The word “bank” generally creates a picture of gray, dull-looking buildings with endless queues, and employees hiding behind huge amounts of paperwork screaming the word inconvenience. With neobanks, the story is a little different. You don’t need to visit a solemn-looking building downtown, but complete your transactions from the comfort of your home, probably while drinking your coffee or petting your cat.
Neobanks are the latest disruptors in the fintech world. In 2021 the global neobanking market size was valued at USD 47.39 billion and is expected to grow at a compound annual growth rate (CAGR) of 53.4% from 2022 to 2030 . The increasing demand for convenience among customers in the fintech world is expected to drive market growth. Neobanks offer banking solutions without the need for physical branches. They offer service in real-time through online channels and mobile sites.
1 in 5 Americans over the age of 18 for their financial transactions , uses a neobank – businesses that aren’t banks but provide all-digital access to a “real” bank account, along with features and a UX specifically catered to their client’s sensibilities. Along with the growing adoption of smartphones and the internet across the world for digital banking is expected to further accelerate the need for neobank platforms.
What exactly are neobanks?
In simple terms, neobanks refers to any service that holds your money. They are sometimes referred to as “challenger banks,” and are fintech firms that provide software and other technologies to streamline mobile and online banking. They leverage technologies such as artificial intelligence (AI) and machine learning (ML) to offer personalized and customized financial services to end-users and minimize the overall operating cost. They also tend to be swifter and more transparent than their megabank counterparts.
They started to become popular over a decade ago, although the moniker ‘neobanks’ wasn’t coined then. It started when retailers and non-financial-institutions started getting into the financial domain. For example, Wal-Mart’s partnership with Green Dot and offering some light banking services to their customers and employees. Likewise, some neobanks today collaborate with traditional banks behind the scenes.
Why have neobanks become popular?
Neobanks are filling in a void that traditional banks have left wide open with their low-cost banking services with low or no-minimum deposit requirements. That relates better with today’s customers’ needs, along with an impressive UX experience and the convenience of probably never having to set foot in a physical branch. Among the best-known and most successful neobanks in the US are Chime, Current, Dave, Greenlight, MoneyLion, and SoFi. Each entity offers pricing and features exclusively created for its target audience.
Neat, a Hong Kong-based neobank has the provision of providing a fully digital, AI-assisted onboarding process (Appzillon AI onboarding). Whereas in a traditional bank, you need to be physically present with a set of documents for validation. The process itself is tedious and time-consuming.
The prolific characteristic of these neobanks is placing customers at the center of their business model, with all decisions flowing from that customer-centric perspective.
Wins and falls of neobanks
Neobanks are still in their nascent stage. This is because their growth and adoption mostly rely on government rules and regulations. Having said that, the benefits of neobanks can’t be ignored. They have taken the term ‘banking on your fingertips’ to a different zenith. Their service speed can be calculated in minutes, unlike the traditional banks where the measuring unit can be days or months.
- With neos, a loan can be processed in minutes without the requirement of physical documents for verification by using the services of the Account Aggregator, one of the players in the Neo ecosystem having online access to the borrower’s bank accounts, who can simply share the desired details with the lenders through online mode after acquiring online approval by the borrower.
- Neo banks provide mobile app-based solutions that can be created by digital experience platforms like Appzillon to access its wide range of services.
- Neo banks take on the role of a personal finance manager. They not only provide access to all the bank accounts held by an individual or a business group on a single app dashboard but can also handle bank reconciliation, accounting entries, budgeting, and wealth enhancement activities for their clients.
One of the major pitfalls of neo banks is that one needs to possess a smartphone, a stable internet connection, and of course the need to be a little tech-savvy for navigating through the myriad of banking features. It often alienates older people who are not familiar with the technology.
In the US, you’re either a bank or you aren’t. There’s no pseudo bank charter for organizations like neobanks and therefore, there is a lack of legal or well-defined process to follow if there are, let’s say, technical errors, where your amount gets debited in a transaction, but the other party does not receive the payment. Fraudulent transactions can be quite frequent if the lines of security are blurred.
What’s the future like for neobanks?
Traditional banks aren’t going anywhere. They are the backbone of the economy and provide a regulatory structure for entities such as neobanks to perform. However, neobanks are slowly nibbling away at the traditional bank’s market share. This number isn’t too significant for the traditional ones to sweat with worry.
A slight peek into the future can tell you that neobanks will move into higher-margin services, especially lending, to increase profitability. With large and loyal followings, neobanks can expect strong support for these services. Despite some hurdles in the road, the neobanks aren’t likely to dissipate anytime soon. And, in an evolving industry that has long needed diversification and a renewed focus on accessibility, the emergence of these financial disruptors can be a good thing.
To understand how neobanks are changing the game with their advanced technology aligned apps, let’s connect.