Neobank vs Traditional Banks: Key Differences

Neobanks have revolutionized the way we think about banking, offering a range of innovative features that traditional banks often can't match.

One key difference between neobanks and traditional banks is the absence of physical branches in neobanks.

Neobanks operate primarily through mobile apps, making banking more accessible and convenient for customers.

In contrast, traditional banks have a strong presence of physical branches, which can be time-consuming to visit.

Neobanks often have lower fees compared to traditional banks, making banking more affordable for customers.

Traditional banks, on the other hand, tend to have more complex fee structures, which can be confusing for customers.

A neobank, also known as a challenger bank, is a fintech company that offers nontraditional banking services digitally. They often provide checking and savings accounts through a mobile app or website and don't have branches.

Neobanks have been around since the 2010s, emerging after the Great Recession. They're projected to reach 350 million users globally by 2026, up from around 150 million users as of 2021.

These digital banks are known for including tools to help customers budget and reach savings goals, and they often offer lower fees and higher interest rates than traditional banks.

Neobanks offer a hyper-enhanced and personalized customer experience, with services such as seamless account creation, round-the-clock customer service, and near real-time cross-border payments.

Automated services are also a key advantage of neobanks, providing businesses with automated and near real-time accounting and reconciliation services, including bookkeeping, balance sheets, and taxation services.

Neobanks are transparent, providing real-time notifications and explanations of any charges and penalties incurred by the customer. They also offer easy-to-use APIs to integrate banking into the accounting and payment infrastructure.

With neobanks, businesses can access deep insights into their financial data, including payments, payables, and receivables, and bank statements, helping them reduce expenditure and boost productivity and revenue.

Here are some benefits of neobanks:

Digital banks and traditional banks have some key differences. Digital banks are often the online-only subsidiary of an established and regulated player in the banking sector.

One notable difference is that digital banks are subject to federal regulation standards, unlike neobanks. This means they have to follow strict rules and guidelines, which can be beneficial for consumers who value stability and security.

Neobanks, on the other hand, exist solely online and independently or in partnership with traditional banks. This allows them to navigate and comply with the regulatory environment in their own way.

Here's a brief comparison of digital banks and traditional banks:

As a result of these differences, digital banks and traditional banks may offer different services and benefits to consumers. However, both types of banks can provide safe and secure banking options for those who choose them.

Neobanks offer a range of benefits, but it's essential to consider the pros and cons before making a decision.

One of the biggest advantages of neobanks is their digitally advanced platform, allowing users to manage their finances entirely online and through mobile apps.

Neobanks also provide 24/7 mobile access, giving users the flexibility to manage their finances at any time from their smartphones.

This flexibility is particularly advantageous for those with busy schedules or those who prioritize on-the-go banking over visiting a branch.

Explore further: Mobile Banking Advantages

Many neobanks pride themselves on offering reduced or no fees, which can translate into significant savings for users.

A notable feature of neobanks is their ability to provide users with early access to direct deposits, making it easier for individuals to meet their financial needs.

Here are some key benefits of neobanks at a glance:

However, there are also some drawbacks to consider.

Neobanks offer a range of benefits that make them an attractive option for many users. One of the most significant advantages is their digitally advanced nature, allowing users to manage their finances entirely online and through mobile apps.

With neobanks, you can enjoy 24/7 mobile access to your finances, making it easy to stay on top of your money no matter where you are or what time it is. This flexibility is perfect for those with busy schedules or who prioritize on-the-go banking.

Low or no fees are another major perk of neobanks. Many of these digital banks pride themselves on offering reduced or no fees compared to traditional banks, which can translate into significant savings over time.

A different take: Three Features of Online and Mobile Banking

Neobanks also offer early access to direct deposits, making it easier for individuals who need immediate access to their funds to meet their financial needs.

Some popular neobanks that offer these benefits include Aspiration, Chime, Current, Revolut, and Varo. These digital banks have gained a large following and are known for their user-friendly interfaces and innovative features.

Regulatory considerations are crucial for neobanks to operate effectively. In India, neobanks face challenges due to the lack of virtual banking licenses, but they can partner with traditional banks to offer services.

The Reserve Bank of India (RBI) prioritizes physical presence for banks, but neobanks can still provide services by outsourcing to licensed banks. This model is already used by major neobanks worldwide.

