Neobanks are changing the financial landscape by offering consumers a digital banking experience that is often more accessible and streamlined than traditional banks.
In this article, we will explain what a neobank is and how it differs from traditional banks, explain the pros and cons, and set you on your journey to starting your own neobank.
What is a neobank?
A neobank, sometimes referred to as a 'challenger bank' in the UK, is a nimble financial institute that operates wholly online.
Neobanks are primarily digital banking platforms that operate without physical branches, but they should not be mistaken for online banks. While online banks have a banking charter and offer a wider range of services, including loans, neobanks tend to focus on core banking services that are delivered digitally.
The goal of these fintechs is to offer digital services and apps that streamline the banking experience for consumers, while often focussing on a specific area.
How do neobanks work?
Unlike traditional banks, neobanks do not have physical branches or locations, which helps to keep their overheads down. Neobanks also use banking APIs and leverage the power of other Fintechs or organisations – even traditional banks – to offer their customers customised services.
Are neobanks safe and secure?
Just like traditional banks, neobanks are subject to regulatory requirements and must adhere to the same standards for security, privacy, and financial stability. This ensures that neobanks operate in a safe and secure manner, protecting the interests of their customers and the wider financial system.
Some neobanks may partner with traditional banks to offer FDIC insurance on deposits. Alternatively, they may opt to obtain their own banking charter, which enables them to provide FDIC insurance directly.
How do neobanks make money?
Not having physical branches gives neobanks a significant advantage in terms of cost, as they can keep operational expenses low. This allows neobanks to offer their customers lower fees, higher interest rates on savings accounts, and other value-added services.
Here are a few examples of the various neobanks in the market:
Founded in 2015, Varo Bank is an all-mobile neobank that offers checking and savings accounts. It obtained a full-service national banking charter from the Office of the Comptroller of the Currency (OCC) in 2020, effectively transforming it into a fully-fledged bank
Current refers to itself as a "financial technology company," that was established to help American citizens who were underserved by the traditional banking system. Some of the services offered by Current Bank include mobile check deposits, peer-to-peer payments, and ATM fee reimbursements.
This British-Lithuanian neobank that focuses on borderless transactions, savings options, retirement annuities, and more to consumers and businesses. One Revolut's core features is the issuing of physical and virtual Visa-backed cards that can be used in a wide range of companies, have set spending limits, etc.
Chime is one of the largest neobanks in the US and was founded in 2013. It provides various banking services such as checking and savings accounts, debit cards, and mobile banking features. Additionally, it offers an early direct deposit service that allows customers to receive their paycheck up to two days in advance and has no monthly fees, overdraft fees, or minimum balance requirements.
N26 is a neobank headquartered in Germany that offers banking services like checking and savings accounts, debit cards, and mobile banking features in Europe and the United States. It is known for its transparent fee structure and security features such as two-factor authentication and real-time transaction notifications, providing customers with a secure and user-friendly banking experience.
Pros and cons of neobanks
|Offer lower fees than traditional banks.||Customer service is only available via chat, email or phone as there is no face-to-face option available.|
|Offers 24/7 online service through dedicated apps or websites.||Not all neobanks offer the same range of services as traditional banks.|
|Sign-up and create accounts online without having to visit a physical bank branch.||Neobanks are a newer way of managing money without the track history of regular banks.|
|Money is just as safe as a regular bank.||Money may not be FDIC insured.|
|Better user experience.||Technology failures in the absence of lack of redundancy.|
How to start a neobank?
Here are a few steps to guide you when starting a neobank:
- Create a business plan – Like any company, you will need to develop a business plan. Who is the target market? What will be your revenue streams? Who are your competitors? How much will the operation cost to start and fund?
- Obtain a licence – This is an incredibly expensive and time-consuming task that will require your organisation to comply with a variety of banking and financial regulations. Or, you can use an agency licence to get you there faster and without breaking the bank.
- Compliance and risk - This involves compliance with industry standards such as AML, safeguarding customer funds, FCA reporting and more.
- Your platform – You will need a substantial technology stack to launch a digital bank. And you'll need to decide between building it from scratch or using an infrastructure that is pre-built.
- Create partnerships – Like most companies, neobanks can live or die by their relationships with other organisations. You'll need to establish partnerships with a wide array of third-party providers.
- Launch and iterate – The beauty of a neobank is its app-driven structure. The offering can be launched to select customers, gain their feedback, and keep tweaking the offering before it is ready for the general public.
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