For centuries, established financial institutions have been maintaining an unchallenged monopoly. Then, a few Fintech players came along and heralded a disruption in the banking industry. The term neobank was first coined in 2016 and rose in popularity after the global pandemic struck in 2020.
A neobank is a digital-only bank that operates without physical branches, meaning everything from opening a bank account to fund transfers is done online through a desktop or mobile-based app. People no longer need to visit the branch and go through annoying paperwork. However, that merely scratches the surface.
Let us start by looking at several factors that led to the popularity of neobanks, and later, we will discuss why they are here to stay.
Reduced Costs
We know that traditional banks have service markups that make it difficult for individuals and families in lower socio-economic conditions to maintain bank accounts. These service markups are levied on deposits, credit/debit cards, SMS alerts, and more. Neobanks allow customers to manage their accounts using a mobile app, which reduces the bank's overhead, enabling them to pass the cost savings to the customer.
For example - with a neobank, you can withdraw money in foreign currency without paying any markup. This would not the case with a traditional bank.
Rapid Customer Support
In the banking industry, customer experience can be a make-or-break factor. This is where neobanks are trying to win over customers. Customer support/convenience is one of the strongest pillars of neobanks. They can offer great customer experiences through user-friendly interfaces and AI-powered, 24x7 chat support. Users can also report a lost/stolen card, request to block/unblock their card, or reset their pin - all from the convenience of a neobank app with a simple two-factor authentication process.
Innovative Technology
One might argue that the net banking facility has been around for a decade, so what does a neobank bring to the table? The short answer is 'better technology.'
Weighed down by legacy systems, traditional banks struggle to offer innovative user experiences. Many traditional banks offer mobile banking but with limited functionality, leaving a technology void that neobanks can fill faster and better than their traditional counterparts
Neobanks offer a comprehensive customer experience, thanks to their robust infrastructure and bank API integrations, that make banking transactions a breeze for individuals and small businesses alike.
Helping the Underbanked
To reach more customers, neobanks must commit a sizable portion of their revenue to marketing and advertising. However, they are competing with established financial institutions that can invest far more in this area.
That is the reason neobanks decided to bypass the competition and carve their own niche.
Neobanks became popular by catering to the socio-economically challenged segment of the population, instead of the more affluent. People who could not afford to maintain an account with a traditional bank turned to neobanks to keep their money secure while using the neobanks services, without having to pay high service fees.
When it comes to lending options, neobanks offer lower interest rates and keep the paperwork to a bare minimum. With their growing popularity and lucrative offers, more people will have a checking account with neobanks by the end of the year. The numbers are expected to grow in subsequent years as neobanks strategically target freelancers and gig workers.
The Future of Neobanks and Why They are Here to Stay
While neobanks do not yet have the financial muscle to outperform traditional banks, they can still beat them on certain fronts by providing exceptional customer service and ease of banking.
Moreover, launching a neobank through collaborations with traditional banks or BaaS (Banking as a Service) providers has become easier than it was a few years ago. Neobanks can build a customer-facing app and APIs and integrate them with the back-end infrastructure of established banks. That way, neobanks can save on upfront costs and reduce time to market. With such a conducive environment and resources at their disposal, neobanks are likely to thrive.
Changing customer behaviors also promise a bright future for neobanks. With more day-to-day activities taking place online, consumers are beginning to expect digital-only banking experiences as well.
With Neobanks challenging the status quo of traditional banks, the latter can keep up with the competition by leveraging their existing infrastructure and launching their own Neobanks as a separate brand entity.
Takeaway
Neobanks are set to revolutionize the banking industry, and it is just the beginning. We are hopeful that with advancements in technology and liberal regulations in the future, neobanks will flourish exponentially, making incumbent banking outdated.
