typically, neobanks form partnerships with traditional banks possessing a bank charter, adhering to necessary regulations, and securing FDIC insurance. The eligibility of FDIC insurance for funds in a neobank account depends on the account opening process and the location of the held funds. However, certain neobanks function as standalone banks. For instance, Varo obtained national banking status in 2020, complete with its FDIC insurance. Neobanks with FDIC coverage can engage in lending, protect deposits, and provide financial services akin to traditional banks. Deposit insurance from the Federal Deposit Insurance Corporation (FDIC) enables consumers to place their money with confidence at FDIC-insured banks and savings associations (insured banks) across the USA. May be you are wondering why aren't all neobanks FDIC-insured? The process of obtaining a banking charter is time-consuming, often taking several years. Consequently, many neobanks opt to collaborate with traditional banks, where the latter manages insurance and regulatory aspects, leaving the neobank responsible for customer service and online accessibility. While considering a neobank it is crucial that users check for FDIC insurance or collaboration with a partner bank possessing a charter and FDIC insurance. Notably, some neobanks also offer investment options like stocks and cryptocurrency, which lack the same insurance coverage as deposits.
2. UNDERSTANDING THE KEY DIFFERENCES
Neobanks and traditional banks differ significantly in various aspects, ranging from their operational structure to technology adoption and physical presence. Understanding these distinctions is crucial for comprehending the impact they have on the services offered to customers.
Traditional banks typically operate through a network of physical branches staffed by employees who handle customer inquiries, account management, loan applications, and other banking services. In contrast, neobanks function entirely online without any brick-and-mortar locations or face-to-face interactions with customers. Instead, they rely on digital platforms and mobile applications as primary channels for delivering financial services.
One notable example of a traditional bank is Barklays bank which is considered a systemically important bank by the Financial Stability Board and traces its origins to the goldsmith banking business established in the City of London in 1690. It operates thousands of branches across Europe. In comparison, Revolut stands out as an influential neobank that offers its services exclusively via its app-based platform.
While traditional banks have been incorporating technology into their operations over time, neobanks are built upon cutting-edge technological infrastructure from inception. Neobanks leverage modern technologies such as user-friendly mobile and web applications, data analytics capabilities, biometric authentication systems, and now artificial intelligence (AI) to enhance user experiences while streamlining processes like account opening or loan approvals.
Traditional banks maintain a physical presence through branch networks where customers can access in-person support or conduct transactions at designated locations during specified hours. On the contrary, neobanks lack physical branches altogether due to their digital-only nature; thus relying solely on remote communication channels like chatbots or phone helplines for customer assistance.
This difference has tangible implications for customers. Traditional banks ensure face-to-face interactions with bank representatives, which some individuals may find more reassuring and trustworthy. However, neobanks offer the convenience of 24/7 access to customer support without geographical constraints.
An interesting fact is that a renowned London-based bank announced that it will shut at least 214 of its bank branches throughout 2023 and 2024 – more than a third of its entire UK network. This comes as a hint towards the future of traditional banking physical presence in the light of the pressing need of branch network optimization.
Impact on Services Offered
The gap/differences between neobanks and traditional banks significantly impact the services they can provide to customers. Neobanks' digital-first approach enables them to offer swift transactions, real-time financial insights, customizable budgeting features, competitive foreign exchange rates, and instant notifications through their mobile applications.
For instance, Monzo provides users with real-time spending notifications, categorization of expenses, and the ability to set budgeting goals directly within their app. These features empower customers with greater control over their finances and promote financial literacy.
In contrast, traditional banks may struggle to match the agility and convenience offered by neobanks due to their legacy systems and bureaucratic processes. Traditional banks often have longer processing times for transactions or loan approvals, causing delays that can frustrate customers.
3. SOURCES OF INCOME FOR NEOBANKS
4. NEW BANKS FACING OLD CHALLENGES
5. WHAT CAN WE EXPECT AS FUTURE DEVELOPMENT OF NEOBANKS
6. TOP NEOBANKS FOR BUSINESSES IN EUROPE