Neo Banks

Online banking on smartphone with businessman showing screen

Pic Creds : FMD Financial

Everything You Need to Know About Neobanks

It is no secret that throughout centuries, the banking industry evolved. It started when empires needed to find a way to conveniently pay for goods and services. From the idea of keeping assets in temples, banks evolved to what it is today. But in modern times, it seems that going digital becomes inevitable. 

The trend that we are going digital is not only limited to banking. And with the presence of mobile apps and fast internet, neobanks have become a natural product of the evolving banking sector. 

Banking, through the years, has been filled with the same institutions.   It has been uncontested for many years. But as times changed, innovation led to digital solutions. Early adopters were able to have neobanks in their territory for over a decade now. But even in places like Australia, many of its first neobanks were established 2017 and 2018

What are Neobanks? 

Before we go any further, what is a neobank? A Neobank is a fintech company that offers online-only financial services. Think of it as a bank but you don’t have a branch that you can visit. Think of passing your identification and other requirements simply via their app. No need to visit a branch to transact. 

Most neobanks don’t have the same offerings as their traditional bank counterparts. But at the very least, neobanks allow you to open a checking and savings account. 

This type of setup has its perks. Just like an online store and a physical mom-and-pop shop, online versions are cheaper to maintain and operate. Neobanks have decreased the overhead cost of their operations. It also means fewer fees for its consumers. And compared to your traditional bank, you get a higher-than-average interest rate which appeals to a lot of individuals today. 

Another thing that makes online-only banks appealing especially to the younger generation is the fact that they have a user-friendly app. These apps can make it easy for the user to manage your finances. You can also figure out the app even when it is your first time to use it. 

What Made Neobanks Popular?

Traditional banks are complacent when it comes to its “updates”. Many of these traditional banks perceived the advancement of a mobile app and paperless transactions as their means to adapt to the changing times. Unfortunately, these aren’t going to meet the growing demands of their clients. 

Another reason why a lot of people today are sticking to digital-only banks is the absence of non-digital touchpoints when it comes to opening your account to doing transactions. Could you imagine visiting a branch on your working hours just to open a bank account because they aren’t open after office hours? On the other hand, you can submit everything via the app if you choose a neobank. 

Not only does it make neobanks convenient, but it also makes it less costly to operate. Imagine the amount of money saved by neobanks on rent and utilities because they don’t have multiple local branches? 

And also, neobanks are open to changes. Unlike traditional banks that are heavily bureaucratic and slow when it comes to implementing improvements in their system, neobanks act fast despite the minimal capital and manpower. They work efficiently to improve their overall services. And since they are out there to prove their dominance in the banking sector, expect superb customer service on their part. 

Things You Should Know Before You Open Your Account

Should you open an account on a digital-only bank? Here are things that you might want to know first. 

Between traditional banks and neobanks, the latter is still quite new. It also means that there are a lot of problems that might just appear. On the other hand, since traditional banks have been around, we’ve seen the most common problems and it is possible that the industry already has an answer to these problems. 

Next, if you are the type of person who prefers face-to-face interaction when opening a bank because it makes you more confident about your money, a modern digital-only bank is not for you. And on top of that, you have all your data online. 40% of UK consumers don’t trust neobanks with their data completely. Also, 49% don’t plan on switching to neobanks unless they can demonstrate that they have the right technology for the job. 

Is Adoption On Its Way?

Accenture’s research discovered that UK neobanks were able to increase their customers by almost 300% just from 2018 to 2019. From 7.7 million in 2018, it grew to 20 million in 2019.  This rate outpaces traditional banks. In the UK, 77% are already thinking of switching to a neobank

Though there are UK neobanks that are already outshining traditional UK banks, the question remains whether or not it is going to continue in other parts of the globe. 

Some of the most successful neobanks have catered transparency and simplicity towards their consumers. They also have a mobile banking app that functions 24/7 beating traditional banks that only have limited operating hours. 

Come to think of it, young individuals today are after convenience and speed. In a study, Gen Z payment habits tend to require these two elements, things that traditional banks usually don’t offer. 

Despite the growth that neobanks experienced in the last years, neobanks are still considered in its infancy. Whether or not it is going to be adopted and make traditional banks obsolete remains to be seen. 

Trust and credibility are two of the things that neobanks can’t take away from well-established traditional banks. Though a lot of services you get from traditional banks tend to be slow, however, their service portfolio makes customers stay and trust traditional banks. 

Minimum Service

One of the drawbacks of neobanks is that they don’t provide you with the complete services offered by traditional banks. Yes, you can have your savings and checking account, but there are lots of things that you will miss out on in case you make the switch. There are many reasons for this. One, you have the regulatory problems that neobanks have to deal with. Since it’s digital-only banks are somewhat new, regulations are not yet clear. And also, between a digital-only bank and an established traditional bank, the latter has more capital. 

 Is It Secure?  

Another question that is usually raised by those who are looking to try a neobank is if it is really secure? Though digital is fast and convenient, you also have to take into account the possibility of fraud. Monzo, a UK-based digital bank, urged 480,000 customers to change their PIN after noticing the possibility of a security breach. It left the information exposed to unauthorized staff. In the end, 20% of its 2.6 million customers were compromised.  

Data privacy is a huge concern in business, especially in the banking sector. For neobanks, they still have to prove themselves and an incident like this is not helping them. 

Bound to Fail?

Nathan Zaia who works as a Morningstar analyst mentioned that neobanks may have caused disruptions but are less likely to dominate the banking industry (at least for the Australian banking sector). Despite the heavy marketing that becomes appealing to tech-savvy individuals, neobanks only made a minor dent in the market share. And on top of that, many of these digital-only banks have growing rates in their loans. 

ING Bank Australia, a company that had its banking license in the country since 1994, has a total of $60 million in debt and a $47 million deposit. Though the debts can also help them improve their offer to the market, it can come with a price. These are high-risk loans that could make neobanks fold. 

What Does it Mean for the Traditional Banking Industry?

Given the rise of neobanks in recent years, what does it mean for the banking industry? Though they’ve been around for quite some time, neobanks can still negatively impact traditional banks if they don’t find a way to fit the needs of their clients. Experts believe that without enough digital transformation, traditional banks might lose 11% of their clients to digital-only banks. This could easily mean $16 billion in lost profits plus $344 billion-worth of deposit. That’s some a serious amount of money that can hurt even traditional banks.  

Whether they like it or not, traditional banks need to borrow a page from their competitor and go digital as well. This will ensure that they can still maintain an advantage in the banking arena.

Both Have a Spot in the Foreseeable Future

Should you choose a traditional bank over neobanks? Or should you go for neobanks instead and abandon traditional banking completely? So far, both have a spot in the foreseeable future. Neobanks offer a good alternative and competition to the traditional banking sector. On the other hand, traditional banks are considered an institution that can’t be replaced by something that is appealing simply because of being 100% digital. 

It is also true that traditional banks are wasting a lot of time and resources, but you can’t take out the fact that it is the complete package. The growth of neobanks is a good thing for the banking sector since it opens up the common problems faced by consumers. Though neobanks are new, we see them surviving and even catching a chunk of traditional banks’ market share.