The financial landscape has undergone radical transformation due to the increasing popularity of neobanking activities. Digital banks or neobanks are new types of financial institutions operating their businesses online.
Moreover, they provide a range of banking and financial services through intuitive mobile apps. The rise of these online banks challenges the traditional offline banking model. However, it is essential for these neobanking platforms to comply with regulations and implement KYC practices to avoid money laundering issues.
In this comprehensive guide, we will explore types of Neobanks, benefits and challenges they face. Whether it’s full-service neobanks or ones that focus on specific areas, this detailed look aims to help you understand the neobanking world better and see where banking is heading.
Types of Neobanks
Front-end neobanks
A neobank with a front-end-focused business has no operating banking license. A traditional financial agency backs the neobank, which works in partnership. This type of neobank also deals with the balance sheets of traditional banks for operating the business.
Online banking units
Independent online banks are the virtual counterparts of established and reputed banks. For instance, SBI launched YONO as a standalone online bank by providing an Internet banking license. The banks receive the banking license if they have much capital to manage investors’ deposits.
Full-stack neobanks
These neobanks have received approval from the bank regulatory. You will get different financial services from the neobanks. These digital banks issue loans and deposits while maintaining independent balance sheets. The digital environment allows banks to avoid the costly physical network. However, not every country has legalized this type of neobank.
Based on the types of customers served by neobanks, there are some other categories. These neobanks aim to provide customized solutions for customers. So, you can find neobanks for:
Individuals- Some neobanks want to provide customer-centric, convenient banking services for individuals. It is easy to set up accounts in these banks. The best neobanks also offer budgeting tools and automated savings. You will get financial insights as a customer.
Small and medium enterprises- There are neobanks established only for SMEs, and they provide special financial solutions for meeting small businesses’ needs. From invoicing to payment processing, different services are available at SME neobanks. You will also receive real-time financial data analytics.
Particular industries- Many neobanks target certain customer segments like foreign travelers and freelancers.
Neobanks provide their services to deal with these particular customer segments and solve their issues.
How do neobanks benefit you?
Neobanks provide a range of benefits for their customers-
- The process of opening accounts has been streamlined. You can create a neo-bank account without complicated paperwork.
- Some neobanks allow you to open zero-balance accounts. Thus, maintaining the minimum balance is not compulsory for most neobanks.
- A more transparent or comparatively low fee is another attractive for neobank customers. Some banks also let you have fee-free accounts.
- The best neobanks implement strong security measures to keep your data safe. So, although they are online banks, you will have no concerns.
Neobanks mainly focus on providing major banking services, including-
- Payment processing
- Checking accounts
- Savings accounts
They do not always offer complex financial solutions, such as mortgages. Legal rules prevent neobanks from direct offering of loans. Moreover, customers may not have pre-defined processes to manage disputes.
Do neobanks face any challenges?
Although neobanks have started gaining attention, they face some challenges. It is not easy to attract customers who like to have in-person help. Thus, the absence of any brick-and-mortar facility poses some difficulties. Those who do not feel comfortable with digital platforms for banking may not like neobanks.
The FinTech sector is vulnerable because every country has different regulations. The rules in a particular nation may not match the rules of other countries. Moreover, neobanking is a fast-paced activity, and as the regulations are dynamic, it may affect the neobanking business model.
Another major challenge is to convince customers to make a transition from conventional banks to online versions. It will take time to influence the customers’ mindset.
Moreover, some traditional banks offer digital services. Thus, if customers are satisfied with the main financial solutions, they will not like to make a switch.
In summary, neobanks offer lots of good things but also face some tough challenges. They bring convenience, money savings, and high-tech features to banking, shaking up the traditional ways. However, they have to deal with problems like keeping accounts safe from hackers. As traditional banking models continue to be disrupted, understanding the various types of neobanks becomes crucial for staying informed about the future of banking.