Fact checked! This material was written by an expert

5 min read 17.02.2022 336
Ibrahim Busari
Ibrahim Busari
Ibrahim is a fintech writer at AskWallet
What is a Neobank?

What is a Neobank?

Traditional banks are having to compete with new, more efficient, and tech-savvy financial institutions that are emerging around the world, such as so-called neobanks and challenger banks. The last ones offer customers much of the convenience of online banking, and they do so while charging lower fees than traditional banks do, making them especially attractive to millennials. In this article, we’ll talk about what neobanks are and how they differ from other types of financial institutions.

An Introduction to Neobanks: A Buyers Guide

First movers have disrupted one of finance’s last major frontiers: banking. Like their more established counterparts, neobanks offer both savings and checking accounts, along with other services such as loans, money transfers, and credit cards. But they operate in a highly digital environment without legacy infrastructure and—more importantly—without big legacy costs. The result is lower fees on everything from lending to deposits to ATM withdrawals (or no fees at all). Best of all, some neobanks are entirely free; you simply pay your bill online or via an app. Over time, others will likely follow suit, offering completely fee-free banking. 

What started out as fintech startups aiming to modernize customer service and reduce customer costs has become a serious threat for incumbents large and small. By offering better prices for better value, many neobanks seem poised to shake up financial institutions across Europe and Asia going forward. In short: A neobank operates similarly to traditional banks but focuses on attracting new customers by offering better rates and fewer fees than traditional banks do (neobanks often charge nothing for current accounts but may charge higher rates on things like overdrafts). They also tend to be aimed at millennials who grew up using smartphones but don't want or need branches where they can go if they ever have problems with transactions. 

So now that you know the definition of neobanks let's take a look at some examples of neobanks in 2022: 

N26

Launched in Germany in 2013, N26 boasts a suite of features such as real-time notifications, multi-currency accounts, and built-in budgeting apps. All these perks come with no fees, no minimum balance, and no hidden costs. Bank transfers are free within Europe (1€ everywhere else), while withdrawals from ATMs cost only 5€. 

The most popular N26 feature is its prepaid MasterCard—enabling customers to swipe anywhere internationally at a 0% fee. From groceries to gas stations and everything in between, you can use your N26 card to save money every time you spend by simply changing N26 Free Cash on your account into any of its 16 supported currencies whenever you like.  Our N26 full review may be found here.

Revolut 

Founded in 2015, they are currently present in 31 countries and counting with more than 18 million customers worldwide. They have become one of Europe’s leading digital banks offering International money transfers and global payment cards with interbank exchange rates. Revolut works on both iOS and Android devices, with convenient apps that allow users to make payments using an alias rather than requiring a user to remember his or her banking details (i.e., username and password). Read our full Revolut review here.

How Neobanks Work

In recent years, there has been an explosion of financial startups that serve to give people financial services and products that are more in line with what they want. Many of these new companies have bypassed legacy banks in order to deliver competitive rates and services directly to customers, often with more personalized care. 

Some of these neobanks include Atom, Revolut, TransferGo, and others. Rather than working through traditional banks, these companies create their own technological platforms on which customers can conduct transactions quickly and easily. They also tend to favor simple products such as mobile checking accounts and low-fee savings accounts instead of credit cards or mortgages.

 These new companies usually work in ways that are similar to traditional banks, although they frequently avoid dealing with them by designing their own software for managing deposits and transactions. 

Since many of these neobanks operate online or through an app, customers do not need to visit a branch location to conduct business. Instead, they use these easy-to-use platforms to log into their accounts from any location and easily move money around as needed. 

Neobanks vs Traditional Banks 

Traditional banks offer physical bank branches and tellers, extensive customer service hours, and other features that many find more appealing than mobile apps and online banking. However, neobanks are simpler to use (no trips to the bank), cheaper (fees tend to be lower than traditional banks), and offer up-to-date information on your financial situation. And some people prefer simplicity over personal relationships when it comes to money. With so many options available today, there’s bound to be one that will appeal to you. So let’s take a look at each option in greater detail and learn what they have to offer! 

