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What is a Neobank?

Updated on October 24, 2023 02:02 pm
what is a neobank

In recent years, the traditional banking sector has seen a significant disruption. Among the most notable and innovative developments in this sector is the emergence of neobanks.

But what exactly is a neobank? In this blog post, we will delve into the world of neobanks, exploring what they are, how they differ from traditional banks, and what are the top neobanks in the world and in India.

What are Neobanks?

The term "neobank" is a portmanteau of "new" and "bank," and it aptly describes the essence of these financial institutions. These new-age banks do not have any physical location as they are entirely digital and provide a range of banking services through a mobile application or website.

Various neobanks provide a different array of financial services, including:

  • Checking accounts
  • High-yield savings accounts
  • Early access to paychecks
  • Free peer-to-peer money transfers
  • Overdraft protection
  • Alternative credit-building options
  • Tools for financial education

What sets them apart from traditional banks is their absence of physical branches and their reliance on cutting-edge technology to provide efficient, user-friendly, and often low-cost financial services.

Key Features of Neobanks

Neobanks, sometimes referred to as 'challenger banks, place greater emphasis on their mobile apps, but many may still allow their customers to manage their accounts through websites and provide physical debit cards for added convenience. Here are the key features of Neobanks:

Digital First

Neobanks operate exclusively online or through mobile apps. This makes them highly accessible to tech-savvy consumers. This digital-first approach eliminates the need for physical branches and the associated overhead costs.

Cost Efficiency

With reduced overhead, these banks can offer more competitive interest rates on savings accounts and lower fees on services like money transfers and foreign currency exchange.

For instance, by switching from a traditional bank with a $15 monthly fee to a neobank with fee-free accounts, you could save $180 annually.

Note: Careful go through Neobank's policies, as some may charge fees for premium services or require a minimum number of monthly transactions for higher interest rates. Make sure their offer aligns with your spending patterns and savings objectives before signing up.

User-Friendly Interfaces

Considering that neobanks prioritize user experience by offering intuitive and user-friendly interfaces, you can easily perform banking tasks, such as setting up accounts, making transfers, and tracking expenses, all from the convenience of your smartphone.

Innovative

Unlike traditional banks, neobanks can adapt quickly to changing market conditions and customer needs. You get access to innovative features and services, such as budgeting tools, investment options, and real-time transaction notifications.

Limited Product Range

Neobanks typically focus on core banking services, such as savings and checking accounts, as well as payment solutions. While they may expand their offerings over time, they tend to avoid complex financial products like mortgages or business loans.

Collaboration with Traditional Banks

Some neobanks partner with traditional banks to provide the underlying infrastructure and regulatory compliance. For example, they ensure the safety of deposits through collaborations with banks insured by the Federal Deposit Insurance Corp (FDIC). This allows neobanks to focus on customer experience and innovation while leveraging the stability and resources of established financial institutions.

Data-Driven Insights

These neobanks harness the power of data analytics to provide personalized financial advice, identify spending patterns, and offer tailored suggestions, empowering users to make informed financial decisions and optimize their money management strategies.

Drawbacks of Neobanks

While neobanks offer many advantages, there are also some challenges to keep in mind:

Limited Physical Access: Neobanks do not have physical branches, which may be a drawback for customers who prefer face-to-face interactions or need in-person banking services.

Regulatory Hurdles: Neobanks must navigate complex regulatory frameworks. Some neobanks rely on traditional banks for underlying infrastructure and regulatory compliance. This can introduce an additional layer of risk if the partner bank faces issues.

Deposit Insurance Variability: While neobanks often partner with insured banks, the level of deposit insurance coverage may vary, potentially impacting the safety of deposits.

Limited Account Services: They often do not offer a comprehensive range of banking services. For instance, they may lack the capability to facilitate wire transfers or easily accept cash deposits, and might not include options like certificates of deposit, investment products, or lending services.

Dependence on Technology: Neobanks heavily rely on technology, making them susceptible to outages or technical issues that can disrupt services.

Risk of Closure: As startups, neobanks can be riskier, and some may struggle to sustain their operations or might be acquired by larger institutions, affecting user experience.

How Do Neobanks Make Money?

Neobanks primarily generate revenue through:

  • Interchange fees
  • Interest on loans and credit cards
  • Transaction fees (e.g., bank transfers, ATM withdrawals, money transfers)
  • Subscription fees (offering premium services for a monthly fee, like Chime and Revolut)
  • Foreign Exchange
  • Investment services

The specific revenue model of a neobank can vary depending on its business strategy, target market, and geographic location.

Are Neobanks FDIC Insured?

Acquiring a banking charter is a time-consuming process, which is why most neobanks prefer to establish partnerships with traditional banks possessing a valid bank charter, full compliance with necessary regulations, and FDIC insurance.

In other words, the traditional bank assumes responsibility for insurance and regulatory matters, while the neobank manages customer service and online access.

Neobanks with FDIC insurance coverage can engage in lending, protect deposits, and provide a range of financial services akin to traditional banks.

However, a few neobanks operate independently as fully-fledged banks. For example, Varo obtained a national banking charter and secured its own FDIC insurance coverage in 2020.

Some neobanks also offer investment opportunities such as stocks and cryptocurrencies, but these forms of investments do not receive the same level of insurance protection as deposits.

If you are considering a neobank, check if it is FDIC-insured or operates with a partner bank that holds a bank charter and is FDIC-insured.

Neobanks Vs. Online Banks

Neobanks and online banks are both financial institutions that offer banking services primarily through digital channels, but there are some key differences between the two.

Online banks usually have FDIC insurance, meaning they have their own banking charters and regulatory compliance, without the need for traditional bank partnerships. They also offer a comprehensive suite of banking services such as checking accounts, savings accounts, CDs, investments, and loans.

