What Are Neobanks and How Are They Different?

Jun 2, 2022

6

min read

I

t's no secret that traditional banks face intense rivalry from the new breed of the bank. This new bank - called Neobank - without brick and mortar locations have revolutionized the way we bank and ended traditional banks' decade-long monopoly. Now, neobanks are currently being hailed as the future of banking.

The global neobank market size stood at $47.39 billion in 2021 and it's expected to increase at the prodigious rate of 53.4 % from 2022 to 2030. The pandemic further accelerated the growth of neobanks, and it has been uphill since then. But, what exactly is a neobank, and how is it different from a traditional bank? Read further to figure it out.

What Are Neobanks?

Neobank is a virtual bank that entirely operates online and has no physical location. It is operated by the Fintech firms, which offer banking services through apps, software, and other digital technologies. They are also known as challenger banks as they emerged after the 2007-2009 financial crisis, which occurred mainly due to the negligence of the traditional banks.

Online Banking Character — **https://www.freepik.com/vectors/e-wallet**

There are two types of neobanks: Full-stack neobanks and front-end focused neobanks. A full-stack neobank is an autonomous neobanks with its own banking license. In contrast, front-end focused neobanks have no banking license and, thus, partner with the traditional banks for banking transactions.

Are Digital Banks and Neobanks Same?

While it seems that digital banks and neobanks are the same, they are pretty different. The term is used interchangeably to describe one another, but it is essential to know that neobanks are one form of the digital bank.

Digital banks are when financial institutions provide their financial services through online platforms. Most traditional banks are also opting to offer their services online, and thus, they are also known as digital banks. But, a neobank is a fully digital bank.

How Does Neobank Compare To Traditional Bank?

Mobile Neobanking — **https://www.freepik.com/vectors/bank-banner**

Neobanks are disrupting the traditional banks by providing personalized services at a minimal cost. They leverage technology and artificial intelligence and offer personalized banking services that conventional banks cannot provide. Neobanks have bridged the gap between the expectation of the tech-savvy generations and the service that traditional banks are offering.

Neobanks work on data-driven technology and provide hassle-free and quick personalized service to the customers. They are cheaper, faster, and can leverage a single network with the entire financial portfolio. Also, they specialize in financial systems such as payments, receivables, and budgeting. While it may take some time to open an account in traditional banks, it is a matter of minutes with a neobank. The database and technology-driven KYC process help you open your bank account quickly. You need to sign up on the mobile app or desktop banking portal, and you can set up your account within a minute.

Apart from this, there are no hidden fees and minimum balance required in neobanks. Since they operate entirely online based on AI technology, the cost is low compared to a traditional bank. In addition, they have an advanced security level, supporting clients, and an easy user interface. This is why it is cheaper and more profitable to the bank in the neobanks.

But, on the downside, most neobanks are not chartered or FDIC insured. Traditional banks are registered financial institutions with a banking license and have been in the market for centuries. However, neobanks are new to the banking world. Some neobanks have a banking license, but most are partnered with established banks. Due to this, neobanks have limited services compared to traditional banks. Usually, neobanks mainly provide savings and transaction accounts. However, some of the neobanks have also started proving several loans and mortgages as well.

The comparison between a traditional bank and a neobank can be found summarized in the following table:

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Popular Neobanks In the USA

There is a staggering number of Neobank in the US market. The number of neobanks skyrocketed from 60 to 256 globally within two years. With the entry of a new competitor market, neobanks provide competitive features. Here are some of the popular neobanks in the USA:

Chime

Chime is one of the biggest neobanks in the USA. It was founded in 2013 and currently has more than 12 million customers worldwide. Partnered with The Bancorp Bank and Stride bank, it offers checking and savings accounts without monthly fees. It also provides secured credit cards.

