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What is a neobank and how does it differ from traditional banking?


Maryna Cherednychenko - May 29, 2020 - 0 comments

The emergence of digital banks organically fits into the world’s digitalization. A smartphone has become an essential part of our everyday life. We store our photos in the cloud, order goods via retail apps, and even kiss through emojis.

It is not surprising that for many people, trips to the branch bank have become a relic of the past. Bank clients have turned into mobile users who are used to control money via the screen tap. In a growing digital environment, neobanks are rising fast. Let’s see how they differ from traditional banks and what makes them in-demand.

What does neo mean? What does traditional mean?

First, let’s define neo concept and traditional concept.

Traditional banking is the customer service of a particular bank with its roots (financial, political, and any other) in our real world. Of course, you do not need to go to the bank branch for this. Modern technologies provide a full package of bank services remotely. Even very complex operations are carried out at any distance from the bank via mobile phone or desktop. Often it doesn’t even matter if you are in your own country or abroad. To sum up, everything happens in the system of a real bank, although outside its walls.

Neo banking is an online-only service. It doesn’t have physical offices and interacts with the clients solely via remote tools: phone, chat, email. Neobank gathers all products in a handy mobile app. The users access their money 24/7 from the comfort of their home or any other place. As a rule, such banks do not provide a full range of banking services. Most often, they come up with a few niche products. At the same time, their services are much more convenient and better than similar offers of traditional banks.

Now, let’s see a side-by-side comparison of the above terms.

 

Comparison of neobank and traditional bank

Neobank vs. traditional bank

Why people choose neo banking

Zion Market Research says that the global market of neo banking has grown at a CAGR of 46.5% from 2018. It is expected to generate $394.6 billion by 2026.

 

Neobank market growth worldwide

Global market neo bank market size

 

What attracts people to neobanks? First of all, it is a smooth UX, ease of use, and competitive rates. Neobanks prioritize сlient relations. They provide classy service, personalized offers, and increased cashback. The newcomers compensate for the lack of a wide range of banking products with fee-free features. Let’s look at the main pros for which customers love neobanks. Also, let’s pay attention to the cons that scare clients away.

Pros

Online banks are very customer-oriented. And what is the first thing customers need? Of course, high interest rates. Today, neobanks offer from 0.9 to 1% for savings and checking accounts compared to 0.1 – 0.5% from traditional banks. It may seem like not much. However, you will feel the difference if you accumulate a significant amount of money.

Lower fees. Traditional banks charge for nearly everything:

  • going below your minimum balance
  • transferring direct deposits
  • delaying payments
  • going over-limit

Working without offices and in-person consultants, neobanks have fewer operating costs. They share their benefits with clients, reducing their spendings as well.

Accessibility. Neobanks work without reference to the office business hours. So, they are available 24/7 all year round. Of course, modern traditional banks also keep up to date. Many of them provide mobile solutions with a variety of options. However, they may not be available everywhere. For a neo bank, your location does not matter. You can manage your finances equally easily from anywhere in the world.

Personalization. As a rule, neobanks occupy specific target niches and focus on a particular buyer. Such an approach helps research the market and study the needs of customers more thoroughly. Along with the tiny fees for bank services, neos offer cool personalized offers and bonuses. As a result, the clients get what they want at the lowest price.

Cons

Confidence. Neobanks have no history, so it’s more challenging to gain the trust of clients. However, if a traditional bank or a large tech platform acts as the “parent” of a neobank, there will be no doubt about its reputation.

Clients. The financial market is crowded with banks and fintech players. It isn’t easy to build a customer base in a highly competitive environment.

No offline presence. For some customers, it is essential to communicate with a bank representative personally. Also, a developed network of ATMs provides easy access to cash. Not all neobanks can organize that.

Profitability. To win new users and markets, newcomers offer the most popular service, often for free. They expect users to love the new bank and switch to full use with it. However, it often happens the other way.

Ways to set up a neobank

You can launch a neobank as a stand-alone organization or as a digital arm of the existing company. Let’s see three types of digital banking.

Standalone neobank

Such a bank is created from scratch. It is necessary to get a virtual banking license to start a business. After that, the neobank operates without physical branches and offices. In most cases, the standalone solutions center around particular services rather than a full spectrum of banking products. They bet on excellent service and a user-oriented approach. In such a manner, they gain clients thanks to personalized offers and attractive returns.

Revolut is a good example of an independent digital bank. It focuses on credit card operations and provides interesting currency conversion rates. Besides, the bank delights the clients with nice bonuses. For example, it gives personalized rewards from most loved brands. The more you spend on a particular brand, the more cashback you get.

 

Revolut banking app rewards

Revolut rewards

Subsidiary unit of a traditional bank

New technologies, devices, and customers keep banks under pressure. Traditional institutions understand that they should keep pace with time. However, fast changes are often impossible due to gaps in the current technology base and a large enterprise system. In this situation, many banks choose to create a new product – neobank. This model is less risky than a self-governing solution as the parent bank bears the regulatory requirements. Also, subsidiary neobank can offer a broader range of banking products. In particular, long-term loans – mortgages, car loans, etc.

Hello Bank! owned by BNP Paribas is one of the most successful filial neobanks. It operates in six European countries and has an extensive user base. The bank offers easy savings and favorable loans. Also, it comes up with nice bonuses. For example, new clients get big cashback for purchases in various stores. Except for traditional services, the bank provides brokerage and insurance tools.

 

Hello Bank! mobile app

Easy savings with Hello Bank!

Subsidiary unit of a non-bank organization

Strong players in the financial market are neobanks organized by tech giants such as Google, Apple, Amazon, Baidu, and others. Such banks have a lot of advantages over their competitors. They are taken to the digital world like a duck to water. Thanks to the resources of parent corporations, they can easily undercut pricing and capture new markets. It is difficult for ordinary banks to deal with tech-savvy opponents because they cannot reduce the price of financial services to the level of neobanks.

MYBank, a part of the Alibaba Group, is one of the most popular banks in China. Currently, it has almost 6 million users. The bank focuses on individual loans. Also, it credits small and medium-sized businesses. You can request a loan via the bank’s app or website. All transactions are conducted online.

 

MYBank mobile app

MYBank supports small and medium-sized businesses

Why are neobanks good?

Neobanks are popular because they have much to offer. Often they build better service that meets clients’ needs. Among other things, people like intuitive app navigation and easy access to money tools. Neobanks have some advantages over traditional banks. They are more flexible and adaptable. Yet, it is challenging to compete with a variety of financial services provided by a brick and mortar bank.

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