Technology is transforming every part of our lives, and one area where it’s making a big impact is finance. A key innovation in this digital age is neobanks. But what exactly are neobanks, and how are they changing the way we manage money?
You’ve likely heard of Fintech, which is the broad term for financial technology. While traditional banks are improving their services, neobanks take it a step further by offering fully digital banking experiences. Think of them as online-only banks that don’t require physical branches.
Neobanks aim to bridge the gap between users and businesses by offering faster, more convenient services, often in areas that traditional banks don’t cover well. They are designed to be more user-friendly, often with features like no-fee accounts and easy mobile apps.
As the digital finance industry grows, neobanks are becoming an important player. In this article, we’ll explore what neobanks are, their features, and the pros and cons of using their services.
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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.
Why Neobanks Are the Future of Digital Banking: Key Features and Benefits
Neobanks are becoming a popular choice for customers, especially younger generations. This trend isn’t surprising, considering the numerous benefits they offer to meet the needs of modern users. For neobanks, the focus is on improving the banking user experience while delivering quick and efficient services.
With smartphone usage becoming widespread worldwide, neobanks are capitalizing on this trend. This is why millennials and younger populations are flocking to these digital-first banks. Neobanks are designed for those who want to manage their finances easily from their mobile devices, without the need for traditional, physical bank branches.
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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Different Types of Neobanks in Digital Banking
I) Front-end Neobanks
These are digital-only platforms that provide user-friendly interfaces for customers to manage their finances but rely on third-party banks for actual banking services. They typically offer simple, straightforward services like checking accounts, savings, and budgeting tools. Examples: Chime, Monzo.
II) Full-stack Licensed Digital Banks
These neobanks operate as fully licensed institutions, meaning they can offer a comprehensive range of services such as loans, credit cards, and savings accounts, all under their own brand. They are independently regulated and often have the same capabilities as traditional banks. Examples: Revolut, N26.
III) Digital Banking Units
These are digital divisions or platforms created by traditional banks to cater to customers seeking digital-first banking experiences. They offer digital-only banking services but are backed by the parent bank’s infrastructure and regulation. Examples: DBS DigiBank, Santander’s Openbank.
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.
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