What is a Neobank

The digital landscape continues to advance and provide consumers with several options for almost everything, including banking and financial management. Many of today’s consumers are looking for banking options that are flexible and convenient and give them more control over their money. Consumers who aren’t satisfied with the disadvantages of traditional banks are switching to neobanks. 

By now, you may have heard about neobanks, as they’ve been around since the early 2010s and are quickly gaining popularity in America. But what is neobanking, and how does it work? We put together this blog to help you understand what a neobank is and what it means for the future of banking.

Neobanks rely entirely on technology and strive to remove the bureaucracies of traditional banks. They use AI-powered solutions and data collection to make strategic decisions. Because most neobanks don’t have a banking license, they often partner with traditional banks to provide secure banking services. Neobanking platforms let customers withdraw and deposit money and often offer physical debit cards. Some platforms even provide loan and credit services.

Neobanks and traditional banks share many similarities but also have some major differences. These include:

Physical Location

The most significant difference between neobanks and traditional banks is their lack of physical locations. Neobanks operate entirely online, and customers access their accounts through mobile apps and web pages. Traditional banks typically have both physical and digital banking options. Though traditional banks often have mobile apps, neobanks usually have more user-friendly features in their apps.

Institution Type

Neobanks are called banks, but they’re actually financial institutions. Banks must have a banking license to operate, which many neobanking platforms don’t have. Since neobanks do not receive regulatory recognition from the RBI, they are not subject to the same regulations as traditional banks. However, some neobanks have specialized banking licenses, which let them provide additional services. 

Affordability

Because neobanks don’t have physical locations, they can operate with much lower costs than traditional banks. This means they have small maintenance costs and don’t have opening fees, hidden fees, or minimum balance requirements. They also often offer higher interest rates for savings accounts. 

Ease of Opening an Account

Opening a neobank account is often easier than a traditional bank account. It’s also usually easier to take out a loan through a neobank than through traditional banks. In general, neobanks do not check your credit history as extensively as traditional banks.

Customer Reach

Although neobanks have grown in popularity in recent years, they’re still facing the challenge of digital literacy. Many members of older generations aren’t educated in new technology, which makes it difficult for them to use digital banking options. Many people who aren’t tech-savvy are sticking with traditional banking services. Traditional banks reach wider audiences due to their combination of digital options and physical locations. 

Digital banking services are the services traditional banks provide online. The digitization of banking has become more popular as it gives customers more access to their finances. Anyone with a good internet connection can access their accounts anytime and anywhere. Though neobanks also operate online, they have some distinct differences from digital banking. The most significant difference is their lack of bank licenses. Online banks have required banking licenses and provide more services to their customers.

Neobanks are becoming increasingly popular. There are currently over 23 million neobank users, and that number is expected to reach 50 million by 2025. Older generations aren’t as well-versed in technology, so it’s no surprise that neobanks and other online banking options mostly appeal to younger, more tech-savvy generations. Neobanks are most popular among 18 to 24-year-olds, though 25 to 34-year-olds aren’t far behind. Men are also more likely than women to switch to neobanking platforms.

There are several advantages of neobanks, including

• Lower costs. Neobanks don’t have to worry about the costs of opening and maintaining physical branches, so they often provide lower costs and fees to their customers.
• Higher interest rates. Low overhead costs allow neobanks to offer higher interest rates on savings accounts. Average interest rates range from 0.5% to 2.5%, much higher than typical traditional bank interest rates of 0.0% to 0.2%.
• Convenience. Customers don’t have to worry about waiting in lines at the bank for financial services. With neobanks, they can conduct all banking tasks on a website or mobile app.
• Quick account setup. Traditional banks often have a more extended account creation process, requiring customers to send multiple documents. Neobanks allow users to open accounts instantly while only requiring a few formalities.
• Accessibility. Neobanking platforms operate 24 hours a day, seven days a week, so customers can make deposits or transfer money anywhere at any time. 

User experience. Because neobanks offer online-only services, they often spend more time optimizing user experience and interface.

Neobanking is making great waves throughout the financial industry. It’s an excellent option for people seeking more banking convenience or who prefer to complete financial tasks online. However, many traditional banks are entering the digital space and providing more convenient banking options for their customers. 

If you’re a financial institution looking for ways to improve customer convenience, BMA can help. With our extensive knowledge of the financial industry, we strive to help financial institutions provide the best services to their customers. Contact BMA today for tips on improving your financial services. Please visit us at www.bmabankingsystems.com or call 801-683-0748.

Below are answers to the most frequently asked questions about neobanking platforms.

Are neobanks regulated?

Neobanks aren’t usually regulated in the same way as traditional banks. Neobanks are financial institutions instead of banks, so they don’t have a bank license with federal or state regulations. They typically partner with a regulated financial institution, so all deposits are insured by the FDIC.

Top neobanking platforms in America 

There are currently over 200 neobanks worldwide. Here are some of the best neobanks in the American market today.

• Chime. With over 12 million users, Chime is one of the most well-known neobanks in the U.S. It’s considered a fintech company rather than a bank. Chime offers early access to direct deposits and opportunities to build credit. 
• Current. Current has hundreds of thousands of users in America. Its benefits include no overdraft fees, cash-back debit card options, and early access to direct deposits.
• Varo Bank. Varo Bank started as a neobank but received a full-service national banking license in 2020. Its two million users benefit from no minimum balance requirements and zero overdraft fees, and users can also open an account without a credit check.
• Lili. Lili is popular among freelancers and small businesses. It offers a business debit card, and the app gives users tools that help with accounting and business taxes. Lili is FDIC-insured.

Is it safe to open a neobank account? 

Many people are concerned by the lack of regulation of neobanking platforms, and although there have been security issues with neobanking, they’re pretty rare. Traditional banks actually face the same threats as neobanks since much of their information is online. Neobanks may be more secure than traditional banks because their business depends on their security measures. Because neobanks don’t have to maintain brick-and-mortar locations, they have more money and resources to dedicate to protecting personal information. 

Even though neobanking is relatively safe, be sure to do some research before choosing a neobank platform. Before creating an account, find out if the platform has FDIC insurance and if it has any negative reviews. FDIC insurance will keep your money safe even if the banking platform goes out of business. Conducting research before signing up for a neobank account will help you find a platform you can trust.

What are people saying about neobanks?

Neobanking platforms have quickly become a popular topic of conversation. Many tech-savvy people are switching to neobanking because they want to manage their finances from their phones. News is also spreading quickly about the lower fees and higher interest rates many neobanking platforms offer. However, many people are still skeptical about the safety concerns of neobanking services. 

Can neobanks accept deposits?

Neobanks are similar to digital banking services that let you make deposits online. Many neobanking platforms will let users take a picture of checks on a mobile device to make a deposit. Most of these platforms will also allow customers to set up direct deposit. Neobanks like Chime and Varo Bank even let users deposit money into their accounts at specific retail locations like CVS and 7-Eleven.