Neobank: Understanding the Basics and How it Benefits its Customers

The emergence of fintech is revolutionizing the way we view the banking sector. This mix of technology and finance is an attractive proposition that stands out for agile operations, drastic cost reduction, physical/virtual cards, multi-currency operations, and cryptocurrency management. For many, neobanks are winning us over for the use of neobank technologies in combination with great customer service.

Neo-bank refers to business models that involve financial services with innovation and technological adoption. Although the legal system does not contemplate a definition of the expression “neo-bank”, in accordance with international guidelines on fintech and the meaning of the term “bank”, it is understood that it refers to branchless digital banking services. This new generation of financial institutions has its origin in Germany and the United Kingdom. 

Thus, considering international guidelines and that the terms mentioned refer, in general, to the exercise of financial activity, the expression “neobank” is connected to said business models. 

And it is that according to the study by the Bank for International Settlements (BIS) called “Implications of fintech developments for bank and bank supervisors” (2018), the main characteristics and criteria that define an entity as a neobank are:

 – A technology company that offers banking or bank-like services, without necessarily being a licensed bank. The absence of a license is the first thing we encounter when we enter into the discussion of neobank vs online bank.

 – Entity that makes extensive use of technology (e.g. API, Big Data, Artificial Intelligence, Blockchain) to offer banking services primarily through digital channels.

– Entity that offers a range of financial services ranging from deposit and credit products to financial advice and budget management.

– Leverage scalable infrastructure through cloud providers or API-based systems to better interact across online, mobile, and social media platforms.

– Its revenue model is predominantly based on commissions and to a lesser extent interest income, along with lower operating costs and a different approach.

It has also been understood that the term neobank refers to new business models implemented on the infrastructure and license of an existing supervised entity (spin-off).

The expression “neobank” must be differentiated from the term “challenger bank”, which is associated with a technology company that offers banking services with a recently granted financial license or a newly created bank built from scratch and unrelated to the dominant financial service providers in the market.

The advantages

The reasons to join a neobank are not lacking, especially for the new generations or those who have never had a relationship with a bank. Among its main advantages, it is worth noting:

– 100% digital operation. Neobank technologies allow you to manage your money wherever you are and with your favorite devices.

– They use new technologies. The premise of a neobank is knowing how to adapt to the dynamics of consumption. To operate diligently and efficiently, they must take full advantage of the internet, AI, Big Data, and other ICTs. In this way they can offer cheaper services, meet customer demand and expand their offer.

– Transparent and cheap offer. This fintech does not want to be a traditional bank. That is why you will not find a catalog of products or services or small print. Many are limited to giving accounts and cards for current operations (buy, pay, withdraw cash, make transfers, manage payroll, and direct debit receipts). The most sophisticated neobanks can offer you insurance, loans, or investments through a marketplace.

– They include multi-currency operations. Most of these digital banks allow you to manage a balance in multiple currencies. This is very convenient when traveling, withdrawing cash from ATMs without commissions, making international transfers, and receiving a more favorable change.

– They accept the use of cryptocurrencies. As cryptocurrencies continue to broaden their acceptance, digital banks are no exception to this reality. Some apps from these companies allow you to buy, save, and trade altcoins according to your preference. This is one characteristic that always comes up when we discuss neobank vs online bank.

– They charge less. Digital banks are a very attractive option because many of their products or services have no commissions and their fees are very low. This applies to ATM withdrawals, national and international transfers, currency exchanges, purchases, account maintenance, direct debits, and more. Due to their virtual nature, they have fewer operating expenses to offset.

These facts and how the banking sector is changing have put most traditional banking entities on alert. To a greater or lesser degree, traditional banks are applying certain adjustments so as not to lose ground in the face of the upward trend of neobank technologies. However, this is not without its risks for these well-known brands.