How Do Online Banks Work?
Updated: Jul 6
There are several reasons people don't like regular banks. For example, transaction processing speed, high service fees, long queues at branches. It seems the traditional banking system has long outlived its usefulness. In contrast, online banks became a great alternative. As of 2020, 39 mln clients actively used them. JEVERA invites you to disassemble how exactly neo banks have reached such popularity. We strive to discover the first things: what is neo banking and why it's not a synonym with the internet one. Here goes!
Online Banks: Definition, Peculiarities, Trends
What Is Neo Banking?
Talking in a nutshell, it's a new niche of banking, where each representative acts exceptionally through the web environment. Neo banks have no branches. All the procedures are conducted online.
Most people used to call such fintech companies' banks', but it's not always correct. The case is here companies rarely receive a banking license. They have to meet lots of state requirements before getting it. So, most neo banks skip this stage and choose a collaboration with the traditional banks to stay afloat.
However, some neo or challenger banks, like Tandem, Monzo, and Atom Bank, have relevant licenses. They can control business activity and act in full measure without traditional bank help.
So, neo banking is about a new approach to financial services provision, achieved by digital technologies usage. Clients like that. That's why, following the DataM Intelligence forecast, neo banking market value will grow at a CAGR of 45.23% within 2020-2027.
Neo banks Peculiarities
"Banking has to work when and where you need it. The best advice and the best service in financial services happens in real-time and is based on customer behavior, using principles of Big Data, mobility, and gamification."
Brett King, CEO, and Co-founder of Moven
#1 Convenience and customer focus are the main features of neo banks. How often have you got a personalized experience in a regular bank?
Recently Oleh Horokhovskyi, Co-founder of The Ukrainian Monobank, shared screenshots of client support live-chat. One of the online bank's clients has written a few lines from the song instead of writing the reason for the request. To which the operator continued a line from the same song. As a result, it turned into a large karaoke flash mob with over 1000 involved customers. As seen, neo banks remain client-centric in any situation. It makes them leaders compared with conventional banks.
#2 Digital Technologies. Neo banks are the engines of progress. They use robust software for flexibility, speed, and full customization. Modern AI and Data technologies help analyze clients' profiles efficiently, build a clear app interface, and provide real-time services. Companies make this cost item the most significant. That's why they get the desired advantage over competitors.
#3 Limited range of services. As seen, chartered banks will never die. Most neo banks cannot provide a variety of financial services because of the license absence. It makes them cooperate with traditional banks to give clients more opportunities. Now online banks look like mobile apps for convenient financial management. Such companies help people to open financial accounts, make transactions 24/7, or take loans.
#4 Narrow target audience. Online banks are designed for certain population segments: travelers, teenagers, sports fans, etc. Profile orientation allows them to provide high-quality services, meeting each customer's needs.
#5 Loyalty system. Neo banks offer cashback. For instance, if a company serves sports fans, it will provide cashback for the purchase of sports goods or services using an online bank card. It encourages people to use the already convenient services.
Neo Banks Development Trends
Neo banking grows hugely actively. We tried to gather a few core tendencies of its development.
The first one is the above collaboration with traditional banks. These are bilateral relations. From one side, an online bank has a sort of protection from a chartered one and can provide more services. From the other one, regular banks can cover a new audience and boost the service provision quality due to a partner neo bank in the middle.
One more fascinating trend is the intertwining of cryptocurrencies and neo banks. Some of the last ones became a point of cryptocurrency sales. And cryptocurrencies holders, because of their attachment to convenience and technologies, are happy to switch to the neo banks' service. Shortly, the scale of this phenomenon will only increase.
The third feature of the neo banking development is inheritance. Lots of traditional banks create a well-designed internet service, calling it a neo bank. But this is just a substitution of concepts. Why? Let's consider it a bit later.
Last but not least are state regulations. Banking activities in different countries are highly regulated. Nevertheless, the digital technologies implementation and the creation of a group of financial institutions that closely resemble banks undermine existing norms. The legislation becomes more loyal to constant innovations, and legislators are more observers than a stop factor for the fintech companies' development in this niche.
What's The Difference Between Internet And Online Banking
It's so easy to confuse internet banking with the neo one. You bet. Both offer financial services over the
Internet and provide clients with a personalized experience. Anyway, we're talking about two different concepts.
Internet banking is usually a website, app, or both, owned by a traditional bank. It's one more communication channel for such a company. People can perform transactions and use several other services there. But anyway, users are limited by the bank's rules. For instance, sometimes it's impossible to pay for online purchases on the day off because it's not a working day for the bank.
Here you go, a reason why clients hurry to switch to online banks. These enterprises work only in online mode. So, the mobile app is the only way to communicate with customers. Here people can receive a few perfectly provided services around the clock.
Thus, sofa banking is a traditional banks' feature for convenient interaction with users. In contrast, online banks are other financial entities that hold their business exceptionally via the Internet.
Top US Online Banks: Reviews
First companies positioning themselves as neo banks appeared in the US. Now, there are over 300 neo banks registered worldwide.
What US banks allow you to open an account online and eliminate the need to come to the branch? Following the Insider's Global Neobank Report, it's about Aspiration, Chime, Dave, Mastercard, Moven, Varo, etc.
Chime's audience is predicted to be the fastest-growing. Under eMarketer, the number of clients will increase from 7.4 mln in 2019 up to 19.8 in 2024. Following the recent Forbes review, this company offers an opportunity to open checking and savings accounts. It helps save money, has a high-grade app, and provides clients with notifications about account conditions daily. The neo bank doesn't require a monthly maintenance fee. Chimes is not an independent bank. It's a fintech company that cooperates with The Bancorp Bank.
Among the fast-growing US online banks, Aspiration and Varo also should be highlighted.
The Aspiration firm's concept is environmental protection. It provides clients with cash management and savings accounts without hidden fees. The company can boast of a profitable cashback system and provide free-fee withdrawals at ATMs. The neo bank has a wide net of integration with chartered banks, like Bremer Bank, ProgressBank, etc.
In Varo Mobile Bank, people can open a checking account. The company does not charge service fees and provides high-interest rates. It enables a client to manage all existing bank accounts with one Varo app. The neo bank also interacts with the above Bancorp Bank and Chimes.
Thus, neo banks give clients much more than money security. They allow unlimited access and control of resources without the need to visit branches and charge additional fees. While these companies often interact with chartered banks, they remove core bottlenecks of a traditional system, ensuring a seamless customer experience.