What are neobanks, and how do they work?

Neobanks have come as a modern solution in today's time where the demand for faster & more convenient digital banking is increasing. The enhancement is because nowadays people become used to things like 5G internet and instant product delivery whether it is food or medicine. So people demand convenience in every service. 

The procedure of traditional banks can be slow and restrictive, and they don’t always meet modern needs. That’s where neobanks come in. These neobanks are digital-only banks. These neobanks are a part of a broader fintech revolution. They are specifically designed to make managing money faster and simpler.

Let's learn about everything you need to know about neobanks and how they work.

What is a Neobank?

Neobanks, also known as "challenger banks," Or “new-age banks “ is a fully digital bank that doesn't have any physical branches. It exists exclusively online. It operates mainly through mobile apps and websites.

Neobanks offer various services like:

• Online savings accounts

• Digital money transfers

• Payment solution

• Loans & investments

Neo banking solutions are designed to meet today’s tech-savvy generation, who demand the convenience of handling finances right from their phones. 

Now let's learn on what makes neobanks different from traditional banks:

• Leverage latest technologies like artificial intelligence (AI) and data analytics. 

• Offer highly customised and efficient banking experiences

Even though these neobanks provide most of the services available in regular banks, their experience is much more agile and personalized. However, most neobanks do not own their own banking licence and therefore partner with licensed banks to offer the same service to customers.

How Do Neobanks Work?

As we said that neobanks are digital payment platforms that can be accessed with a smartphone app or a website. Using neobanks customers can easily manage their accounts from anywhere and at any time. Lets learn about how neobanks work:

• Account Setup: Customers requires to download the app, fill in their personal details, and do an identity verification. 

• Customer Support: Neobanks offer in-app chat support or email support. Many use chatbots to help with basic questions, so customers get quick answers.

• Financial Tools: Neobanks use advanced tools like data analytics. With the help of this tool, it offer personalized advice, budgeting tools, and insights of finances. 

• Security: Neobanks use advanced security measures, like two-factor authentication and sometimes biometric scans, to keep accounts safe.

Neobanks earn revenue from:

• Transaction fees

• Premium service charges

• Lending out deposits 

• Earning interest

Types of Neobanks

Neobanks come in several forms, each with its own structure and approach. Here are three common types:

1. Front-End Neobanks: These neobanks partner with traditional banks and don’t have their own banking license. Instead, they focus on creating a smooth, user-friendly experience for customers while their partner banks handle all the back-end operations.

2. Digital Banking Units: Many established banks have created digital-only branches, like SBI’s YONO app in India. These units operate entirely online and rely on the banking licence of their parent bank, giving users a mix of traditional and digital banking services.

3. Full-Stack Digital Banks: In countries where regulations permit, these neobanks operate independently with their own banking licences. They offer a full range of banking services online without needing partnerships with traditional banks. However, this model isn’t available in India yet due to regulatory limitations.

Read more - The Future of Neobanking: Emerging Trends and Opportunities in 2024

What are the Pros and Cons of Neobanks? 

Pros:

• Lower Operating Costs: Since neobanks don’t have physical branches to maintain, they save on expenses. This often means lower fees for customers.

• Convenience and Speed: Neobanks are accessible 24/7, so you can manage your finances anytime. They also use smart technology to quickly handle questions and requests.

• Easy-to-Use Apps: Neobanks are designed to be digital from the ground up, which means their apps are usually smooth, intuitive, and fast—unlike some traditional banks’ apps.

• Flexible and Modern: Neobanks often work with traditional banks but aren’t bound by the same strict rules. This freedom lets them experiment with new services and keep costs down. 

• Advanced Security: Neobanks use modern technology to keep data secure, sometimes with stricter measures than traditional banks.

• Extra Features: Many neobanks offer handy tools like budgeting, instant notifications, and automatic savings features.

Cons:

• Lack of Personal Interaction: Without physical branches, neobanks don’t offer face-to-face support. This can be frustrating for users who need personal help, especially for complex issues.

• Limited Services: Neobanks usually provide fewer services than traditional banks, which may not suit everyone’s needs.

• Regulatory Concerns: In some countries, neobanks don’t yet have full licenses, which might affect how much people trust them.

Conclusion

Neobanks are changing the way we bank by offering a tech-savvy, easy-to-use experience. They're especially appealing to people who want digital convenience and lower fees. As neobanks continue to grow and adjust to new regulations, the future of neobanking is all set to become an even bigger part of the future of finance.