Neobanks: a revolution in the world of finance

The word ‘neobank’ has been in circulation since around 2017. It refers to a new type of financial institutions that are similar to traditional banks but different from them at the same time. The number of neobanks is currently growing at a fast rate and so is the number of their clients. What are the main characteristics that make neobanks so popular? How do they differ from traditional banks? What are their key advantages and disadvantages? What groups of clients find neobanks especially attractive? Please find the answers to these and other related questions in the text below.

Neobanks: key features

The defining feature of neobanks is that they do not have any physical branches: all the banking services are provided online or via mobile applications. What consequences does such mode of operations entail? First and foremost, the absence of physical offices makes neobanks more cost-efficient, which means that they can offer banking services at reduced prices. Think of the glass-and-concrete skyscrapers that serve as main buildings for large traditional banks: it does cost a pretty penny to maintain these huge buildings while neobanks avoid the cost. The low costs of banking services is one of the main reasons why neobanks are attracting more and more clients.

The second consequence of this mode of operations is the extensive use of various modern digital technologies in providing services to customers. Everything can be done from wherever you are located at the moment on the condition that there is internet connection in the area. What do you have to do if you want to establish an account with a neobank? You have to download an application to your smartphone after which you will be several clicks away from opening a bank account! At the same time, there are some people who are at a loss with the new technologies and those who are simply reluctant to delve into the new world of possibilities. Such people are unlikely to become customers of neobanks as these are targeted at tech-savvy clientele in the first place. So, if you are living in the past or if you are repelled by digital technologies, neobanks are probably not for you.

In addition to that, the absence of physical branches makes it impossible to have a face-to-face conversation with a bank officer. Of course, neobanks do not entirely rely on computer programs to run the business. Living creatures do work for neobanks but they work for them from home via the Internet. Thus, in case you have to make a complicated transaction, you cannot count on a bank officer’s help in the course of a personal talk, which can be regarded as one of the disadvantages that neobanks have.

Another important characteristic that neobanks possess is that they are not normally regarded as banks even though they do provide financial services to customers. Many neobanks do not hold banking licenses, which leads to some noteworthy consequences. First, as neobanks are not banks in the full sense of the word, they are not regulated so rigorously by the financial authorities. (This does not mean that they are not regulated at all: all neobanks must acquire licenses that permit the provision of financial services anyway.) This fact allows them to be more flexible in offering services to their clients. On the other hand, if a financial institution does not have a banking license, it means that the deposits that it holds are not insured at the national (or federal) level.

To balance this situation and to cut the risks the classical neobank does not give loans nor does it issue credit cards. With most neobanks, you can set up a savings and/ or a checking account and acquire a debit card and that is it. In other words, neobanks will not fit those who require bank credits or some fancy banking services. Neobanks are meant for people and businesses that need fast and simple ways to manage their finances but do not need any complicated financial services. Many neobanks also offer financial management consultancy, which is another attractive feature that they possess.

It has to be noted, however, that some neobanks do establish partner relations with classical banks that hold full banking licenses. Such partnerships allow them to have the deposits insured and to make loans as well. Without any doubt, you feel safer when you know that your bank deposit is insured but you have to realize that this comes at a cost. Thus, if a neobank works in a tandem with a traditional bank, it certainly boasts some advantages but it will not be able to offer such attractive service conditions as its ‘independent’ competitors offer.

Another interesting characteristic that neobanks possess is the desire that some of them have to focus on providing some specific services or on servicing some specific groups of customers. TransferWise, for example, is a very popular tool for transboundary transactions. Monese, in its turn, is appreciated by migrant workers, a group of people who used to have very limited access to banking services before. Thus, some neobanks concentrate on underserved customers while others take the niches in the financial industry that are not entirely occupied by others.

Neobanks: a brief history

Even though the word ‘neobank’ went into use quite recently, the start of remote banking service provision dates back to 1989 when First Direct launched its telephone banking service in Great Britain. The main goal that his project pursued was providing 24/7 non-stop banking services to clients. In two years, the bank was able to attract a hundred thousand new clients, which served as a good incentive for other banks to start providing similar services.

By approximately 2000, the banking industry had changed significantly. Provision of online and mobile services became the main area of banking service development. Currently, all major banks in the world have online and mobile applications that make using their services much more convenient for the customers. We do not have to go to the bank any longer when we want to make a money transfer! All we have to do is make a couple of clicks on our mobile phones and bingo: the payment has been made!

The first banks that provide digital services exclusively (i.e. the first neobanks proper) appeared in Great Britain. Then they spread to Europe and later, when the legislation in both Americas and Asia had been altered, neobanks started appearing on these continents as well. At the moment, nearly forty neobanks are in operation and the USA has the largest number of them even though British neobanks still provide the largest portion of digital banking services.

How to open an account with a neobank

First and foremost, you do not have to go anywhere in order to set up a foreign bank account. This opportunity should already sound very attractive and it is especially valuable in the lockdown times. This does not mean, however, that opening an account in a neobank is as easy as squeezing a lemon: you do have to undergo all the due diligence procedures and complete all the KYC (Know Your Client) forms.

Contemporary fintech companies (and neobanks qualify as fintech companies indeed) use a variety of modern technologies for the purpose of client identification. Face-recognition applications, voice-recognition applications, eye scans, fingerprint scans – these and other instruments are widely used by neobanks when taking new clients onboard and when providing for transaction security too.

The good news is that all these procedures can be performed remotely, without paying a personal visit to the bank. Besides, setting up an account with a neobank usually takes between seven and ten days while a month or two may pass before you can acquire services from a traditional bank.

We will be happy to help you establish a foreign bank account with a totally secure and reliable financial institution. We also recommend that you apply for our preapproval service. Before you apply for services to a bank – be it a neobank or a traditional bank – you can obtain a preapproval of your application. If you do so, it will mean that you have provisional consent of the bank to provide services to you. Why obtaining a preapproval is always a good idea is because the number of documents to be submitted is much smaller in comparison to the situation when you are filing an application for banking services and the cost of our preapproval service is quite low. So please get in touch with us, supply only key personal information and we will advise on the best banks and payment service providers that are likely to take you onboard if you apply for banking services to them.