Neobanking: What you need to know

Neobanks started as a way to cater to the needs of the world’s growing population who transact more of their businesses online. These groups of people are at a level that the traditional banks are still trying to catch up which is creating a sort of lag.

In this article, you will learn about what neobanking is, how it began, and the impact it is making in the international market.

What is neobanking?

Neobanking is a form of online banking but differs in its operation and management from traditional banking. Neobanks generally do not have physical banking facilities or buildings, unlike traditional banks.

Neobanks can exist in two forms –

1. Financial institutions with banking licenses that only transact their business online and no physical banking buildings, and
2. Companies with no banking license act as an intermediary between traditional banks and their users or subscribers or use a traditional bank to process the transactions of their customers.

What gave rise to neobanks?

One major reason why neobanks are on the rise in the UK and all over the world is the mistrust in the traditional banking system. This was a result of the financial crisis over a decade ago where traditional banks gave loans and raised interest rates that made it difficult for loan repayments. Many companies liquidated and the economy of the world crashed. For this reason, many have lost confidence in the banking industry.

However, legislation all over the world also gave the opportunity for banks to operate solely online and this gave the world a form of breathing space where banking is concerned. These new banks offer better services and interest rates to the younger consumers who are the untrusting majority. Teenagers and young adults make up most of the people that carry out online transactions and these are the targets of neobanks.

How does a neobank differ from an online bank?

The reason why online banking cannot be termed neobanking is that traditional banks also operate online banking platforms for their customers. 

Neobank on the other hand does not have to have any interaction with a traditional bank, especially if they have a banking license of their own.

Popular neobanks in the UK

There are two popular neobanks virtually everyone will be familiar with in the UK – Monzo and Revolut. This is based on the number of account holders they currently have. Monzo is recording over 5.8 million while Revolut has over 3.1 million account holders.

Some other neobanks that may be of interest to you are

• Monese
• OakNorth
• Muniy
• FairFX
• Dozens
• Go Solo
• Go Henry
• Anna Money
• Atom Bank
• Coconut
• Soldo
• Tandem

What are the pros and cons of transacting through a neobank?

One of the reasons why neobanks seem to be thriving, despite the fact that they have no physical presence, is that they offer better services to customers. The following are the advantages of neobanks over traditional banks.

• Impressive interest rates – since they do not have to spend money on overhead costs, the neobanks can offer interest rates that are catchy to their customers. Unlike the traditional banks which give interest rates of less than 5% per month provided, there is a limited transaction on the account, neobanks sometimes have higher interest rates.
   
• User-friendly apps – unlike the banking apps of traditional banks, the neobanks tend to have more user-friendly apps. This is because all their business is online anyway and they put their effort into making their customers feel safe to use their platform. Traditional banks simply do not have the time or effort to devote to such since they have more customers anyway.
   
• The creditworthiness of customers is not an issue – neobanks usually run zero account balances to encourage more customers to join their platforms. This is how they attract customers.
   
• Impressive addons – neobanks add features like targets, investment options, budgeting, etc. to help customers better navigate their financial capacity. Whereas, one would probably need the help of a financial advisor for this with a traditional banking system.
   
• Easy setup and use – being user-friendly, it is easier to sign up and get new account numbers with neobanks than the traditional banks. The paperwork and process are less stressful.

These are just a few advantages to using neobanks. However, there are cons too.

• No physical bank to lodge complaints – as they operate online only, there is no chance that you will ever get an in-person interaction with any of their workers. Complaints have to be logged online or through a customer care representative. This is a reason why you must verify that the bank is insured by the Financial Services Compensation Scheme (FSCS) before operating an account with them. FSCS is the nationally approved insurance company for the banking sector of the UK.
   
• Fewer services – services like loans and salary advances may not be possible with neobanks because they expend their energy more on savings and credit accounts.

Conclusion

Neobanks have come to stay. Funny enough, many traditional banks are choosing to partner with neobanks rather than fight them. This is a step in the right direction because it will help build synergy and probably restore the lost trust of the younger public.