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Neo Banks have emerged as the latest buzzword in the FinTech industry. It has taken the entire FinTech industry by storm. In a way, it’s redefining the banking sector at once by showing what the possible future of banking could look like.

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But what exactly is a Neo Bank and why is it such a big deal? In this blog, we are going to discuss the same along with comparing it with traditional banks and digital banks. Furthermore, we will also discuss its top benefits. So, without further ado, let’s begin.

What is Neo Banks?

Neo Banks can be defined as digital banks that have no physical branch whatsoever. It can be called a truly branchless digital bank. Instead of physical branches, Neo Banks have their presence entirely online.

Neo-bank targets tech-savvy users who prefer the majority of money management via their mobile app or other digital media.

You can call NeoBanks the FinTech firms which provides a wide range of financial services like money transfers, money lending, mobile-first financial solutions, and many more.

The main objective of Neo Banks is to offer such a level of seamless customer experience that no traditional bank could ever offer. Neo Banks are also known to be faster and cheaper. Neo banks also save on banking costs thus allowing them to reduce fees and avail their services to the underbanked.

How does it work?

Neobanks work on the “Banking as a Service” model. Currently, the neobank landscape can be categorized into three major types:

  • The first type features those non-licensed FinTech that have partnered with a traditional bank. In this type, FinTech utilizes a wrapper around the various services and products of its partner bank.
  • The second type is when a traditional bank launches its digital-only initiative in the form of neobanks.
  • The third and last type is the neobank that have digital banking licenses. However, this type of neobanks exists only in those countries that permit stand-alone digital entities.

Currently, there are very few neobanks that have their own digital banking license. Most of the neobanks that exist today mostly falls under the first or the second type. That’s the reason why the majority of neobanks have a bank as a partner. Banks act as a platform for neobanks to offer core banking services.

Usually, these banks have outdated infrastructure and legacy systems. Neobanks put a layer of its digital services and products over these legacy systems to make banking services flexible, accessible, and scalable.

Neobanks are customer-oriented as they provide highly customized and personalized services. Since Neobanks are 100% digital, technology becomes a vital part. Neobanks mostly work on the decision-making model. They are also driven by data-based decisions. That’s the reason why they collect data and analyze the patterns to understand them as to how the customer will behave.

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Stats associated with neobanks

Over the past few years, Neobanks have seen some tremendous growth. As of 2019, neobanks had more than 30 million customers. What’s interesting here is this figure excludes massive markets like China and India.

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Neobanks are growing quite rapidly; it’s quite clear from aggressive investments as several Neobanks are having funding rounds of around $2.5B in 2019.

One of the major reason for this explosive growth can also be attributed to the fact that neobanks roll out advanced features at a faster rate thus enhancing their performance. As per the 2018 market analysis, Neobanking apps are adding 10 new features per year. This number for traditional banking is just 6.

If we talk about the total number of app updates per year, then the average number for neobank app updates is 27. On the other hand, for traditional banks, this number is under 10.

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When it comes to customer satisfaction, neobanks are way ahead of the traditional banks. A recent study has shown that around 90% of users in the US are satisfied with Neobanks. This number is interesting as the top 50 global banks only managed to satisfy 66% of the users.

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How are Neobanks different from traditional banks & digital banks?

It’s easier to differentiate between neobanks and traditional banks since they are fundamentally so different. However, people find it tough to differentiate between neobanks and digital banks. So, let’s compare neobanks with traditional banks and digital banks.

Neobanks VS Traditional Banks

Neobanks are fundamentally different from traditional banks in almost every aspect. Neobanks are sometimes also referred to as “challenger banks” since they challenge the traditional banks by offering more convenient and customer-centric banking services. Let’s try to understand the major differences between neobanks and traditional banks from the below table:

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The above table clearly shows the key differences between traditional banks and neobanks. The first major difference is the fact that neobanks are considered as 100% digital which is in complete contrast to traditional banks that have branches located in several parts of the country and the world.

In traditional banks, the customer support is personal which also means that it’s slower. For example, a mortgage application can take ages in traditional banks as it involves a lot of paperwork, in-branch meetings, submissions of documentation, and many more.

Whereas, the same process in neobanks is faster and convenient since neobanks are designed to avoid laborious tasks via time-saving processes such as automatic checks of credit history, sign-up forms, etc. Furthermore, in neobanks, you also don’t need to provide personal contact to anyone for loan approval, account creation, and draft.

As mentioned above, neobanks can have different stages of licensing. The type of license or the lack of it determines what services they can offer to their customers. For example, some neobanks offer deposit insurance and some do not. When it comes to traditional banks, they all have full bank licenses.

