Neobanks: Everything You Need to Know

In this modern age, traditional banks often bring to mind monolithic brick-and-mortars, slow processes, lots of paperwork and outdated services. This has been the style of most traditional banks before the boom of fintech – a far cry from customers’ expectations in the digital age.

Neobanks came about as a result of bridging the gap between traditional banks and customer expectations. These digital-only, fintech are creating banking platforms that promise a seamless banking experience at lower costs to customers.

What is a Neobank

Neobanks are financial institutions that offer digital-only banking services to customers. They operate exclusively online without physical branch networks and tend to maintain low operating costs. 

The offerings of neobanks are usually limited compared to that of traditional banks. However, they offer certain innovative services traditional banks cannot offer or regular banking services in fresh and interesting ways.

Neobanks emerged as a challenger bank to traditional banks in terms of customer engagement, reach and user experience in 2017. They leveraged technology and artificial intelligence to compete with traditional banks on these grounds and quickly scooped up market share. However, it must be noted that neobanks are different from challenger banks.

Difference between Neobanks and Challenger Banks

Neobanks operates exclusively online, purely digital, without physical presence at all like branches. They reach out to customers through mobile and web-based applications only and usually do not own a banking license. Instead, they partner with an existing traditional bank to offer licensed banking services.

Challenger banks on the other hand are digital-first banks licensed to offer banking services just like a traditional bank. They leverage innovative digital banking technologies as well as maintain a limited physical presence. 

Difference Between Neobanks and Traditional Banks

Traditional banks are the conventional brick-and-mortal banks we’re conversant with and they have been around for over a century. Neobanks have only been around for a decade and were part of the earliest forms of fintech companies.

Here’s how neobanks are different from traditional banks:

Service platform

Traditional banks have an extensive physical presence, larger than challenger banks. The largest traditional banks may establish branches even outside their home countries. Neobanks deliver their services through mobile and web-based platforms.

Today, most traditional banks have online banking products that offer customers simple digital banking services such as account opening, payments, loans and even support. However, they may not as efficient or technologically driven as digital banking services offered by neobanks. 

This is because neobanks tend to focus on a specific banking niche like loan or payment and offer highly innovative services that traditional banks cannot compete with. For example, SoFi bank exclusively offers student loans with zero fees for overdrafts up to a certain amount. The loan options are also more diverse than student loans offered by traditional banks, often infused with other financial services such as active and automated investing, cryptocurrency trading, credit cards, and retirement accounts.

Support and Client Relationship

Traditional banks favour the in-person customer support model with just enough done in terms of online customer support technologies. However, the in-person support model is beneficial for servicing special clients, for example, high net-worth individuals (HNWIs) or offering relationship management services.

Neobanks invest heavily in digital support tools like chatbox, self-service and more and maintain a limited amount of in-person relationships or support staff. Most support activities happen online virtually and procedures are flexible compared to traditional banks.

Costs and Bank Fees

Operating virtually and with a thin staff count means neobanks maintain an extremely low operating cost compared to traditional banks. This allows them to offer many banking services at drastically reduced or zero costs. 

In Nigeria, for example, Kuda Bank allows customers to make up to 25 bank transfers to other banks per month for free. The same amount of transactions monthly would cost a regular bank user up to NGN15,000 (USD36) per year. Chime, one of the world’s largest neobank offers checking (called “spending”) and savings accounts, both at zero monthly fees.

Neobanks Setup Structures

There are three types of neobank structures anyone looking to launch a neobank can adopt. Let’s see them below:

Independent Neobanks

Standalone neobanks are neobanks built from scratch to serve that specific niche within the banking industry or deliver particular banking services. You would need to acquire a virtual banking license from regulators and build out the banking technologies needed to power the platform. After that, your neobank can operate online without any physical offices.

The biggest advantage of standalone neobanks is betting on an excellent user-oriented approach and user experience. A good example of a standalone neobank is Revolut, It focuses on credit card operations and provides interesting currency conversion rates offered along with personalized rewards over an outstanding user interface.

Subsidiary unit of a non-banking organisation

Non-banking businesses such as fintechs can launch digital banking products. MyBank by Alibaba Group is one of such and one of the most popular neobanks in China. The bank focuses on individual loans and extends credits to small and medium-sized businesses.

Neobanks introduced by fintech giants are often very competitive and capture new markets quickly, especially through price undercutting. Traditional banks have a hard time keeping up with these types of banks as they cannot reduce their rates to compete for the market.

Subsidiary unit of a traditional bank

Traditional banks may introduce a digital-only banking platform as a subsidiary of their bank to keep up with digital banking competition. These neobanks often leverage the banking license of their parent banks and can offer a broader range of banking products compared to standalone neobanks.

ALAT by Wema bank is an example of filial neobank structure and one of the most successful of this model in Nigeria. As noted earlier, this is different from online banking applications managed by most traditional banks. The banking product must exist as a standalone product outside its parent bank.


Building a Neobank with SpotBanc

SpotBanc is a digital banking ecosystem helping businesses build banking capabilities into their non-banking products or launch full-scale financial products such as a neobank. SpotBanc’s bank-in-a-box model allows you to design and launch a functional neobank within 21 days at cost-effective rates. Learn more here.

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