What is a neobank?
A neobank is a fintech company that provides banking services exclusively online. While most regular banks have a website or an app, the functionality there is limited, and customers still have to visit a physical branch for less routine operations.
Neobanks eradicate this necessity completely. They enable their customers to do everything from conducting transactions to opening deposits online, and this experience is usually sweetened by a personalized look and lower fees.
How neobanks work
Traditional banks require a bank license to operate, and they must adhere to the corresponding federal banking laws. They also must be insured to safeguard customers’ funds. So how does a neobank work?
Unlike regular banks, neobanks are mostly not chartered, meaning they do not have governmental authorization to function as banks. Such banks operate as financial institutions instead, partnering with licensed banks to insure their customers’ assets, lend money, and hold deposits. Establishing such a partnership is typically the first step companies take when building a neobanking startup.
Once this back-end infrastructure is in place, a company may start developing a neobank app or website, depending on the target platforms. Users then can interact with their funds via an online interface, and the actual transactions, withdrawals, and other operations go through the partner bank.
Neobanks vs. online banks
The main difference between a digital bank and a neobank is the model they work under. Although these may sound similar, online banks represent digital facets of regular licensed banks, and they come with the corresponding fees and requirements.
Neobanks, on the other hand, are financial institutions that need to partner with an established bank to operate. At the same time, they offer more flexibility, lower fees, and oftentimes a wider range of functionality.
Pros of neobanks
Because of how neobanks work, they occupy an advantageous position in the market for people who prefer digital services. Here are several benefits that explain why:
- Fast customer onboarding: Opening an account is usually an incredibly fast process when it comes to neobanking, since customers don’t have to visit a branch.
- Lower fees and expenses: Neobanking apps have lower maintenance costs, as businesses don’t have to support and staff physical locations. For companies, it results in decreased operating costs, and customers can enjoy lower fees, as well as higher interest rates on savings accounts.
- Better customer experience: By a neobank definition, it is an application that caters to users who prefer managing their finances online, and such companies make it their mission to deliver the most seamless experience possible. Therefore, neobank apps are typically distinguished by an intuitive UI and swift customer support service. They are also available round the clock, so customers rarely have to wait for business hours to conduct financial operations.
- High variety of features: Besides being a banking tool, a neobank app can offer budgeting and savings functionality, as well as security features (for instance, blocking a card or changing a PIN). Although less commonly, some neobanks also enable users to get car insurance and mortgages.
Top neobanks examples
Some of the best neobanks in the world include the following:
- Nubank,
- Revolut,
- Monzo,
- SoFi,
- Chime,
- Varo Bank,
- Starling Bank,
- N26, and
- Aspiration.