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Traditional banks have been around for hundreds of years, but they run behind in providing for today’s tech-savvy world. Long waiting lines and tedious paperwork are counterproductive in a world where time is money. While we are constantly looking for convenience and efficiency, not all banks have an online footprint to offer net/mobile banking. To address the limitation, neobanks, a new online financial service provider, is gaining traction to work closely with physical banks. Neobanks work 24/7, providing personalized online banking services cost- and time-efficiently. They address almost all reliability and convenience issues that traditional banks carry. The concept is quite new to most of us, so here are the top 10 neobank FAQs.
Also known as a challenger bank, a neobank is similar to a digital bank that operates exclusively online without any traditional physical branches. Neobanks is entirely online and may be called fintech firms that provide apps, software, and other similar technologies to streamline online and mobile banking. Neobanks generally do not have their own bank license. Instead, they rely on partner banks to provide bank-licensed services.
But in some countries, neobanks are operating with their own license. Neobanks operate round-the-clock, have no physical branch and capital, offer AI-based personalized online banking services, and are highly cost-effective for service providers and customers. Online bank, internet-only bank, digital bank, or a virtual bank are other terms used to refer to a neobank. Neobanks fill the gap between the services offered by traditional banks and the ever-rising expectations of new-age customers.
Neobanks are particularly helpful for retail customers and small and medium business groups typically underserved by traditional banks and the Gen-Z community, which prefers to do everything online.
Neobanks can follow one of these operating models:
Non-licensed fintech firms collaborate with traditional banks to provide a mobile/web interface around the products of their partner banks. Within the outsourcing and collaboration operating model, the banking partner provides the overall platform for managing customer accounts, holding customer funds, and the rails for interbank payments and settlements. Most neobanks in India currently fall under this category. Fi Money and Jupiter are two neobanks backed by the Federal Bank.
Licensed neo-banks exist as their own entity and do not partner with traditional banks. This is usually witnessed in countries that allow digital banking licenses. N26 in Wuripe, Xinja in Australia, and Monzo in the UK are examples of this operating model. Traditional banks with their own digital initiatives. For example, Kotak 811–is a platform that brings you a virtual debit card inside your mobile banking app that can be used to pay bills, shop online, recharge accounts, etc.
Neobanks are 100% tech-based initiatives that attempt to incorporate whatever technology the current generation approves. Neobanks use technologies such as AI to analyze customer data and make strategic data-driven decisions.
Neobanks work towards giving today’s banking customers the much sought-after convenience, transparency, and flexibility.
Low operating costs: Since neobanks do not require physical capital or infrastructure, they have low operating costs. This allows consumers to benefit from cheaper rates and no monthly fees.
Convenience: With the availability of the internet everywhere today, neobanks are highly accessible. It literally takes minutes for customers to set up their accounts. In case of an issue, neobank representatives can be contacted via digital media. Also, AI-powered operations of neobanks allow services to be personalized for each customer’s needs. Neobanks are also accessible 24×7 and support the latest technologies in the fintech world.
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Customer Orientation: Neobanks aims to develop an easy-to-use, intuitive system that can be a superior alternative to traditional banking systems. Neobank apps are highly crisp, clean, and user-friendly.
Smart Reporting: In addition to displaying your updated balance at all times, neobanks also provide a rundown of all your expenditure goals for savings. They allow you to customize reports according to your requirements. Smart reporting by neobanks gives users a clear idea about their finances and helps them make insight-driven decisions. Moreover, neobanks bypass all the time-consuming processes of traditional banks.
Seamless international payments: Neobanks allow easy international payments without requiring the user to make explicit requests for an upgrade on their current or international card. With neobanks, you can use your card to make transactions internationally, with current exchange rates.
Value-added Services: Neobanks use customer data, account information, behavior patterns, etc., to recommend other relevant services to users. These offers are backed up with statistics and insights.
Additional Security: Neobanks implement biometric verification, Two-factor Authorization, Role-based Access Control, encryption technology, and other top security features to make banking safe for users.
Neobanks mostly appeal to the tech-savvy generation looking for convenient and faster banking operations. Interestingly, neobanks also target audiences overlooked or underserved by traditional banks. These include the unbanked population, small and medium enterprises (SMEs), and new-to-credit customers and students.
