What is Meant by Neobanks? A Quick Explanation

what is a neobank

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Technology is seeping through every part of our lives. As a consequence, one area where it has brought immense benefits is that of finances and money. A brainchild of digitalization in finance is neobanks. But many people still wonder what Neobank is. So, today we are going to dive in and investigate what Neobanks are, how they work, and how they are revolutionizing finance.

You may already have heard of Fintech. While both Fintech and traditional banks are trying to make their systems more convenient, neobanks are a step forward.

Neobanks are creating digital bridges to eliminate the gap between the user and the business. They are especially focusing on areas that are not properly covered by traditional banking facilities.

They are a growing industry and are one that I think everyone should know about. Therefore, in this article, we will discuss what neobanks are, what are their features, and the pros and cons of using their services.

Table of Contents

What is a Neobank and How Does It All Work?

Neobanks are banking platforms that are digital-only. This means that they operate only online. Simply put, they do not have a physical building or infrastructure like typical banks.

For customers, transactions in usual banks take a whole lot of time and effort. It is a difficult process to get even the little things done. Needless to say, it can leave any of us frustrated.

This is where neobanks truly shine. Neobanks offer a seamless experience online. You can get things done within minutes, if not seconds. Customers can easily create accounts by themselves. They are then quickly able to use neobanks’ offerings without any hassle. 

This would be almost impossible with a traditional bank. But many neobanks partner with physical banks to offer their main services.

Features of Neobanks

Neobanks are becoming a popular choice for customers, specifically younger ones. This doesn’t come as a surprise due to the multiple benefits they offer to meet the needs of new-age users. For neobanks, the focus is on enhancing the banking user experience while also serving a need quickly.

Today, smartphone usage is becoming widespread all across the world. As such, neobanks take advantage of this. This is why they have attracted a lot of millennials and younger populations.

That said, here are a few notable features of neobanks that set them apart from anything else:

1) Savings Account

None of us are strangers to extremely high waiting times in traditional banks. The entire process can just seem endless.

Due to the digital nature of neobanks, they enable customers to easily open accounts within minutes. They even provide a physical card. You don’t have to wait at an establishment for hours to get things done. You get to do everything at home.

2) Credit Cards

Neobanks provide great offers on credit cards. This is not usual with traditional banks. They are usually pretty wary of offering financial services to certain industries.

On the other hand, neobanks are becoming a more useful option. Some neobanks even provide unsecured credit cards based on business performance.

3) Personal or Business Loans

Neobanks offer a host of services including startup loans and individual loans. Their aim is also to serve communities that do not have access to traditional banking. In doing so, neobanks are addressing a very important need. This way, they are helping grow businesses across the globe by providing a level-playing field for everyone.

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The Different Types of Neobanks

I) Front-end Neobanks

A front-end neobank does not have an operating banking license. It usually functions in partnership with a traditional financial institution to provide services.

II) Full-stack Licensed Digital Banks

These types of banks have the required licenses and approvals. Due to this, they can offer many different types of services. They issue deposits and loans. In addition to that, they have their independent brand and balance sheets.

III) Digital Banking Units

Independent digital banks are an extension of a physical bank. They have to obtain a virtual banking license to run. These banks can get a banking license once they show proof of sufficient capital.

What is the Difference Between Neobank and Digital Bank?

Neobanks are not the same as traditional banks in their structure and services. They typically differ in the following aspects:

  • They are not bound by state or federal regulators like banks
  • Neobanks don’t extend credit
  • These digital banks partner with traditional banks
  • You are given a more streamlined process that works best on smartphones

It is easy to distinguish neobanks from traditional banks. But you may find it hard to differentiate between neobanks and digital banks sometimes.

Digital banks act as an arm or online version of an established bank. They provide all the services of traditional banks – just in the form of a website, an app, or both.

In contrast to this, a neobank offers a completely digital experience that is mostly independent of a traditional bank. You can think of neobanks as a step further from digital banks.

They have no physical branches and may not offer as many services. Despite offering select services, though, neobanks give you highly personalized services that are modern. Plus, they can serve customers at 1/3rd the cost of a traditional bank.

In simple words, traditional banks, digital banks, and neobanks can be thought of as three generations of banking. The first is our traditional brick-and-mortar banks. Second, digital banks serve as an extension of physical banks. The third and last is Neobanks which are independent entities with no physical presence.

Pros and Cons of Neobanks

Neobanks are being welcomed in many countries. The most notable example is that of India. However, they still face many regulatory issues that they are yet to overcome. So, as with anything new, neobanks have their pros and cons. Let’s take a look:

Pros of Neobanks

  • Convenience. Neobanks allow you to do almost all of your banking through a smartphone. In addition to basic banking tasks, you can manage your finances and predict activity in your accounts to maintain security.
  • Low prices. A neobank is bound by fewer regulations. There is also the absence of credit risk. These factors allow neobanks to keep their prices low. Products are usually inexpensive with no monthly maintenance fees.
  • Lower wait times. Probably one of the biggest benefits of neobanks is the quick processing time. Customers can quickly set up accounts and send and receive money. Any neobanks that offer loans can skip the long loan application process as they rely on more innovative strategies. In many cases, you can view your interest rates within minutes. This way, the whole process is simplified.  

Cons of Neobanks

  • Requires you to be tech-savvy. Someone who is not well-versed in technology may find neobanks hard to use. Neobanks use cutting-edge technology and you need to be fairly tech-savvy to use it. Hence, if you are not comfortable with that, you may not be able to take advantage of their full offerings. Some people enjoy exploring new technology and some don’t. Thus, if you are part of the latter group of people, neobanks might not be the right choice for you.
  • Fewer regulations. Since neobanks are not legally considered banks, they are not heavily regulated. As a result, you may not have any legal recourse or a defined process to follow if you have a problematic experience with them. Also, there can be confusion about who would be responsible for any potential fraud and errors.
  • No physical branches. Some people want the ability to visit a branch in person to resolve an issue. This is especially true if the issue is related to a complex transaction. While neobanks do offer robust online customer service, they just do not provide the face-to-face choice of asking questions and getting answers.

To Wrap It Up – What is Meant by Neobanks?

The concept of neobanks was born to meet the changes that are rapidly happening around us every day. So far, it has lived up to the expectations. There are a ton of problems that it effectively solves.

Low-interest credit, seamless processes, low costs, and high-interest savings are just some of the benefits of neobanks.

Finally, as with any new technology, though, neobanks still have a long way to go. Nonetheless, these banks have a lot of aspects that work in their favor. To sum it up, neobanks are a great choice for most people nowadays. 

If you enjoyed this article on What is Meant by Neobanks? A Quick Explanation or have any questions for me, please feel free to leave them in the comment section below!

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    Giovana Vega

    Best Seller Author, Award Winner, Trader & Investor Blogger

    I’m Giovana currently living in Amsterdam, I used to work in big corporate firms in the finance sector. I quit my job after working more than a decade and started the path as a trader, investor and blogger. End  your search now and grow your financial knowledge with my book “Trading for Success: 8 secrets why women are better forex traders”. If there is an opportunity and adventure, count me in. 

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