Neobanks are a global FinTech trend that skyrocketed in popularity due to the COVID-19 pandemic, when people started looking for safe options that would allow them to buy things and pay for services online. This has led to the growing popularity of neobanks – financial institutions that provide services exclusively online. Digital banks do not use offices or branches for customer services. They are available exclusively through gadgets (mobile phones, computers, etc.).
What Is a Neobank?
- Those that have a separate financial license and provide financial services independently;
- Those directly cooperating with traditional banks to provide remote financial services.
The business model of neobanks targets users looking for an easy and affordable way to manage their cash flow. Such institutions do not have offices or branches, so they do not need to bear the cost of renting the premises and hiring staff. Neobanks focus on modern technologies that allow them to process large amounts of data and provide services to the general public due to their easy availability. In addition, not many of these institutions are engaged in issuing loans, which allows them to avoid high cost associated with creating reserves and significantly reduces their risks.
Following are the main sources of income for neobanks:
- Transaction fees;
- Subscription to premium accounts;
- Commissions from third-party services.
Are you looking for the most suitable payment tool in a foreign bank/payment system? Contact our experts for a free consultation.
Some History and Statistics
The term “neobank” was first used in 2017 to describe FinTech providers of financial services. According to the Paymentscardsandmobile portal, in 2018 there were 60 neobanks in the world. By the beginning of 2021, the number of active digital institutions grew to 319. Moreover, in the two years alone (2019 and 2020), the same number of neobanks were started each year (72), making 144 together.
The first neobanks began to appear in Europe in 2015. Financial companies from Great Britain, Germany, France, and Finland have become pioneers in the new fintech sphere. And from there, a new trend has spread around the world. According to the Exton portal, today there are about 100 neobanks in Europe, where 50 million users are registered.
The UK is the leader in the number of digital banks on the European continent. Thanks to low taxes, developed infrastructure, and state support, excellent conditions have been formed here for opening neobanks. Today, there are 35 similar organizations operating there, a third of all European digital banks.
The rapid growth in the popularity of neobanks has been recorded in Latin America. Today there are about 54 neobanks there. Neobanks have also began to develop actively in China. Local digital banks (Ant Financial and WeBank) are among the largest in the world.
Please note. The TOP-5 countries with active neobank markets are: UK, South Korea, Sweden, France, and Brazil (according to Exton Neobanking Database).
The huge interest in the industry among investors illustrates the promising prospects of remote banking services. Even during the quarantine of 2020, neobanks raised more than $2 billion in venture capital around the world. According to PitchBook analysts, by 2024 the number of neobank app users in North America and Europe will reach 145 million. Statista predicts the total neobanks’ transaction value to reach $4.1 trillion by 2026.
The Largest Neobanks in the World
Among the 319 operating neobanks, there are several giants with worldwide client base, including:
- Chime (USA) – the most expensive neobank in the world, worth about $14.5 billion;
- Nubank (Brazil) – the largest number of users, 35 million people;
- Revolut (UK) – used by about 15 million clients in Europe alone, worth $33 billion.
Main Differences of Neobanks from Traditional Banks
Considering that some neobanks do not provide most basic banking services, but specialize in payment transfers (often only within one country), the regulators’ requirements to them are lower. They can form the capital in the smaller amount than traditional banks and are not required to comply with liquidity requirements.
However, over time regulators are paying more and more attention to the regulation of digital institutions. Like traditional banks, they are required to comply with AML requirements and report suspicious transactions to the competent authorities.
Financial Services Provided by Neobanks
Neobanks offer a wide range of financial services, including the following:
- Payments and Money Transfers
- Credit and Debit Cards
- Loans for individuals and companies
- Checking and Savings Accounts
- Access to a wide network of ATMs domestically and internationally
- Other services, (e.g., budgeting).
Key Advantages of Neobanks
Unlike traditional financial institutions, neobanks are capable of offering their clients some innovative features and simplified processes, including opening an account in just a few minutes, issuing free debit cards, making instant payments online, operations with cryptocurrencies, P2P (peer-2-peer) transfers, lower fees and prices, mobile deposits, mobile budgeting tools, and so on.
- Convenience. Neobanks provide access to the use of all the banking services on the client’s smartphone. It is really quick and easy to open an account, and the banks put forward minimal data requirements. The innovative tools make the customers’ financial management more efficient.
