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In recent years, neobanks, also called digital banks or challenger banks, have become popular. These banks operate exclusively on the internet, meaning you won’t come across any of their physical branches in your local area.
The neobanking sector has witnessed a substantial expansion, with a remarkable 36% year-over-year growth from 2020 to 2021. This surge indicates a growing demand for digital banking solutions. Anticipating a higher compound annual growth rate over the next 8 years, this trend is poised to persist.
Projections show that the share of neobanks in the US is expected to reach over $2 billion USD by 2030. These figures underscore the prevailing consumer preference for convenience, with digital banking emerging as a secure, user-friendly, and easily accessible choice for today’s consumers.
What sets neobanks apart is their use of cutting-edge technology to make banking easier and more effective. Let’s discover what are neobanks and how they work in today’s world.
What is a Neobank?
A neobank is like a bank, but it’s all online. These institutions provide services like checking accounts and debit cards, but there is no way to find its physical branch. Neobank, fintech bank, challenger bank, and digital bank are often used to mean the same thing and supposed to be a neobank definition. Their main purpose is to simplify banking and offer digital services that focus on customers’ needs.
Neobank VS Digital Bank
We often come across the terms “Neobank” and “Digital Bank.” But what’s the difference between these two?
Neobank
Think of a Neobank as a bank that exists on the Internet. It doesn’t have physical branches you can visit. Instead, it provides various banking services to save and check accounts, loans, and more, but you can only access them online, with your mobile phone, tablet, or laptop.
Digital Bank
A digital bank is more similar to a traditional bank but the one that has adapted to the digital era. It can do the same things as old-school banks but excels at using websites and apps to assist you with your finances. Sometimes, it maintains physical branches, but its primary focus is online banking.
What Sets Them Apart?
The significant difference lies in their origins and how they operate.
- Neobanks were born in the digital era. They have updated systems and physical branches. Their entire existence is based online.
- Digital Banks, on the other hand, used to be traditional banks but have become proficient at using the Internet. While they might still have physical locations, they primarily emphasize online banking.
Why Are Neobanks So Popular?
Neobanks have gained significant popularity in the financial world for several reasons. They offer user-friendly interfaces, lower fees, and innovative approaches to assessing credit. For individuals who were previously excluded from traditional banking, neobanks provide access to credit cards, checking accounts, and financial tools.
In recent times, an increasing percentage of Gen Z and Millennial individuals are opting for online banks as their go-to option for checking accounts. This trend has outpaced the preference for traditional community banks and credit unions.
Neobanks are not merely about shifting traditional banking services to digital platforms; it encompasses the creation of something entirely novel and cutting-edge within the realm of finance. Suppose you’re wondering about how to build a neobank, establish a neobank or consider launching a digital bank. In that case, it’s essential to understand that neobanks offer a more inventive approach as they are built from the ground up rather than built upon traditional banking institutions’ foundations.
When we draw a comparison between neobanks and traditional banks, it’s akin to contrasting the trailblazers in the financial realm. They are about cutting-edge financial solutions, money management apps, and online payment tools, addressing issues like long wait times and security concerns. Neobanks are transforming the customer experience, setting a new standard that challenges traditional financial institutions. If you seek efficiency, security, and a modern banking experience, neobanks are the way to go.
How Neobanks Operate?
Neobank runs by offering financial services online or through a mobile app. While traditional banks do many things in person and online, neobanks usually focus on the basics, like checking and savings accounts. However, they’ve been adding more services as they grow.
Traditional banks do many things: checking and savings accounts, loans for cars and homes, credit cards, and investment options. Neobanks stand out by keeping fees low or even free and giving tools to help you manage your money, like free overdraft protection.
Different neobanks offer various services, including:
- Checking accounts
- High-interest savings accounts
- Free money transfers to friends
- Getting your paycheck early
- Protection from overdrawing your account
- New ways to build your credit score
- Tools to learn about handling money
Even though neobanks are quite popular these days, many haven’t made enough money to support themselves, and only a few can say they’re making a profit.
Numerous neobanks have faced the daunting challenge of closing their operations due to flawed business strategies. The most recent prominent case of liquidating assets including its neobank is LendUp, which is a stark reminder of the volatile nature of this sector.
Building Blocks of Technology in a Neobank
Cloud Infrastructure Hosting
Neobanks rely on Cloud infrastructure, a robust digital toolbox, to build their banking platform. However, they don’t put all their tools in one box. They use a mix of public Cloud for some things and private Cloud for others to keep everything safe and working smoothly.
Open-Source Core Platform Design
Neobanks use a particular way of building their platform (similar to a process of building a house with building blocks). These blocks help them grow, manage, and make their banking tools work well for customers. This approach is one of the secrets behind neobanks’ success.
Customer-Friendly Front-End Apps
Neobanking business is all about the importance of understanding how clients interact with the banks in real life. They’ve moved from the old, serious banking style to a new, fun way of banking. They use chatbots, like Bard, and virtual assistants, clever automation tools, and even cool VR/AR tech to make your banking experience more exciting. They also use smart math to help you make better money choices.
The Power of Using the Cloud in Neobanking
Like a super helper, the Cloud is a big deal for neobanks. It helps them grow without spending too much money upfront. This means they can offer better banking services without needing expensive physical branches. They use innovative technology like AI to make things work better and cost less.
Moving to the Cloud makes everything run smoothly and keeps your financial info safe. It’s like hiring an expert to help you do things right. So, if neobanks want to use the Cloud, they should find a trusted company with the proven expertise in developing Cloud solutions.
How Do Neobanks Make Money?
In the fintech sector, various neobank business models exist, and neobanks employ several distinct methods to generate income.
- Debit Card Usage: A substantial part of a neobank’s earnings arises from interchange fees paid by merchants when customers use their debit cards for transactions. Each time a purchase is made with, for instance, a Visa debit card, Visa adds a small fee to the total cost. In return, Visa allocates a portion of these fees to the neobank.
- Credit / Loan Services: Neobanks provide credit card services, allowing users to make purchases on credit, for which they charge a fee. When customers exceed their credit (or loan) limits and incur interest charges, it generates revenue for the company.
- Savings Accounts: Neobanks generate income from the interest accrued on new account balances.
- ATM Fees: Neobanks often collect fees related to ATM withdrawals, adding to their revenue streams.
- VIP Client Services: Catering to high-value clients, neobanks offer premium services for a specific fee, creating an additional source of income.
Neobanks Disrupting Fintech Industry
Neobanks, also known as digital banks, are disrupting the fintech space by offering various financial services beyond traditional savings and checking accounts.
A significant aspect of their services includes online lending, which includes personal loans resembling borrowing from a reliable friend. What’s intriguing about these loans is that they typically offer lower interest rates, and borrowers have the flexibility to decide how they wish to repay them. This flexibility spans from making weekly or bi-weekly payments to lump-sum payments or settling the entire amount.
Top neobanks in the US like Chime or SoFi are revolutionizing the traditional banking industry by challenging the status quo and pushing traditional banks to work harder and become more innovative. This competition has resulted in better financial options for consumers, with more affordable loan options and increased accessibility to banking services.
Summing Up
To wrap it up, the emergence of neobanks has changed the way traditional banks operate, making the fintech experience better for regular people and businesses. These modern banks use cool tech to provide money services that are good, safe, and don’t cost an arm and a leg.
And guess what? They will keep growing and improving, offering more choices, being super easy to use, and making your banking feel just right. So, keep an eye out for these neobanks because they’re the future of finance.
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