In the US, neobanks are not directly regulated, but their partner banks are responsible for overseeing them. The partner banks are regulated by examiners, such as the FDIC, Federal Reserve, or OCC, and must prove oversight and control over the neobank.

Neobanks can scale their compliance programs as they grow, and having an internal compliance team can be a strong indicator to partner banks that they understand risk and consumer safety.

On a similar theme: How to Improve Online Banking Services

One of the main cons of neobanks is the lack of physical branches, which can be a drawback for those who prefer face-to-face interactions.

This means neobanks rely on online channels, limiting the personalized customer service you might get at a bank branch. In contrast, traditional banks often have a physical presence where you can meet with a representative.

Some neobanks may not offer a comprehensive suite of financial products, including specialized services like mortgages and auto loans. This can be a con for customers who need these types of services.

If you're concerned about the safety of your deposits, you should know that not all neobanks guarantee FDIC insurance. However, many neobanks partner with chartered banks to receive FDIC coverage.

Here are some key differences between neobanks and traditional banks to consider:

In India, virtual banking licenses are still not granted, though foreign national banks offer digital-only products through their Indian subsidiaries.

The Reserve Bank of India (RBI) prioritizes banks' physical presence and requires digital banking service providers to have some physical presence.

Neobanks in India are addressing the regulatory predicament by outsourcing their banking responsibilities to those with licenses, creating strategic partnerships with traditional banks, and providing amplified services on behalf of existing ones.

This model is already being used worldwide by some of the biggest names in neobanking.

Neobanks partner with traditional banks to offer business and consumer banking services, with the partner bank managing monetary transactions from a regulatory perspective.

The RBI does not see payment banks becoming "virtual" or branchless banks, highlighting the significance of brick-and-mortar bank branches for customer service and dispute resolution.

By outsourcing banking responsibilities, neobanks can overcome regulatory hindrances and provide a wider range of services to customers.

Security and Compliance is crucial for neobanks to ensure they're operating smoothly and within regulatory guidelines.

Treasury Prime's compliance offering helps neobanks grow and scale their internal program while remaining in good standing with partner banks. This cost-effective method saves time by cutting down on ongoing requests and process audits. Most successful and growing fintechs own their compliance framework, and Treasury Prime's solution helps lay that foundation.

Treasury Prime integrates directly with specialized compliance partners like Alloy, Cable, and Unit 21 to provide unparalleled visibility and control to end users.

Assessing risk and preventing fintech fraud is key to an effective compliance culture. Neobanks should understand specific risk that products, use cases, customers, and geographies pose, and put controls into place to limit that risk.

Here are some examples of risk criteria to consider:

By understanding and mitigating risk, neobanks can protect themselves and make working with their banking partners easier.

Neobanks should adopt an AI-first mindset and build a holistic set of capabilities in four interconnected layers to acquire differentiating characteristics.

These layers include building the right API architecture, investing in open-banking features, and creating a default open-first approach. This allows neobanks to seamlessly tap into the broader open-banking ecosystem and offer customers superior products and services.

Some popular neobanks have successfully implemented these features, such as Chime, which uses open-banking features to let customers link all their bank accounts within the Chime app.

For another approach, see: Online Banking like Chime

Here are some of the most popular neobanks available in the U.S., each with their own unique features and benefits:

Launching products quickly is crucial for neobanks to stay competitive. Most banks take years to launch a new product, but neobanks can do it in months or even weeks.

To achieve this, neobanks make substantial investments in gathering and analyzing extensive customer data. They organize full-stack teams that include people from each of the relevant functions—product owners, designers, and data scientists, as well as members of the legal, risk, operations, and marketing teams.

Neobanks with an AI-first mindset can launch new products rapidly by maintaining flexible and configurable tech platforms that allow relatively easy creation of new products. This is evident in Revolut's strategy, which allowed it to branch into 20 products and services by 2020.

Revolut's case is a great example of how neobanks can experiment with launching new products across the stack to address evolving market trends. By doubling down on the products getting the most traction, they can quickly adapt to changing customer needs.

By launching new products at high velocity, neobanks can attract, engage, and monetize various customer segments. This is a key differentiator for winning neobanks, who prioritize customer delight and adaptability.

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Successful neobanks operate with a streamlined operating model layer that enables them to provide seamless customer experiences. This layer is built around four interconnected layers: the engagement layer, the decisioning layer, the product innovation engine, and the data platform.