Apart from that, Neobanks are much cheaper than their traditional counterparts. The pricing of neobanks is very transparent and customers don’t need to worry about any hidden fees. Whereas, traditional banks may charge various fees including the monthly fees for specific kinds of accounts.

Neobanks VS Digital Banks

People really struggle to differentiate between digital banks and neobanks since they are so similar. Digital banks are known to offer very similar kind of services as that of NeoBanks in which they enable users to withdraw, deposit, borrow, transfer, and perform several other kinds of bank-related operations.

If we talk about the difference then NeoBanks are independent and are not associated with traditional banks at all. On the other hand, digital banks tend to exist like a branch of a larger traditional bank. Below is a Venn diagram that clearly differentiates neobanks from traditional and digital banks.

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What are the benefits of NeoBanks?

By now, I hope you’d have understood what Neobanks are and how they are different from the traditional banks. But why they are so talked about? What makes it a buzzword? The answer is the top-notch benefits that offer to its customers. Let’s have a look at these benefits one by one.

Low cost

One of the major benefits of Neobanking is that it’s cost-effective as compared to the traditional banks. It’s because the traditional banks have to cover operational and labour costs since they have physical branches.

Whereas, Neobanks don’t have to pay for the costs of running physical branches. Hence, they can afford to charge little to no fees at all. Also, due to the absence of credit risks and fewer regulations, Neobanks becomes much more cost-effective.

Convenience

NeoBanks are also known for offering top-notch convenience to their users since it’s entirely digital. The entire digital setup also means that customers can use all the banking services at the convenience of their smartphone.

In case, if you have any issues related to banking, then you can simply contact the Neobank representative through digital mediums. In NeoBanks, the issues are resolved way faster and require way fewer efforts from the user.

In addition to all the above benefits, NeoBanks enables users to manage their finances efficiently.

Customer Orientation

NeoBanks heavily emphasizes on feel and the design of their platform. In comparison to NeoBanks, traditional banks can look quite outdated.

NeoBanks aims to develop an easy-to-use and intuitive system that can become a superior alternative to the traditional banking systems.

Neobank apps are highly user-friendly, crisp, and clean. They are also designed well to cater for the complex needs of the customer. User-friendliness is one of the major USPs of neobanks.

Smart reporting

NeoBanks offer advanced and smart reporting. It’s because it provides an updated balance of your account every time you check it. With this, you can see the details of all your payments and transactions on a single app.

Neobanks also provides you with an overview of all your expenditures and saving goals. Furthermore, you can customize reports as per your requirements. Smart reporting by NeoBanks help users to have a clear idea about their finances. This also helps them to take better insight-driven decisions.

Fast processing time

NeoBanks are known for their faster processing time as compared to the traditional banks. For an instance, if a user wants to apply for a loan in a traditional bank then he has to undergo several rigid processes which are also time-consuming.

Whereas, neobanks by-pass all these time-consuming processes and leverages innovative strategies to speed up the entire process. For example, SoFi enables a user to pre-qualify for loan and interest rates within a matter of few minutes.

International payments at ease

When it comes to making international payments, then users have to experience difficulties in traditional banking. It’s because to make international payments, users have to make a request to upgrade their debit card into an international debit card.

However, if you have your account in a neobank, then you can use your card to make international transactions without requesting any upgrade.

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Value-added services

Today, banking has become much more than just payments and money transfer. And Neobanks proves that with its value-added services. Neobanks utilize customer data, account information, patterns, and a lot more with the help of AI to recommend other financial services to the users.

Neobanks not only recommends various financial services but also backs it up with stats and insights.

Neo banks also recommend service that is based on demographics thus making it easier for customers to make investment decisions.

Advanced security features

Neobanks are also known to leverage some of the most advanced security features. They implement biometric verification, 2FA (2-factor authorization), RBAC (Role-Based Access Control), top-notch encryption technology, and many other advanced security measures to make banking safe for users.

Furthermore, these applications also comply with privacy laws of customers, anti-money laundering laws, etc.

Conclusion

Neobanking is the perfect example of how convenient banking can be for users. Consumers across the world already like this new, fast, and convenient form of banking. Neobanking will further boost if it manages to eradicate certain hurdles like less regulation and the absence of any physical bank branches.

But nothing can be said for certain as of now as neo banking is still in its nascent stage. A few years from now will clear the picture as to in which direction Neobanking is heading towards. I won’t be surprised if neo banking becomes the future of banking in the coming years.

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2021-04-09T13:38:38+00:00
Product manager of Digipay.guru, one of the leading digital wallet solution. He is a visionary leader whose flamboyant management style has given profitable results for the company. He believes in the mantra of giving 100% to his work.

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