Neo bank, as the name implies, simply means a new bank. The term neobank is used to describe a new classification of banks that operate on the digital sphere, thereby becoming more accessible.
Also called challenger banks, neobanks are innovations in the financial industry that operate exclusively through digital media, with the use of apps and online platforms for client engagement and support. They do not in any way depend on physical locations to operate.
The concept of neobanking came into existence some years ago in the United Kingdom with significant inputs from Fintech giants like Atom bank and Monzo. In recent times, however, there has been a steady increase in the number of financial institutions aiming to establish their own version of neobanks. An example of such bank is RBS.
Neobanks are set up in a manner that depends on their clients having accounts with physically-located banks. Furthermore, they are licensed to operate as functional commercial banks. It can as well be described as the digital manifestation of traditional banks.
Neobanks offer many conveniences to customers in the area of operations while charging low-interest rates in comparison with traditional banks. Just like the traditional banks, neobanks offer a variety of financial services for customers which include current accounts, savings account, loans, credit cards and money transfers. They also go the extra length of providing analytics for customers to evaluate their respective spending behaviours. Put aptly, they represent an extension of traditional banks.
Neobanks are designed to bypass the rigors of paperwork documentation that the traditional banks are known for. For instance, a traditional bank may require submissions of proof and documentation to offer loans to a customer.
However, with the emergence of neobanks, quick sign-ups and automatic credit history checks for loans make the transaction faster and less stressful. The initial successes of the first known neobanks have spurred others to spring up, with some neobanks like Harrods bank go as far as acquiring fully-licensed banks to develop their product and services.
Neobanks differ from traditional banks in a variety of ways:
- Unlike traditional banks, neobanks do not operate in a physical location. This means they do not operate physical branches.
- Transactions relating to neobanks are made only through online or dedicated apps, thereby designating themselves as a new type of financial technology solution
- While traditional banks may need a full license to operate, neobanks operate on partial or full license to operate.
- Neobanks do not charge monthly costs; hence customers are not burdened by various hidden charges that traditional banks are known for.
Although, neobanks presently do not have the finances nor the customer base to compete with traditional banks, the ease of operations and the comfortability of making transactions is making financial services consumers to patronize them.
The possibility of outperforming traditional banks in the area of customer service and product offerings may sway the competition in future. There is an expectation from people that neobanks are going to challenge traditional banks if they get their cards right.