In this article, you will find an overview of the type of institution and general characteristics of new online banks, referred to as neobanks: Competition is increasing in the online banking ecosystem in many countries, but nowhere is the proliferation as great as in the US. This growth is good news for customers who can now access broader offerings, often free of charge and generally based on a solid infrastructure.
So-called neobanks are not always technically licensed banks. They mainly offer debit cards and sophisticated online banking applications. Instead of obtaining a bank license, which is expensive, time-consuming and costly, they often negotiate partnerships with a bank within the same group or with a completely independent institution. These licensed banks provide the infrastructure and hold the clients’ deposits. From the customer’s perspective, these banks exist for them only as applications on their smartphone or on their computer, although some neobanks offer the possibility to request support at their parent company’s offices.
Online banks or neobanks derive their attractiveness from the following characteristics:
- They have in common that they are convenient and easy to use;
- They are very cheap in their basic version in a business area where fees have been steadily increasing for 20 years. They have a less extensive offer than traditional banks, but have lower fixed costs, due to a lower number of employees per customer;
- The pandemic accelerated their adoption and their use is likely to be long term.
In general, we can also note the following disturbing points for some users:
- These new actors communicate in a very informal way and use slang words, which gives little desire to entrust them with large sums of money for the older generations;
- It is not certain that it is wise to manage all banking and pension affairs from a phone, especially concerning retirement accounts or 6 or 7 digit investments. So, many surveys suggest that only a small fraction of bank customers consider fintechs as their primary bank;
- These startups pride themselves on their speed of execution compared to big banks and are able to open accounts quickly with ease: The flip side of these accelerated identity checks can reveal gaps in the organization and anti-money laundering procedures, as found by the German financial regulator (Bafin) in the deficiencies discovered with N26;
- The free nature of some offers is often just a sales pitch to acquire more customers. Fees are often charged for withdrawals or transfers, especially to foreign countries, or for currency conversions;
- Many neobanks have to bleed money to promote their solution in order to gain customer trust by offering promotions until they reach a minimum break-even point. For some of them, accelerated client acquisition comes with a high price (paid leads or extensive promotions).
Next to pure start-ups, established banks are also supporting or developing their own applications. For the existing players, there seems to be no other choice than to invest in this niche at the risk of having a young customer base captured by foreign or non-banking players. This seems to be fruitful for a few of the new entrants who indicate that virtually all their users are new customers and that there is virtually no cannibalization of the parent company’s customer base. For most, the business model adopted is similar to that of a growing start-up that accepts a structural deficit in order to establish itself in a market (already saturated for certain segments). We are now witnessing a phase of investment and spending. A phase of consolidation will certainly follow in the coming years, so you should select a solid player if you plan to entrust them significant funds for an extended period of time (e.g. portfolio management or retirement solutions).
See the following article for an overview of the particularities of each Swiss neobank (https://guidefinances.com/2021/09/02/the-best-swiss-online-banks-neobanks) or get to http://www.guidefinances.com.