Here is a list of potential target markets for neobanks:
Startups, businesses, self-employees, freelancers, crypto or blockchain-related businesses, Environmentalists, Millennials and Gen-Z, Seekers of AI consumer banks, Investors, High Net Worth Individuals, Cryptocurrency users, Migrants, Creators, gamers, streamers, People with special needs, Travellers, People looking for a banking experience that’s driven by automated technology. International students and professionals
Neobanks allow businesses to significantly increase customer service by using technology to offer personalized service to each valuable customer. It gives businesses a unified platform that helps them control, track, and analyze all money movements. Reduced manual effort and infrastructural costs contribute to big-time savings. In-depth financial CRM allows you to manage and track the movement of money to customers, vendors, employees, and other stakeholders.
Neobanks offer round-the-clock business banking that allows businesses to make 24×7 payouts, refunds, disbursals, and other financial activities. Neobanks allow businesses to make bulk payouts, contractor payments, etc., in one go. Some neobank platforms do not require a cooling period for transacting with a newly added beneficiary. A unified banking platform makes it easy for businesses to automate and execute payroll with zero to minimal manual interference.
A large percentage of neobanks’ profit comes from interchange fees paid by businesses whenever a customer makes a purchase using a neobank debit and/or credit card. They also benefit from interest charges on deposits and account openings and the interest earned on ATM fees.
Since neobanks aim to operate across borders, there are several challenges they’d need to face:
Different Licensing Requirements: Neobanks either need a license or partner with a traditional bank that already has a license. Since different countries have different licensing requirements, it might be tricky to identify the accurate regulations for neobanks. Cross-border data protection and privacy laws are other concerns along the same lines.
Regulatory Ambiguity: In the case of India, the RBI does not recognize entirely virtual banks and does not regulate neobanks. Therefore, there is no knowing what and how many neo-banking services are allowed. However, the RBI and NITI Ayog have actively been discussing the matter. The latter has also released a discussion paper, Digital Banks: A Proposal for Licensing & Regulatory Regime for India, proposing that a framework be created for neobanks to become fully-licensed digital banks in the country.
Data Privacy: Any digital offering must ensure complete data privacy. Neobanks fundamentally use customer data to sell products and services. This operation may be affected by different personal data protection bills worldwide. One example of such a bill is the American Data and Privacy Protection Act which can affect entities such as neobanks associated with entity collecting, processing, or transferring covered data.
Multiple payment options: Sending money through a variety of channels such as:
A2A: Account-to-account transfers where payments are made directly from one bank account to another without needing payment instruments such as cards.
P2P: Peer-to-peer payments wherein a user can transfer funds to another user’s account via a digital medium such as the internet or a mobile device.
Customized UX: A more personalized experience than your average mobile banking app. For example, digital personal notes near receipts and a search engine allow users to find what is needed based on those personal notes.
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Gamification: Some neobanks already add movable gamified icons to their UIs. Neobank users can apply these icons to mark their receipts and automate their personal notes.
Biometric technology: Younger age groups favor no-password authentication enabled by biometrics, eye print, or ear scanning technology. Not only does this amount to positive user feedback, but it also adds another layer of security.
Easy account opening: The whole point of having an internet-only bank is that users don’t have to fill up tedious forms while waiting in queues for their turn. Taking a photo of your valid ID can help prepopulate the eligibility fields for new users and provide quick identity verification.
Real-time fraud detection: Using the latest technology to detect out-of-pattern behavior and location change of a user and preventing possible fraud.
Mobile marketing: Engaging users in targeted campaigns by applying data analytics and metrics to qualify, generate leads and promote the efficient adoption of new products.
Online lending: Algorithms can predefine candidates’ qualifications for online lending programs, allowing them to swiftly apply for loans.
Here are some neobank FAQs on how to start one:
Baking license: There are two options to go about this—you can either claim a license or partner with a traditional bank that already has a license.
Developer license: A developer license is required to build a neobanking application.
Building and testing: User interface and experience are immensely important aspects of neobanking. Thorough research, mock-up, and testing are important to develop a user-friendly front end.
Internet presence: Setting up a web page with the help of a hosting web service to increase your neobank’s web presence.
The cost of launching a neobank can only be made after analyzing detailed information about the project. The final price depends on several factors, such as the operating model, technology stack, desired features, marketing, etc. Reach out to us today for a cost estimate for launching your own neobank.
According to the statistics, the global market size for neobanks was $47.39 billion in 2021. It has been expected to grow at an impressive CAGR of 53.4% from 2022 to 2030. The neobank FAQs on whether they will replace traditional banks are unclear. This is because neobanks have not started functioning fully and offer all the services traditional banks do. But neobanks are definitely one of the most preferred ways of banking by most of us. The world is getting more internet-literate daily, driven by information and technology. Amidst that, neobanks are definitely upholding the interests of the mass.
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