Four main reasons behind the rise of neobanks: 

  • You don't need lots of paperwork or documentation for an account 
  • You can open an account with little or no collateral (deposits, cash) 
  • Lower fees – no fees for balances below $5k 
  • Higher interest rates – as much as 5% APY on certain accounts Another benefit is app accessibility. 

Most of these companies have apps where you can do everything from deposit checks remotely, to schedule transfers between different accounts at different institutions. Check out our list below for some of the best neobanks out there!

How Do Neobanks Make Money?

Because of their high costs, neobanks will have to make money some other way than by charging you an overdraft fee or lending you money. Their main source of income usually comes from non-interest-based financing. This means that they don’t charge you interest for loans, but instead generate revenue through fees and special features. For example, while traditional banks might give you 0% on savings accounts with no minimum balance requirements, neobanks might offer 3% interest on savings accounts with a $50 minimum balance requirement. 

Neobanks often operate on a different business model than traditional banks. They derive a significant portion of their revenue through interchange fees, which merchants pay when users use their debit cards to make transactions. Because they are smaller firms, neobanks can have interchange percentages up to seven times greater than banks with more than $10 billion in assets.

However, not all challenger banks are success stories, and some doubters dispute such exorbitant valuations. The epidemic and its influence on consumer spending delivered a significant blow to certain early European darlings such as Monzo. Xinja, an Australian neobank, went bankrupt this year, blaming the Covid-19 issue and the accompanying difficulty in acquiring money.

Pros and Cons of Neobanks

Pros of Neobanks 

  • They’re user-friendly and encourage people to think more actively about their money management.
  • They use cutting-edge technology to make banking easier. 
  • They have transparent, low fees. You usually don’t have to worry about hidden fees that could hurt your finances if you sign up for one of these banks.
  • They make it easier to invest in stocks and other financial products. 
  • You can easily manage your finances online or through mobile apps. Some neobanks use artificial intelligence to help you save money.
  • In addition, neobanks provide rapid account creation and processing. Customers can open up accounts and submit requests in a timely way at these technologically advanced organizations.

Cons of neobanks

  • While they have many advantages, neobanks may not be for everyone. If you’re accustomed to having direct access to an account representative or community financial advisor, for example, you might not like how impersonal these organizations can be. 
  • If you’re looking for private banking services, neobanks probably won’t meet your needs. While some neobanks will offer basic private banking services such as foreign currency exchange and international wire transfers, other types of banking accounts that provide more hands-on attention simply aren’t available through most neobanks. 
  • At least at first, most neobanks don’t have extensive branch networks.

Are Neobanks safe?

Online-only banks are relatively new, so it’s worth asking: are neobanks safe? The short answer to that question is it depends. Of course, that doesn’t help much when it comes to protecting your money. So here’s some more detail: It depends on how you view safety and security. In terms of regulatory compliance, today all retail banks are essentially as safe as one another because they all have to follow very similar rules from their country’s central bank. So if you worry about whether your money will be stolen from your account or if you will suddenly lose access to your funds, then all established financial institutions (including neobanks) would be equally safe for you.

Many individuals did not trust the system in the early days of the neobanks since it was not controlled by any financial authority. However, the tide is turning, and many nonbanks are receiving restrictions from the FCS and other agencies. Even in Australia, the government insures bank deposits up to $250,000 for Authorised Deposit-Taking Institutions (ADIs). In the United Kingdom, the Financial Conduct Authority (FCA) safeguards deposits of up to $250,000 in the unlikely event that a neobank collapses.