- Better Customer Experience. Neobanks strive for user friendliness and a hassle-free user experience. Their apps are modern, highly responsive, and well-designed to meet the needs of clients. A user-friendly interface is a must for this type of fintech entities.
- Low Costs. All the operations through neobanks are digital, which eliminates the traditional operational and labor costs. This allows neobanks to lower their service fees. Neobanks are a lot more cost-effective due to fewer regulations and the absence of credit risks.
- Advanced Security Features. There are specific security regulations connected the work of neobanks. They make use of some of the most modern security features such as two-factor authorization, biometric user verification, RBAC (Role-Based Access Control), modern encryption technologies, which makes them safer than traditional banks.
- More Efficient International Transactions. When using a neobank, customers experience no difference between making national and international transactions. Their cards are usable in the international space. Also, they can save money on international transfers or purchases on the exchange rates and the bank fees. For instance, Revolut charges zero commission on such operations and accepts more than 100 different currencies.
Ensuring the Security of Customers’ Money in Neobanks
Talking about neobanks, we must make a few more remarks about financial security. How well is customers’ money protected in neobanks? There are several ways to answer this question, depending on the type of neobank.
Neobanks that Work as Branches of Traditional Banks
The customers’ money is protected in the specific amount set by the local legislation. Payment of funds of a bankrupt financial institution is carried out through an authorized bank designated by the local Guarantee Fund.
Neobanks that Work as Independent FinTech Companies
Neobanks of this type are not members of the guarantee fund. However, in this case the following rules and requirements of the supervisory authorities concerning protection of customers’ funds, similar to those for payment systems, are applied to them:
- Ensuring the protection of clients’ funds from the moment they are received;
- Separating clients’ money from real business;
- Client funds must be kept in full on special protective accounts opened with authorized financial institutions. Alternatively, the neobank is obliged to sign an insurance/guarantee agreement with authorized companies and provide daily insurance protection of funds;
- Existence of processes and procedures that ensure control over the liquidity of the institution.
In addition to all said above, neobanks regularly undergo inspections by supervisory authorities.
If you have any further questions about neobanks or would like assistance in using one, please contact the experts of International Wealth portal to get advice on the topic.
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Choosing a Neobank to Open an Account
The search for a suitable neobank for your needs should begin with a list of tasks and goals that you are planning to solve. However, independently analyzing about 300 financial institutions to find the best conditions for your situation is not an easy task, and would certainly take a lot of time and effort.
Another rather serious problem is preparing the documents required for opening an account. Neobanks are obligated to comply with AML requirements, and therefore any error or inaccuracy reduces the likelihood of a positive result.
By contacting us and getting our experts’ help in selecting an account, you can avoid the problems and obstacles associated with opening an account in a foreign neobank. We have been working on the market for more than 10 years, and our experts have all the necessary knowledge. Using our experience, you will be able to save time and resources in order to acquire a payment instrument best suited to your needs.
Write to us in the online chat, email us at info@offshore-pro.info, or leave your contact information in the special form. We will contact you as soon as possible.
Also, you can read a more detailed analysis of the services and working conditions of the most popular and customer-friendly neobanks in this article about the best neobanks in 2021.
What is a Neobank?
A neobank is a provider of financial services, which works fully remotely. It may be either an independent company or a separate brank in a traditional bank.
How do neobanks protect customer funds?
Neobanks that work as branches of traditional banks (not as separate companies) are subject to banking legislation that guarantees the return of customers’ funds from the Deposit Guarantee Fund. Neobanks that belong to payment systems are required to keep the balances of customer funds in full on special protective accounts.
TOP-3 Most Valuable Neobanks in the World
Here is the 2021 TOP-3 list of the most valuable neobanks on the planet according to the WhiteSight portal:
– Nubank (Brazil) worth $45 billion (a staggering increase from $10 billion in 2020!), with about 50 million customers over the last three years, out of which 72% are active users;
– Revolut (UK) valuated at $33 billion, jumped up two spots in the rating from 2020; has a strong user base of about 15 million throughout the European market; and
– Tinkoff (Russia) with a $21 billion market capitalization (compared to $6.5 billion in 2020!), with over 18.5 million customers across Russia, and an extended arm in the works towards Southeast Asia.