Certain brick-and-mortar banks have online-only divisions that offer a complete range of digital accounts accessible through computer or smartphone apps. These divisions, backed by traditional banks, could be classified as online banks rather than neobanks.

Also, many traditional banks offer online access to their regular accounts, but they are not exclusively online. Customers still have access to physical branches, and these accounts often come with monthly fees and lower interest rates.

On the other hand, neobanks, born in the digital age, offer a modern, branchless banking experience by leveraging financial technology and focusing on innovation.

They cater to tech-savvy customers, often targeting specific niches or demographics and forming partnerships with traditional banks for services like deposit insurance. However, their banking services may be more limited compared to traditional banks.

Top Neobanks

In recent years, the neobank industry has seen remarkable expansion, witnessing an influx of new entrants and existing neobanks broadening their services and customer reach.

According to a study by Mordor Intelligence, the worldwide neobanks market was valued at USD 18.6 billion in 2020, and it is projected to achieve USD 333.4 billion by 2026, experiencing a substantial compound annual growth rate (CAGR) of 50.6% throughout the forecast period.

The rise of neobanks can be largely attributed to the widespread adoption of digital payment methods, which reflects customers' preference for banking solutions that are convenient, secure, straightforward, and readily accessible.

Here are the top neobanks that are recognized globally:

Revolut

Established in 2015, Revolut is a major European neobank, boasting over 18 million customers and generating over $1 billion in revenue. Revolut provides a wide array of financial services, including bank accounts, debit cards, currency exchange, stock trading, cryptocurrency, and peer-to-peer payments. Remarkably, it caters to both individuals and businesses, supporting more than 30 currencies. As it expands into the US market, it's on track to become one of the world's largest neobanks.

Chime

Founded in 2012 and based in San Francisco, California, Chime partners with an FDIC-insured bank to revolutionize overdraft fees. It offers mobile-first checking accounts, savings accounts, and a Chime Visa Debit Card. Account holders enjoy a competitive APY and are spared from overdraft fees. Chime also grants early access to direct deposits, delivers $200 in fee-free overdraft protection via SpotMe, and extends credit to users who may not qualify for traditional credit cards. This approach helps users avoid overdraft charges, reduce reliance on payday loans, and sidestep credit card debt.

Varo

Varo Bank, founded in 2015 as Varo Money, earned distinction as the first self-chartered neobank, securing a national bank charter in 2020. Varo offers a checking account, high-yield savings accounts, and up to $100 in interest-free cash advances. It differentiates itself with no credit checks, no minimum balance requirements, and no overdraft fees. Varo Believe, its secured credit card with no fees, enables users to build credit without incurring interest. You also earn cashback, a perk typically reserved for credit cardholders. By providing access to premium financial services, Varo empowers individuals with limited or no credit history to enhance their financial well-being.

SoFi

Founded in 2011 to assist students in financing their education, SoFi has grown into a prominent neobank, serving more than 5.7 million users. SoFi offers a comprehensive suite of services, encompassing checking and savings accounts, loans, credit cards, investment accounts, and student loan refinancing. In contrast to traditional banks and student loan providers, SoFi aims to support its customers holistically, whether they are at home, work, or school.

Monzo

Established in 2015, Monzo is a UK-based neobank. It introduced its digital banking platform in the United States in 2022. Its notable feature is the absence of foreign transaction fees, including no charges for foreign ATM withdrawals (excluding any fees imposed by the ATM owner). Additional travel-friendly features include real-time transaction alerts and the ability to freeze a lost card. Monzo does not impose monthly or overdraft fees. Monzo provides its accounts through a partnership with Sutton Bank.

N26

N26 is headquartered in Germany and was established in 2013. It operates in several nations, such as Austria, Estonia, France, Germany, Latvia, the Netherlands, Poland, Spain, Switzerland, the United Kingdom, and others. What sets N26 apart as a neobank are its mobile-centric approach and global availability. Operating in multiple European countries and the US, N26 is an excellent choice for individuals who frequently travel or relocate internationally. It offers services like fee-free checking accounts, budget management tools, and mobile payments.

Starling Bank

Starling Bank is a neobank based in the United Kingdom, which was established in 2014. Among Starling Bank's standout attributes are its real-time notifications, providing customers with immediate updates on their expenditures and account balances. The mobile app offers various budgeting tools, including spending categorization and insights. It also has a range of protective features such as the capability to instantly freeze and unfreeze your card, establish location-based security settings, and activate two-factor authentication.

Neobanks in India

Neobanks have been making significant inroads in India's rapidly evolving financial landscape. Although relatively a new banking system, neobanks have gained significant favor among both individuals and businesses in India.

Here is a list of the top 21 Neobanks in India 2023

  • Finin
  • Freo
  • InstantPay
  • Jupiter
  • Mahila Money
  • Mool
  • Niyo
  • FamPay
  • FI Money
  • Akudo
  • Chqbook
  • Digibank
  • OneCard
  • Open
  • Paytm Bank
  • Piggy Neobank
  • RazorpayX
  • Uni Card
  • Walrus Club
  • ZikZuk
  • Zolve

Conclusion

In an era characterized by advancements in financial technology and changing consumer preferences, neobanks are redefining the banking industry. Their digital-first approach, cost-efficiency, and commitment to innovation have made them a compelling choice for a growing number of consumers seeking modern, convenient, and affordable banking solutions.

As neobanking continues to mature and expand its offerings, they are likely to play an increasingly significant role in the future of finance. However, you should weigh the advantages and drawbacks carefully to determine whether a neobank aligns with their financial needs and preferences.

If you're interested in an online banking service to send money internationally, be sure to compare money transfer providers to see offered rates, fees, and more for sending money abroad using CompareRemit today!

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