The term “neobank” has become the current buzzword in the FinTech market, taking the banking industry by storm, as it redefines what banking will be in the future. The descent of traditional banking as a result of high service fees and outdated technologies, along with the growing demand for digital solutions has hastened the transition to digital-only banking. Increased customer desire in using financial service mobile applications instead of cash and credit cards is fueling worldwide competition, prompting neobanks to launch expensive features like overdraft protection and sign-up rewards.
Often neobanks are confused with digital banks, or the terms are used interchangeably. The similarity between them is that they both offer online banking services, but that’s where the similarities end. Neobanks exist independently like traditional banks, whereas digital banks are more than often the digital arm of a pre-existing bank or union. They are free of traditional banking technologies and expensive branch networks.
Neobanks differ from traditional banks in a way that neobanks are solely digital, with their own banking license, and have no physical presence. They can be accessed through mobile phones, tablets, and computers online, and function just like normal banks where people can deposit, withdraw and make payments from.
Moreover, neobanks typically make their profit in a different way as compared to traditional banks. They generate a significant portion of their revenue through interchange fees paid by merchants when customers use their credit/debit cards to make transactions. Smaller neobanks are even permitted interchange percentages up to 7 times greater than banks with more than $10 billion in assets.
Tech Advancements in Banking:
In addition to the above-mentioned, neobanks utilize technologies such as AI and Machine Learning to offer personalized services to customers while maintaining minimal operational costs. Since they are not associated with traditional banks, there is no physical branch where customers are required to visit for in-branch services, all their banking needs can be fulfilled at any time of the day on their mobile phones.
Neobanks provide mobile and online banking solutions in the form of apps, software, and other technologies. Fintechs typically focus on certain financial products, such as current and savings accounts. They are also more transparent than the traditional banking competitors. For instance, Capital One 360 offers a no-fee checking account with benefits such as no minimum balance limitations. Other notable neobanks include Revolut, Statrys, N26, Starling Bank, Atom Bank, Cleo, and Qube Money.
The MENA region is in its infancy stage when it comes to neo banks. Currently, the UAE has been at the forefront of introducing neobanks in the region. Though there are numerous digital banks in the region, Xpense, Jingle Pay, and Rise in the UAE are among the only few existing neo banks in MENA.
The emergence of neobanks will be driven by the increasing preference for digital banking services among the younger generations, as well as a growing level of trust in digital-only banks among all age groups. The market prospects for neobanks have piqued the interest of venture capital and private equity investors. The global neo banking industry is estimated to reach $333.4 billion by 2026, growing at a CAGR of 47.1%.
Digital banks and Neobanks offer a range of features that traditional banks don’t. This includes:
It’s clear to see why neobanks are appealing to an increasing number of clients who want digital financial services. These banks offer convenience in performing routine tasks online, such as depositing checks, transferring to peers, and making payments, without incurring heaps of service charges. Because neobanks are more nimble and have fewer regulatory barriers to jump through, account setup and processing processes are frequently swifter than traditional banking.
Neobanks aims to set the standard for personalized banking by utilizing Artificial Intelligence to track data and personalize user experience and enhance the human touch of in-branch services, while also providing a more sophisticated virtual assistant experience. They may also be able to confirm transactions in real-time and detect fraud more quickly by tracking behavioral trends. This model might be used to prevent customers’ financial issues before they arise.
While neobanks lack the resources and client base to topple the traditional banking industry, they do possess the unique weapon of innovation. They can introduce new products and negotiate partnerships to serve their consumers significantly faster than traditional banks. Retail clients, as well as SMEs, which are usually overlooked by traditional banks, are readily welcomed by neobanks. They use the mobile-first approach to set themselves apart by offering cutting-edge technologies and providing exceptional customer service.
Neobanks, like any financial entity, have advantages and disadvantages. The key to its success is in meeting the demands of a certain market niche, as well as implementing the appropriate technology, corporate strategy, and business culture.
Sania Shah
Researcher