We are currently in the midst of the Digital Revolution, and the industry of financial services has not been in the least bit immune to the onslaught of so-called “disruptors” who have entered the arena to shake up traditional procedures. The banking business has traditionally operated as somewhat of a monopoly, and in certain nations, the only five big banks in a given financial service zone which has any real longevity are monopolies. The formerly high barriers to market entry have been lowered as a result of developments in financial regulation, which has enabled new competitors to enter the sector.
It has been a few years since the concept of neobanks was first presented to the rest of the globe. Because neo is short for “new,” a straightforward description of neobanks can be reduced to “new bank” in its most basic form. It is not a secret that so-called “new banks” have recently been generating a lot of noise in the financial technology business.
A bank that operates solely online and has no physical locations is known as a neobank. Neobanks, in contrast to conventional banks, can only be accessed through their respective internet banking platforms or mobile applications. These banks cater to a variety of consumer demographics, including younger people who are accustomed to technology and prefer to perform their banking online, unbanked populations, and enterprises whose requirements are always shifting and evolving. It is common practice for neobanks to form strategic alliances with conventional, chartered financial institutions. Such partnerships are mutually beneficial, as they enable the conventional financial institution to attract new customers while also offering deposit insurance to the neobank. Treasury Prime referred to a traditional chartered bank as just a fintech bank whenever the bank employs Banking as a Service (BaaS) technology to service fintech consumers on its own. BaaS stands for banking as a service. The most important distinction is that neobanks do not have their charters, whereas fintech banks have. Fintech includes neobanks as one of its subcategories.
Due to the inflexibility of their foundations, many traditional banks did not have the competence to undergo digital transformation. Customers began to show a preference for financial technology solutions that made it possible for them to consolidate all of their traditional banking activities into a single location and combine their existing bank accounts. The gap that existed between the services provided by traditional banks and what their customers anticipated from them increased as time went on. During the epidemic, the chasm that exists between banks and their customers grew even more apparent.
Neobanks like Chime, Open, as well as Affirm offer cutting-edge solutions with the assistance of the traditional financial institutions that they work with
The absence of a requirement for physical branches as well as the upkeep of those branches is yet another quality that neobanks have used to their advantage. Because of this, they can start their company with a smaller amount of cash, incur reduced expenditures, and direct more of their investments into the creation of innovative technology. At the moment, the most common method for neobanks to generate revenue is through the sale of premium banking accounts. While it is true that neobanks have low operating expenses, they also have low earnings. What exactly is the catch, then?
The majority of neobanks are participating in the “user race.” Even though it may impair their profitability, several neobanks have made it a top priority to build scale in their operations. Because they are still fairly new in the industry, their primary objective right now is to build up as large of a consumer base as they can.
Customers can open accounts with neobanks via their mobile devices and from the convenience of their own homes because neobanks do not have physical branches in the communities where they operate. And because their Know Your Customer (KYC) procedure is driven by technology, the account could be available in as little as a matter of moments.
And how exactly do you use the services offered by a neobank? In the same manner that you would schedule a ride with Uber or purchase food with Zomato. By utilizing an app. Neobanks offer its services to customers through a mobile application.
Neobanks are redefining what the future of banking will look like. It is a significant advance toward achieving the goal of expanding access across the American financial sector. When someone asks you in the future, “What is a neobank?” you will be able to respond with complete confidence. Neobanks are here to assist you in your lifestyles as well as the work that you do best, without making any apologies for the fact that you generate money in a manner that is unique to you.