But what is a neobank exactly?
A neobank is a digital fintech platform that provides financial services exclusively through online channels. Neobanks are also called “challenger” banks because they address many of the limitations of traditional institutions, eliminating the need for physical branches as well as overly complex paperwork. You don’t have to jump through ridiculous hoops to get your loans approved, which can take weeks (if not months) to get final sign off through traditional banks.
Using a neobank account allows you to enjoy lower monthly maintenance fees as you conduct your banking transactions through a smartphone app. A quality neobank offering will also include great tech integration to ensure quick processing times for loan applications.
Unlike the majority of traditional banking institutions, neobanks utilise data-driven systems that enable them to personalise their services to their customers through digital profiles on their accounts. The system can identify what kind of card they need or send automated reminders and updates. Fintech technology also allows neobanks to analyse multiple data points to improve customer experience.
What are the benefits of having a neobank account?
Neobanks are filling the gap in the market to provide better banking services to a wider range of people. Banks have been a cause of headaches for so many for so long and gotten away with it due to a lack of other options for customers. That is changing.
Neobanks have the ability to accelerate the globalisation of digital financial services since they function remotely, allowing people to trade and conduct transactions from anywhere in the world. The innovative technology utilised in neobank platforms has also improved the transparency and communication between service providers and their customers. Neobanks empower customers to review their own transactions with intuitive data, allowing people to be more informed about their finances.
Here are five advantages of using a neobank account:
1. Lower maintenance costs
The most significant expenses of traditional banks include their physical branches and ATM installations, as well as the maintenance and security costs to these facilities. Neobank expenses are minimised since they exist only as mobile applications and desktop interfaces. This enables the platform to use their revenue to upgrade their products and services with minimal fees for customers.
Technologies such as artificial intelligence (AI), cloud computing and big-data analytics are systemically merged into neobank platforms to provide a seamless and integrated experience. Unlike traditional banks driven by legacy systems, neobanks offer services such as budget trackers, card management systems and smart UI/UX.
3. Quick turnaround times
The integration of technology increases the efficiency and accuracy of banking processes in neobanks. Customer service chatbots with AI capabilities can resolve concerns and questions in real-time, ensuring that every customer is well taken care of, reducing overhead costs and wait times.
4. Accessibility and convenience
Historically, people needed to go directly to a physical branch or call customer service before they could resolve their banking concerns. The digital platform of neobanks enables you to make transactions on the go, with just a few simple taps on your phone.
5. Financial inclusivity
Neobanks cater to the drivers of our economy, particularly Millennials and Gen Z customers. Traditional institutions still hold the largest market share in the industry, but the rapid growth of neobanks indicates an increase in the number of customers switching to “challenger” banks.
What are the risks of having a neobank account?
Not all neobanks are created equal, like all banking, you need to do your due diligence and educate yourself about the potential risks. Here are some things to look for when researching the right neobank for your financial needs:
Some neobanks find it difficult to move past the startup stage due to a lack of planning for business continuity and sustainability. As challengers in the financial services market, neobanks are primarily focused on growth by providing customer-centric services, which can become all-consuming if they are not careful.
A credible neobank knows that attracting customers with niche products and services is just the first step and they will have a long-term strategic design that’s well-integrated into the digital platform. As well as strong long-term performance, this has added benefits in building customer trust and confidence.
2. No banking charter
Unlike traditional institutions, many neobanks do not have a banking charter, which is a legal document that authorises a banking company to commence operations. This can be time-consuming and costly to obtain, which is why competitive (and more reputable) neobanking entrants negotiate partnerships with small regional lenders that hold and insure customers’ deposits. Do your research to ensure your neobank is partnered with a banking charter lender.
3. Lack of brand recognition
Traditional banks may be more frustrating to deal with, but customers continue to hold primary accounts within these institutions through loyalty as well as their established brand credibility. Many neobanks are new and are yet to establish that trust and recognition.
4. Recent surge
There has been a significant surge in interest in challenger banks since the global lockdowns started in 2020. Neobanking enabled people to manage their finances from the comfort and safety of home, which was often the only option amidst the pandemic. Since neobanks technically still operate outside official financial systems, navigating a post-Covid world is uncharted territory for challenger banks and it remains to be seen how they will fare in popularity as we go back to “normal”. This makes it crucial to partner with a reputable fintech platform that has long-term plans for business sustainability and agility.
5. Charge to merchants
While conventional banks earn profit through overdrafts and other fees, neobanks typically make money from interchange fees on debit-card transactions. The interchange rate refers to the fees a merchant pays with every debit or credit transaction. An interchange-based neobank business is only viable if the costs are contained and if there’s a high volume of transactions.
To help solve these risks, regulators across the globe are developing new rules solely for neobanks and similar platforms, since they have a completely different modus operandi from conventional banks.
One reduced risk when it comes to neobanks is accuracy. Monolithic banks run higher operational risks due to errors, disruptions or damages caused by people, legacy systems or outdated processes. This can lead to internal fraud or costly human errors; one example is if a bank teller accidentally gives or receives more money than what is actually calculated and agreed upon during the transaction.
Neobanks don’t have this issue because they are more digitally inclined and not hampered by legacy technology, giving better accuracy.
Also, without the burden of regulatory requirements, neobanks are more likely to provide unique product offerings that address multiple financial issues of the underserved market.
Neobanking is the future of the financial services industry, it gives more people better access to faster money and empowers customers to make well-informed decisions about their finances while allowing them to utilise intuitive technology for greater mobility. Credible neobanks will provide encrypted online channels to ensure the privacy and security of personal data, protecting customers against malware issues and potential cyber-attacks.
Nauggets is one of the pioneering gold-backed fintech platforms in Australia. Our proven team is dedicated to helping you build your wealth through the ease and accuracy of online technologies. Check out our website for information on opening a secure gold-backed account.