Neobanks Explained: Definition and Examples of Popular Neobanks

The diversity of online banking services is steadily growing worldwide. Allied Market Research states that the global online banking market size reached $11.43 bn in 2019 and is projected to gain $31.81 bn by 2027, growing at a CAGR of 13.6% between 2020 and 2027.

While digital transformation is changing the traditional banking services, another type of online banking service has appeared – neobanking – and its popularity is currently on the rise.

Neobanks are first banks that have no brick-and-mortar facilities however they provide their customers with improved banking services. Operating on different models, neobanks can offer banking and financial services at much lower rates and much faster. Therefore, many businesses and individual users have already expressed their interest in the services neobanks offer.

Neobanks are a rather young notion in the Fintech industry but are rapidly gaining popularity. More and more finance-related businesses are investing into neobank development and the competition is increasing rapidly.

In this article, we’ll have a closer look at neobanks as a notion and find out why neobanks are getting popular, how they work and what to expect from neo banking in the near future.

What is a Neobank?

Neobanks are digital-based banking organizations that provide their services via mobile and/or web applications. Often called challengers for the great potential to disrupt traditional banking, neobanks don’t have any physical presence. They largely rely on digital FinTech solutions and function independently from brick-and-mortar financial institutions.

Although neobanks offer a quite limited number of services due to an online-only presence, they also include low maintenance costs and highly streamlined operations. Their services usually vary from provider to provider. The most common of them include: checking and saving accounts, payments processing, cash transfers, peer-to-peer payments, and others.

To expand the number of their offerings, neobanks sometimes cooperate with traditional banks and add to their list such options as virtual credit cards, micro-investments, loan arrangements, and many more.

How Do Neo Banks Work?

Let’s have a look at how challengers operate from the point of view of a neobank owner and their customers.

Neobanks differ in their offerings and structure from conventional banks. They don’t have to comply with heavy state or federal banking regulations and, therefore, they can use other than traditional banks’ business models to provide their services.

Digital-only neobanks gain most of their revenues from the interchange. These are the fees merchants pay to organizations when buyers use their debit cards to purchase products. Another source of income for neobanks is the fees they charge from customers for using out-of-network ATMs. The revenue amount can make up to 20% of neobanks’ income.

Above all, as neobanks are online-only present organizations, they significantly cut down the expenses on employees, equipment,office space, and etc. As a result, they can provide much lower service rates in comparison to traditional banks. This makes them highly competitive and attractive to many customers.

From customers’ perspectives, neobanks look just like a common online banking service. It means that they simply need to download the app and sign up for an account. Depending on the app’s functionality, they can complete various transactions and simple financial activities but at a lower cost.

Why are Neobanks Popular?

More and more businesses and individual users see digital-only banks as a viable alternative to conventional banking. The main reasons for that are:

• convenience – neobanks attract a wide range of tech-savvy users that are used to completing most of their tasks online; using digital-only bank apps they can perform all the basic banking activities and manage their finances without the need to spend hours in lines in brick-and-mortar facilities;
• simpler access to banking services – there are many people around the world that have no account in a bank, e.g. in the US alone there were 5.4% (about 7.1 million) of unbanked households in 2019; challengers can provide banking services for the unbanked categories of people through convenient mobile and web applications;
• lower costs – most neobanks attract their customers with minimal servicing costs or don’t charge any fees at all, as they have other sources for making revenues such as interchange;
• streamlined processes – challengers provide only the most essential services for customers; moreover, they can skip many time-consuming processes that are customary for conventional banks; for example, if a challenger offers crediting, the loan-application process will be as simplified as possible; read more about loan types and alternative credit scoring.

Most Popular Neobanks

In recent years, the neobanks have quickly spread worldwide and customers can freely choose between several neobank providers. The top 3 most prominent neobank providers are:

• Chime is a bank aimed at business banking purposes. It supports credit and debit card transactions, cash, and direct deposits. Chime combines low-interest rates together with fee-free services which makes it an attractive solution for many businesses. Above all, Chime is FDIC insured and has strong security and fraud protection.
• Nubank is one of the largest Brazilian independent digital-only banks whose value reached $45 bn in 2021. The challenger offers two types of accounts – personal and for business and supports digital payment accounts, credit and debit cards, personal loans, insurance, and much more. Nubank is licensed by the Brazilian Central Bank and successfully operates across Brasil.
• Revolut is a British FinTech company that provides neobank services to its customers. There were 15.5 mln Revolut users as of June 2021 with 1.1 mln app users growing daily. The company supports international money transfers as well as provides free UK and euro accounts, free ATM withdrawals per month, currency exchange, and much more.

Bottom Line

Neobanking is a new phenomenon that has recently appeared on the FinTech market and has already generated much hype. Many businesses and individual users find it much more attractive to use neo-banking services rather than going to brick-and-mortar facilities due to the speed of services and much lower rates they provide.

The increased popularity and promising prospects of neobanks make many businesses actively invest in building their neobanks and add more services to attract broader audiences.  The competition is tense and it’s essential for neobank businesses to provide their clients with high-quality digital products. Therefore, choosing the right FinTech software development company for building neobank apps has never been more important.