What Is A Neobank? - FourWeekMBA (2024)

A neobank is any bank that operates online without a network of physical branches. For this reason, neobanks are also known as online banks, virtual banks, or digital banks.
A neobank does not use technology to attract customers per se. Nevertheless, the technology appeals to savvier consumers who prefer to do their banking in a mobile app. Most neobanks partner with traditional banks to insure customer funds and do not tend to offer credit as a general rule.
Popular neobanks in the United States include Chime, Varo Bank, and MoneyLion. All three sell various products designed to help consumers improve their financial literacy and reduce fees.

Aspect	Explanation
Definition	A Neobank, also known as a digital bank or online-only bank, is a financial institution that operates exclusively online and offers banking services to customers without physical branch locations. Neobanks leverage technology and digital platforms to provide a range of financial services, including savings accounts, checking accounts, payment processing, lending, and often feature user-friendly mobile apps and websites for easy access and management of accounts. Neobanks often focus on providing a seamless and convenient banking experience with competitive fees and rates.
Key Concepts	– Digital-Only: Neobanks do not have brick-and-mortar branches and rely on digital channels for customer interactions. – Technology-Centric: They leverage technology, automation, and data analytics to streamline banking operations. – User Experience: Neobanks prioritize user-friendly interfaces and mobile apps for customer convenience. – Competitive Offerings: They often offer competitive fees, rates, and innovative financial products. – Accessibility: Neobanks aim to make banking services accessible to a broader range of customers through digital means.
Characteristics	– No Physical Branches: Neobanks operate without traditional physical branch locations. – Digital Services: They offer a wide range of banking services through web and mobile applications. – Fintech Integration: Neobanks often integrate with financial technology (fintech) services for enhanced offerings. – Low Overheads: Operating costs are lower due to the absence of physical branches. – Customer-Centric: They prioritize customer-centric design and user experience.
Implications	– Convenience: Neobanks offer convenient, 24/7 access to banking services via digital devices. – Cost Savings: They often have lower fees and competitive interest rates due to reduced overhead. – Financial Inclusion: Neobanks may improve financial inclusion by providing services to underserved populations. – Disruption: Traditional banks face competition and may need to innovate to remain competitive. – Security: Cybersecurity is a crucial concern in the digital banking landscape.
Advantages	– Accessibility: Neobanks offer accessible banking services to individuals who prefer digital banking. – Lower Fees: They often have lower or no fees for common transactions. – Innovation: Neobanks introduce innovative financial products and features. – User-Friendly: Customer-centric design results in user-friendly interfaces. – Convenience: Banking can be conducted from anywhere with an internet connection.
Drawbacks	– Limited Services: Neobanks may not offer the full range of services provided by traditional banks. – Security Concerns: Online banking involves cybersecurity risks, and customers need to be vigilant. – Trust and Regulation: Some customers may have trust concerns, and regulatory compliance is essential. – Dependence on Technology: Outages or technical issues can disrupt service. – Lack of Physical Presence: For some, the absence of physical branches can be a drawback.
Applications	Neobanks primarily serve as digital banking institutions accessible through web browsers and mobile apps. They cater to individuals seeking convenient and cost-effective banking solutions and may also be integrated with other fintech services.
Use Cases	– Personal Banking: Individuals opt for Neobanks for personal banking needs, including savings and checking accounts. – Business Banking: Neobanks offer business accounts and financial tools for entrepreneurs and small businesses. – International Travel: Travelers may use Neobank services for convenient international transactions. – Financial Inclusion: Neobanks may provide banking services to unbanked or underbanked populations. – Fintech Integration: They integrate with fintech apps and services for enhanced financial management.

Table of Contents

Introduction

A neobank is any bank that operates online without a network of physical branches. For this reason, neobanks are also known as online banks, virtual banks, or digital banks.

The earliest neobanks emerged from the ashes of the 2008 Global Financial Crisis as consumer confidence in the banking sector plummeted to historically low levels. Neobanks capitalized on the resentment felt toward traditional banks by offering a seamless online experience under a no or low-fee service model.

Today, neobanks are transforming the sector in a way not dissimilar to Airbnb in accommodation and Uber in personal transportation. Recent data shows that 6% of all American adults have a digital bank account, which equates to around 15.56 million people. This number is expected to increase to just over 39 million by 2025.

Common characteristics of a neobank

In fundamental terms, a neobank is a fintech company offering a banking service to tech-savvy consumers who prefer to do their banking in a mobile app.

It should also be noted that neobanks do not use technology to attract customers per se. Instead, the technology is used to streamline processes, reduce fees, and then pass those savings on to customers.

The vast majority of neobanks also differ from traditional banks in the following ways:

They are not chartered as banks. In other words, their operations are not governed by bank-specific state or federal regulations. Having said that, neobanks do partner with traditional banks to insure customer deposits.
Neobanks do not extend traditional forms of credit to consumers such as an account overdraft. Their products may be more limited as a result and be restricted to checking and savings accounts, money transfer and payment services, and educative tools that increase financial literacy such as budget or investment trackers.
They use everything from big data to artificial intelligence to help consumers manage their money. This may include alerting the customer to unused subscriptions or unusually high bills. Some neobanks even help their users switch to cheaper electricity providers.

Popular neobanks

Lastly, let’s take a look at some of the most popular neobanks on the market today:

Chime

The most popular in the United States with over 13 million customers and a valuation of $25 billion. True to type, Chime eliminates many of the fees associated with traditional banks and also provides consumers with an opportunity to build their credit.

Varo Bank

Varo was founded as a neobank but also received a full-service national charter in July 2020 to allow it to operate as a traditional bank. Varo boasts no minimum balance, no monthly fees, no credit checks for new customers, no overdraft fees, and a network of over 55,000 fee-free ATMs.

MoneyLion

This neobank was founded in 2013 to serve more than 70% of American consumers who have less than $2,000 in savings and are living from paycheque to paycheque. The platform has a strong focus on helping its community of customers gain financial literacy.

Key Highlights

Definition of Neobank: Online bank without physical branches, offers seamless digital banking experience.
Targeting Tech-Savvy Consumers: Caters to customers who prefer mobile app-based banking.
No Traditional Forms of Credit: Focuses on services like checking, savings, transfers, and payments.
Technology Integration and Automation: Utilizes AI and big data for streamlined processes.
Partnering with Traditional Banks: Collaborates to insure customer deposits and provide FDIC-insured accounts.
Fee Reduction and Elimination: Minimizes or eliminates fees like minimum balance and maintenance charges.
Focus on Financial Literacy: Some neobanks offer resources to improve customers’ financial knowledge.
Popular Neobank: Chime: Over 13 million customers, fee-free financial services, and credit-building opportunities.
Popular Neobank: Varo Bank: No minimum balance, no monthly fees, access to fee-free ATMs.
Popular Neobank: MoneyLion: Supports customers with limited savings, emphasizes financial education.