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Digital-only banks have been slowly growing in popularity, especially after the pandemic. Also known as online banks, neobanks, digital challenger banks, internet-only banks, and virtual banks, it made the lives of millions of people so much easier during the worldwide lockdowns!
What we love about this new development is that it is opening up the banking industry for new entrants and is directly giving brick-and-mortar banks a run for their money. People with digital accounts can simply choose to conduct all transactions in the virtual world, and skip long wait times.
This shift, however, was already predicted by financial advisors at various summits as a huge population had become comfortable with cashless transactions and using mobile banking services to access their savings accounts.
In this blog, we will take an in-depth look at this emerging arena:
As discussed above, the major difference between neobanks and conventional ones is that the former is 100% digital. It can be considered to be a 21st-century take on the traditional banking system.
Neobanks, run by FinTechs which operate on the “Banking as a Service” model, provide debit cards and comprehensive banking services through intuitive mobile applications. To run a neobank, one doesn’t have to sign up for a banking charter - which is expensive, slow, and has a long-drawn process.
Rather, they can simply reach out to regional lenders and partner with them to maintain and insure deposits made by users. Because of this, neobanks operate at superfast speed and can process paychecks quicker than your average bank. Opening an account is also simple and quick - identity checks just take a few minutes and people with poor credit may also be considered for them.
Neobanks make profits through interbank fees when users transact with their debit cards. On the contrary, traditional banks generate revenue mostly through overdraft fees and other charges.
Here, it is important to note that neobanks are outside the purview of federal and state regulations. Very few of them have their own digital banking licenses and only operate out of countries that permit the existence of such standalone entities.
Because of relaxed rules, starting a neobank doesn’t require loads of money. Customers can also access and operate their accounts whenever they want, without having to stick to normal banking hours.
However, digital-only banks are not without disadvantages. As pointed out at several financial events, people who are not comfortable with tech may give neobanks a miss.
In addition to this, many people who prefer a personal touch and face-to-face interactions may not find neobanks alluring. There are also concerns pertaining to cybersecurity and the legal remedies one can seek if they face issues with their neobank accounts.
We don’t see neobanks completely eliminating the hegemony of the traditional banking system any time soon. But yes, it is going to play a big role in changing our relationship with money. Hundreds of businesses have already embraced digital-only banks to maintain their payrolls and for quick money transfers. As the pace of innovation picks up in the financial sector, neobanks are only going to grow in the coming years.
If you seek to explore more such emerging trends in the world of finance and insurance, do register for our much-awaited post COVID finance event - the Money 2.0 Conference!