Top Neobanks in the US

Chime

If you’re from Europe or Asia, then you’ve probably never heard of Chime (shame on you). But if you live in America and use financial services—which pretty much means most people—then you probably have used it. At least 500,000 Americans have; that's more than any other current account but for one startup. So what exactly is Chime? Basically, it's like a bank-with-no-banks: It has no branches, ATMs, or tellers whatsoever. Instead, its customers manage their finances online and over mobile devices by themselves or with help from customer service operators. 

Varo 

This NYC-based neobank was launched in 2016 with promises to shake up everything we know about financial institutions. This neobank only keeps customer funds on hand for two days, as opposed to commercial banks which hold money for 10–30 business days. Varo is not FDIC insured and its current value sits at $100 million. What’s most interesting about Varo is that they’re truly taking on conventional banking giants by offering low-cost services and products (e.g., savings accounts starting at 1%). While it may be too early to tell, one thing we know for sure: Millennial customer expectations are changing fast and Varo has set itself up as one of those companies leading our next wave of financial institutions.

Current

Current is a neobank, that provides a basic spending account with no monthly fee and a premium account with perks such as early access to direct deposit for a monthly price of $4.99. Neither account pays interest, but both include a rewards program in which account holders may earn points by using their debit card at participating stores.

Top Neobanks in the UK

Monzo 

Known as the future of banking, Monzo (formerly Mondo) has been growing in popularity and in usability with their free current account. They now have over 5.8 million users, and currently do not charge for ATM withdrawals and overseas transactions (though there are plans to introduce fees at some point). Their application process only takes minutes - you’ll need a basic bank account (so no pre-paid cards or unusual credit histories), plus a few pieces of personal information: your name, address, date of birth, etc. However, it may take up to 14 days for your card to arrive. Once set up, it’s incredibly easy to use – even better than most traditional banks!

Starling Bank 

Starling offers basic bank accounts with affordable and transparent fees. Starling does not charge customers for transferring money, making payments, or using ATMs abroad. Customers can order a physical debit card in about two minutes, but there is no credit check and an overdraft option. If customers want to apply for more advanced features like mortgages, loans, or insurance products from other financial companies, Starling offers its Open Platform that lets users choose partners to build their own customized solutions without having to fill out forms on different websites.

Monese 

An online-only bank that gives you access to your money via apps and on any device. Monese also supports in-app payments, where you can send money to anyone using your smartphone; you don’t need to know their account details. It’s up to them whether they pay it back in person or digitally. This type of banking innovation makes Monese one of those neobanks we spoke about at the start: An entirely new way for you to interact with your money.

Atom Bank

Based in England, Atom Bank promises to take advantage of new technology to modernize and improve banking. Rather than chase after big-name clients or try to expand overseas, they’re starting small and focusing on one area: online customer service. They keep costs low by using existing financial institutions like Lloyds as partners, but they’re offering almost all services you’d expect from an online bank—without charging any fees.

Should You Consider Switching to a Neobank?

If you’re satisfied with your current bank, there’s no need to switch. On paper, neobanks are still new and unproven. But some banks have been around for centuries; they’re not exactly high-risk propositions. If you're considering switching to a neobank, it's important to make sure that you won't be sacrificing customer service or convenience in any way.

In addition, it's also worth asking what your bank can do for you that other financial services can't (e.g., discounts on items) before making such an important decision. Regardless of whether you decide to give neobanks a try, expect major disruption as these newcomers force traditional banks to change how they operate. 

Remember: just because something has worked one way for decades doesn't mean it will work that way forever. Don't get too comfortable with old habits and trust your own instincts when choosing where to keep your money!

Final Thoughts 

Although some may find that neobanks are merely digital versions of traditional banks, there’s a lot more to them than meets the eye. They focus on personalized services and convenience. But, you have to wonder—will customers be just as satisfied with their digital-only approach or will they want to branch out into brick-and-mortar shops in order to see a financial advisor in person? Only time will tell. In any case, it seems like neobanks are certainly here to stay and could represent a whole new wave in banking innovation.