Features of Chime

Savings round-up
Automatic saving feature
Credit cards
Instant cash out with no fee
Transaction alerts
24/7 customer service

Pros

Free account options
Competitive savings APY
No Monthly Fees
Fee-free Overdraft
60,000+ Fee-Free ATMs
High Yield Savings Account
High-security

Cons

No multi-currency account options.
Spending limits on withdrawals and purchases.
Available to US residents.
Online customer service.
No deposit retailer
Slow customer service

SO FI

SoFi, aka Social Finance, is an American online personal finance company and online bank founded in 2011. It provides student and auto loans, personal loans, credit cards, and investing services through mobile and desktop banking. It has partnered with Samsung Pay to launch digital and physical debit cards. It currently has more than 4M customers.

Features of SoFi

24/7 account monitoring
Investments SIPC protected up to $500K
Complimentary member benefits
Redeemable reward points
Wide range of saving and loan products.

Pros

Free management
24/7 Customer support
Automatic rebalancing
FDIC insurance up to $1.5 million

Cons

Limited ATM access
No retail cash deposits
Transaction limits and restrictions.

Go2Bank

Go2bank is a digital bank founded by a fintech company named Greendot. The company was founded in 1999 and aimed to be the go-to destination for affordable and seamless banking- combining the security, stability, and banking experience with the innovation and agility of a leading fintech. Go2Bank was launched in January 2021.

Features of Go2Bank

Overdraft protection up to $200
Local retailer cash deposits
Free nationwide ATM network
Earn up to 7% instant cashback

Pros

No hidden fees
No minimum balance is required.
Competitive interest rates
Low credit limit

Cons

No external transfer
Limited overdraft coverage
Limits to funds access

Acorns

Acorns is an American Fintech Company based in California founded in 2012. It specializes in micro-investing and Robo investing and has around 8.2 million customers

Features of Acorns

256-bit encryption and two-factor authentication.
Bitcoin-linked exchange-traded fund
Real-time round-up debit cards
Personal checking, investing, and retirement accounts are available.
All-digital banking through desktop and mobile app
FDIC is insured through Lincoln Savings bank.
Fraud protection and all digital card lock
Smart deposit built-in to invest money before you spend it.

Pros

Automatically invest spare change
Cashback at selected retailers
Access to an intelligent portfolio designed by experts
Backed by leading investors
Strong security
No hidden cost

Cons

High Fee on small account balances
No tax strategy

Varo Bank

Varo Bank is a fully digital bank founded in 2015. It is the first fintech company to receive a full-service bank charter from the government. It offers various digital products and services with competitive features.

Features of Varo Bank

Contactless debit card
24/7 mobile banking
Free Varo to Varo balance transfers
Insured deposits up to $250,000
Direct deposit with benefits

Pros

No minimum balance
No monthly and overdraft fees.
No credit check
Attractive interest rates
High-rated mobile app.
Large fee-free ATM network

Cons

High yield saving accounts are only available for checking account holders
Slow customer service.
An external transfer is limited to $10,000 per month.
A certificate of deposit is not available.
Cash deposits can only be made through third-party services.

Challenges of Neobanks

Neobanks are challenging traditional banking services through personalized, low-cost, and hassle-free banking services. But, neobanks have their own set of challenges.

The major challenge of Neobank is becoming the bank itself. Establishing a bank is not easy as it requires a long, tedious legal process. For the financial institution to be known as a bank requires a banking license that most neobanks do not have. Even Chime, US's leading neobank with more than 25m users, does not have a banking license of its own. It has partnered with an established bank to provide banking services.

The traditional banks also provide digital services to their customers, which is a significant threat to the neobank. Neobanks explored the niche that traditional banking could not, but since they are aware of this niche. They are putting their hands on it as well. The primary threat that neobanks possesses is that traditional banks have been in the banking market for centuries and have earned the customers' trust. If conventional banking also offers neobank services, the neobanks will cease to exist.

Conclusion

Neobank is a virtual bank operating with no physical presence and provides fully digital banking services. It offers services in a way that traditional banks cannot and thus, bridges the gap between the services provided by conventional banks and evolving customers' expectations. Neobank is expanding exponentially, leveraging the state of the art technologies to offer cheaper, quicker, and more efficient banking services. With the covid pandemic, they had a significant boost and are known as the future of banking. However, neobanks are not the banks since they don't have banking licenses which is their biggest challenge.