Neobank

As more of people’s everyday activities move online, a new class of financial institutions has emerged that heavily leverages technology and the internet. According to Grand View Research, the global “neobanking” market is currently valued at approximately $66 billion USD. 

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These neobanks operate entirely online, doing away with some of the more cumbersome aspects of traditional banking. They aim to make banking as accessible as possible while passing on cost savings to customers.

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So what is a neobank, and what is neobanking? Here, we’ll explain what a neobank is (and isn’t), as well as why people and companies are switching to neobanking. We’ll also discuss some of the anti-fraud and AML regulatory challenges with neobanks to keep in mind should you consider joining one – or even creating your own.

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A neobank is a type of financial institution that has no physical branches, instead operating entirely online. A neobank relies on technology to minimize operating costs and provide better value for money, while at the same time offering more user-friendly services to its customers.

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Neobank examples include Chime, Current, Aspiration, and Varo in the US as well as Monzo, Revolut, Starling Bank, and Monese elsewhere in the world.

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Neobanks vs. Digital Banks

The terms “digital bank,” “digital banking,” and “online banking” all generally refer to the ability to make financial transactions over the internet. However, this can simply apply to traditional banks offering ways to use their services online as a complement to in-person business at their physical branches.

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Neobanks, in contrast, are completely digital banks that have no physical branches. So all banking transactions with them have to be carried out online. In short, all neobanks are digital banks, but not all digital banking is neobanking.

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Neobanks vs. Traditional Banks

Neobanks are sometimes called “challenger banks” because they were created to compete with traditional banking institutions. By offering online services, neobanks can cut operating costs associated with leasing physical spaces, hiring branch employees, and dealing in physical money. This allows them to charge lower fees and offer higher interest rates than traditional banks.

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However, neobanks aren’t completely superior to, or independent of, traditional banks. Neobanks typically partner with traditional financial institutions to offer their services, and may not offer as full a range of solutions as traditional banks do. They also lack in-person customer service to work through complicated financial processes with clients. Another concern is that because the neobanking market is relatively new, it isn’t as highly regulated as traditional banking. This can make neobanks somewhat unreliable in terms of insurance if something goes wrong.

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Are Neobanks Regulated?

Yes, neobanks are regulated. They are subject to many of the same regulations as traditional banks.

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That being said, digital-only banks do have their fare share of considerations that come with their own set of regulations. While some may apply to traditional banks as well, they are of particular concern for neobanks looking to stay compliant. Most importantly, these involve data collection, storage, and protection requirements that set requirements for organizations that handle personal information virtually.

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Despite their potential drawbacks, neobanks have a number of advantages that make them attractive to customers who are tech-savvy or dissatisfied with how traditional banks operate. Benefits of neobanks include:

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• Accessibility: Neobanks tend to invest heavily in designing simple user interfaces that make completing banking functions easy. This is one of the core things that differentiates a neobank vs. a traditional bank.
• Convenience: Because they operate completely online, neobanks can be accessed from anywhere an internet connection is obtainable. They also don’t have set business hours, so customers can use them at any time of day.
• Cost: Another advantage of neobanks’ online-only format is it incurs fewer costs surrounding maintaining physical infrastructure and capital. This allows neobanks to pass on savings to customers as lower fees and higher interest rates.
• Speed: Since neobank transactions don’t require a dedicated financial employee to handle them, they often take less time than visiting a physical bank and potentially having to wait in line for an agent to become available.
• Seamless international payments: With some traditional banks, customers have to make a request or purchase additional services in order to make international payments with a debit card. Neobanks typically offer debit cards that, by default, allow for international transactions at current exchange rates without all the hassle.
• Information availability: Neobanks can be accessed over the internet at nearly any place and time. This means that a customer is able to access all information pertinent to their finances whenever they need it. This includes things like transaction records, and may also include advanced tools such as spending trend reports and savings goal managers.‍
• Security: Because of neobanks’ focus on technology and customer experience, they tend to invest in cutting-edge security measures to protect client information. Also, since they don’t deal in physical money, they eliminate the risk of it being stolen or counterfeited.

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Neobanks are surprisingly varied themselves—some focus exclusively on common banking, offering basic products like checking and savings accounts, basic credit cards, and other traditional banking products. Others focus on investment banking, combining casual banking with digital investing so users can access all their services in one place.

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Below, we look at a few of the top neobanks as examples of what a neobank is.

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Chime

One of the leading neobanks on the market, Chime has carved a name for itself by offering modern customer exactly what they want—digital banking with no monthly fees and no minimum balance. Chime has basic chequing and savings accounts, but they also have advanced features that are extremely easy for customers to use, like their automatic savings feature. With a heavy focus on user experience, Chime offers customers seamless digital banking with no costs.

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Lili

Lili positions themselves a digital bank for businesses, and is dedicated to designing a product that makes it extremely easy for small businesses and startups to manage their finances. Lili offers bookkeeping, financial planning, invoicing and payments, and even tax solutions in a single, unified place so businesses can manage everything with ease.

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Revolut

Revolut is revolutionizing modern banking by bringing a consumers entire suite of financial services under one roof. Users can manage all their financial services online, from traditional banking to investment planning and so much more. With all of this data unified, customers have a much better user experience when banking.

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One of the main advantages of neobanks is that they smooth out onboarding and transaction processes. This is because they typically have accessible user interfaces, as well as the ability to be used virtually anywhere regardless of operating hours or agent availability. 

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But this has to be balanced against adequate security and customer verification in order to comply with anti-fraud and AML standards.

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Unfortunately, because neobanking is a relatively new concept, there aren’t comprehensive regulations specific to the industry in place yet. So many neobanks are left to figure this balance out for themselves. 

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Another consequence of neobanking being an untested industry is that neobanks have to work much harder to win and maintain customers and their trust. And a big part of that is assuring customers that a neobank is complying with best practices for protecting their sensitive information.

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While this can be difficult, there are a few things a neobank can do to maintain compliance:

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• Hire a compliance officer to develop and execute an AML compliance strategy for your organization
• Research and invest in identity verification (KYC) and transaction monitoring solutions
• Recognize common money laundering typologies and put controls in place to combat them
• Be sure that current compliance requirements are already covered by your selected anti-fraud/AML software solution
• Check databases to screen potential customers for histories of suspicious transactions before onboarding them
• Stay informed of changes in financial regulations applicable to your institution

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