Everyone is talking about neobanks (alternatively known as hybrid banks or in the UK, challenger banks). In 2018 alone, consumers saved USD$5 billion by using neobanks rather than going through traditional avenues. That’s a lot of cash. Sure, neobanks are seen as “disruptors,” but they also may help with business growth and individual finance. The question is, are they the future of banking?
Traditional banking route
Going through the traditional lending process has historically been the only route for small business owners and individuals to obtain a loan. There has been limited competition and let’s face it, slow processes that seemed to be accepted because it was simply the way things were done.
For the bigger banks themselves, lending to small businesses especially was tough. Smaller loans, yet the same amount of paperwork and manual processes required for bigger-value loans. The smaller ones seemed unprofitable and perhaps that’s why neobanks have seen such a recent surge over the past 3 years.
Introducing neobanks
To date, Americans have opened approximately 3.25 million accounts with US-based neobanks. Just under USD$1.7 billion is held in these accounts. This equates to around 0.014 per cent of all deposits held in US banks. While this may not seem like a large disruption to the traditional bank route, they are definitely making waves.
Also Read: Fintech and banks: collaboration or competition?
Neobanks tend to share a few characteristics such as offering microloans and fast digital customer experience. Their low-cost structure minimizes overdraft and monthly fees. However, as a result, customers tend not to earn that much interest on their deposits. And finally, for the budget-conscious customers, there are often budgeting and savings tools built into accounts so consumers can automate their financial transactions, which leads to better savings habits.
Neobanks is definitely surging in popularity, and are certainly making headlines. In fact, in 2018, neobanks in America received four times as much funding as they did in 2017 and ten times as much funding than in 2015. While neobanks first found their home in the UK, mainly because the UK market isn’t as saturated with big banks like the US, they are popping up worldwide. So why are they gaining popularity at such speed?
The neobank success
For starters, unlike traditional banks, neobanks aren’t burdened by cumbersome systems and organizational structures. As well as this, because they tend to offer niche services, and certainly don’t provide the full banking experience, there are fewer regulatory requirements.
For many neobanks, it’s about helping consumers lead healthy financial lives by providing helpful products and services with fewer fees. Banking is quick and simple. There’s no need to book an appointment at a banking branch and no need to fill out lengthy forms to set up an account.
For the customer, there’s a seamless and useable platform to use and are changing the way people save and spend their money, with real-time updates on spending, transfers and incoming money, and the ability to send money through to friends using merely their names or contact numbers.
Another bonus that comes with neobanks is the ability to save in a smarter, more user-friendly way. For example, many platforms will allow you to partition your savings into specific buckets that are kept separate, so if you’re saving for a holiday or a house deposit, you can allocate your funds accordingly.
It’s a handy feature for the younger generation, and as an added bonus, it helps keep track of where the money is going. However, the traditional banks are taking notice, and some are even adopting the same techniques in order to retain their customers and encourage new ones.
Some of the bigger banks are launching side projects of their own. One notable example is Goldman Sachs which launched a digital retail offering called Marcus by Goldman Sachs.
JP Morgan is also chasing the neobank tail with Finn by Chase which is a completely digital bank, targeting the younger generation and those who live in areas of the US with a shortage of physical bank branches.
Will they last?
Sure, neobanks are shining at the moment, but not all shiny things last. They’re on the rise but it’s questionable whether they will fully overtake traditional banks, especially anytime soon.
The traditional sector connotes a kind of trust that newer, challenger and neobanks simply don’t have at the moment. Second, the traditional banks offer a full-service model, whereas many neobanks rely on one particular niche area of service, such as debit cards.
Also Read: Threat or opportunity? boosting digital banking in Asia
Most neobanks are enjoying success with the younger generation. Yet it may be too soon to tell whether the millennial customer base will remain with a digital-only bank. Are neobanks offering enough to take their younger demographic into their middle and older years?
Neobanks are certainly transforming consumer banking and small business lending, it may be too early to tell whether they’ll survive.
While people are certainly turning to neobanks to help them save, avoid fees and enjoy quick and simple banking, perhaps there’s still room for both traditional and challenger banks in our future.
–
Editor’s note: e27 publishes relevant guest contributions from the community. Share your honest opinions and expert knowledge by submitting your content here.
Join our e27 Telegram group here, or our e27 contributor Facebook page here.
Image Credit: Sasha • Stories
The post Neobanks: the future of banking? appeared first on e27.