What are Neobanks and How are they Changing Financial Services?

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Banking is a critical part of our global economy. Imagine if all banks were to shut down for a week; the result would be chaos. Our modern banking system began in the 12th and 13th centuries and has undergone many upheavals and iterations.

In the 20th century, banking was done mainly with paper, which made things slow and tiring. It was the best they could come up with then, but it had many drawbacks. In the 21st century, banking has mainly become digital. People now move billions of dollars without interacting with any paper.

“Neobanks” have made banking even more effortless. This term refers to banks that operate primarily online with little or no physical presence. Compare that to the 20th century when banks required a physical presence. This article will explain neobanks and how they are changing the financial services industry.

What is a Neobank?

They are banks that operate primarily online. They offer the same services as traditional banks – savings accounts, loans, foreign exchange, etc. – but don’t have physical locations. All banking activities occur online, from opening an account to transferring money to other people.

The term “neobank” has been used to describe new online banks since around 2016. “Neo” is a Greek expression for “new” or “recent.” Essentially, a neobank means a new type of bank.

There are two types of neobanks. The first type is the one that applies for its banking license to offer financial services to end consumers. The second type does not have a banking license but instead partners with an existing financial institution that already has a license.

Obtaining a new banking license is challenging, which deters most neobanks from seeking one. Instead, they just team up with an existing institution and build an app atop their infrastructure. However, some neobanks apply for banking licenses and get them. They usually start by partnering with an existing institution while they await their banking license.

How Do Neobanks Work?

Neobanks offer their services through a website or mobile application. Interested customers can open accounts on the website or app. Once their account is activated, customers can transact online seamlessly. For instance, you can send money to local or foreign accounts. You can exchange currencies, pay bills, buy phone plans, pay taxes, etc.

Neobanks charge lower transaction fees than traditional banks. They can do this because they don’t have expensive overhead costs for operating physical branches. Their main cost center is maintaining a support team that customers can consult online.

How do they make money?

Neobanks earn revenue in two major ways:

  • Out-of-network ATM fees: They charge fees when you use your debit or credit card at other ATMs different from the issuing bank.
  • Transaction fees: They charge fees for different transactions, such as transfers, bill payments, foreign exchange, etc. But, these fees are usually lower than what traditional banks charge.
  • Interchange fees: They charge fees when you purchase something online using your debit or credit card.

Examples of Neobanks

  • Revolut: A UK-based company that offers online banking services across Europe. It is regulated by the Bank of Lithuania under the European Union.
  • Chime: An American neobank with over 13 million users, making it the largest in the country.
  • CryptoWallet: A European crypto neobank that allows people to manage their digital tokens seamlessly.
  • Statrys: A Hong Kong-based company that offers online corporate banking services.

Advantages of Neobanks

  1. They are more convenient to use than traditional banks. You don’t need to visit any physical branch to open an account or resolve issues; you can do that entirely online.
  2. They charge lower fees than traditional banks and can save customers considerable money.
  3. They usually have intuitive apps that are easy to use and navigate.
  4. Some neobanks offer 24/7 customer support to users.

Conclusion

We have explained neobanks: how they work, how they make money, and their benefits. They are changing the financial services industry for the better, provoking traditional banks to offer better online services.

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