The engagement layer is where neobanks create experiences that are delightful, intuitive, and responsive. They achieve this by building low-friction, low-latency, and highly customizable mobile-first journeys that are integrated with various ecosystem partners.

Neobanks also focus on hyper-personalizing experiences and propositions by matching customers' present context and historical behavior. This is achieved through the use of machine-learning-enabled personalization across customer touchpoints.

To deliver superior engagement, neobanks are adopting conversational design, replacing forms and questionnaires with chatbots, voice assistants, and live video consultations. This enables them to scale with higher operating leverage while serving millions of customers every day.

The decisioning layer is where neobanks use AI-and-analytics-led decisioning to identify the next-best action for customers. This requires multiple machine-learning models across domains, including credit analytics, product and channel propensity, fatigue, and risk.

To build and deploy these models, neobanks need to create data ingestion pipelines and store the data in a unified data platform that aggregates, enriches, and maintains a 360-degree view of existing and potential users. This provides complete visibility on all customer interactions with the bank across products, transactions, and service requests.

Neobanks also need to rapidly deploy, test, and iterate on their models in live production environments, requiring technical capabilities such as machine-learning operations (MLOps) and close coordination among data science, product, technology, and business teams.

By building a holistic set of capabilities in these four interconnected layers, neobanks can equip themselves to acquire differentiating characteristics that set them apart from traditional banks.

Online banks and neobanks are often confused with each other, but they have some key differences. Traditional online banks are actually online banking products offered by established banks, which means they still have minimum account balances and fees, just like their physical branches.

In contrast, neobanks are digital-only banks that operate independently or in partnership with traditional banks, without any physical branches. This allows them to offer lower fees and greater convenience to customers.

Neobanks can offer a range of services, including savings accounts, fixed accounts, payments solutions, transfers, and investment management, all through digital channels. For example, Singapore's largest bank recently launched its services in India, including digital savings accounts and payment solutions.

Here are some key features of online banks and neobanks:

In the US, some popular neobanks include Aspiration, Chime, Current, Revolut, and Varo, which offer features such as no overdraft fees, no minimum balance requirements, and no ATM fees. These neobanks are changing the way people bank and are gaining popularity due to their convenience and lower fees.

Neobanks can leapfrog traditional banks by building a cloud-based, flexible, and highly configurable banking core from scratch.

This core technology and data layer is crucial for developing experiences and personalizing decisions in the engagement and decisioning layers. Most neobanks use externally available cloud-based infrastructure and storage services.

A modern technology and data core should be modular, micro-services-led, and API-first, allowing for efficient scaling, high reusability, and ease of integration with partners and the open-banking ecosystem.

Neobanks that adopt an open-first approach can tap into the broader open-banking ecosystem and offer customers superior products and services.

This approach allows neobanks to invest in building the right API architecture and experiences from the outset, giving them a competitive advantage.

Chime, a San Francisco-headquartered fintech, uses open-banking features to let customers link all their bank accounts within the Chime app.

Customers can see all their accounts, balances, and transactions in one place, increasing their engagement and giving them a full picture of their finances.

Users who link a non-Chime account typically spend five times more money through various purchases with their Chime debit card in their first 12 months on the platform.

A unique perspective: How Does Chime Bank Work

A modern technology and data core is essential for developing experiences in the engagement layer and personalizing the decisioning layer. Neobanks can leapfrog incumbents by building their core tech from scratch.

Most neobanks use externally available cloud-based infrastructure and storage services, such as cloud-based infrastructure. This allows them to focus on building a cloud-based, flexible, and highly configurable banking core.

Neobanks should design a modular, micro-services-led, API-first architecture to scale efficiently and allow high reusability. This architecture enables easy integration with various partners and the open-banking ecosystem.

Data management is crucial for enabling data liquidity, including the ability to access, ingest, and manipulate data across systems and models. This foundation is essential for all decisions in the decisioning layer.

A cloud-based, flexible, and highly configurable banking core can help engineering teams launch new product variants rapidly through easy configurations.

Neobanks are venturing into new territory with cryptocurrency, an area where traditional banks are lacking in knowledge and experience.

This unprecedented regulatory scheme makes it crucial for neobanks to partner with banking partners who understand the industry, risks, and operations.

Neobanks can access a network of banks through Treasury Prime, which is committed to innovating responsibly and providing opportunities for neobanks to find suitable partners.

These banking partners can help neobanks navigate the complexities of cryptocurrency and blockchain.