Banks are closing down at an alarming rate. According to recent reports from the Office of the Comptroller of the Currency, 754 bank branches closed between January and September. While many may be tempted to dismiss this as the failings of smaller, community banks, the data would indicate otherwise. Bank of America, US Bank, Wells Fargo, and Chase account for just over half of that amount in closures.
Close to 78% of customers may not find this disconcerting, citing their preference for digital banking. Added to this is the surge in neo banks, fintech disruptors to the traditional banking system.
With transaction volume growing at 13.15% per year, these digital-first banks are a growing force to be reckoned with, increasingly appealing to customer needs.
With user-friendly apps and websites, they’ve transformed the banking industry through simpler, more efficient, and tailored to consumer trends and behavior. Let’s explore the business’s unusual approach to banking:
Neobank vs. digital bank vs. traditional bank
To an outsider, it may seem like semantics, but the financial industry clearly differentiates between neo-banks, digital banks, and, of course, traditional banks.
The most distinctive feature of neobanks is their lack of physical presence. There are no brick-and-mortar branches, and all activities and transactions occur online. Usually, this is in the app or on the website. In essence, these are mobile-first banks that deliver all their services virtually.
Digital banks are not the same as neobanks. They serve as the digital extension of traditional banks. When you think about the 754 bank branches that closed, it’s their digital banking services that pick up the slack.
Traditional banks, the system you are most familiar with, are considered a legacy system. Tied down by stringent regulatory requirements and bureaucratic red tape, these banks are slower to innovate and meet the demands of customers. Traditional banks also have an extensive physical presence across multiple locations.
Neobanks, conversely, thrive on innovation and delivering on consumer demands. However, they do not enjoy the same level of public trust, credibility, funding, and service range that traditional banks can offer.
Advantages of neobanks
While neobanks may not have the prestige, history, and public trust that traditional banks have accumulated (some, over centuries), they do offer significant advantages to their target audience. These include:
Lower costs
Neobanks can afford to offer lower service charges because their overheads are significantly lower. With no physical locations and fewer human resources to compensate, neobanks are able to transfer their savings to customers and have made this a key offering. This is an important factor when considering that neobanks often look to the unbanked and lower-income consumers as their target audience.
Customer experience
Conventional banks are weighed down by legacy systems that make it difficult for them to easily adapt to changing customer demands. This ties in closely with customer experience. Without the ability to easily introduce new technologies and systems, customers are forced to use outdated processes when banking. With millennial and Gen Z customers relying heavily on technology, this is a significant failure on their part.
Neobanks are an innovation of the fintech sector, and are therefore flexible and customer-centric. The technological advancements are further supported by a more fluid organizational culture which allows these banks to remain responsive to changing customer needs. Neobanks are able to onboard new tools, update app and website interfaces to remain user-friendly, and address customer needs.
Innovative technology
Neobanks exist to address a gap in the market; access to banking services that are seamless, digital-based, and affordable. To meet customer demands, they often make use of powerful technology stacks like artificial intelligence (AI) and machine learning. With a superior tech stack, they provide users with a number of banking services; chatbots for self-assistance, personalized recommendations, and secure authentications.
Serving the unbanked and “under-banked” market segments
Neobanks understand that they’re not a direct competitor to traditional banks, but rather exist to serve a massive market that exists on the fringe of conventional banking. That market encompasses nearly two billion adults, who don’t have access to a bank account.
To address their needs, neobanks focus on providing specific services at a fraction of the cost. Without having to cross-sell and upsell on various services, they can specialize in doing a few things really well.
Customers who fall in either of these categories (unbanked or under-banked) are drawn to the affordable interest rates, low service fees, and user-friendly onboarding process. Additionally, neobanks target niche market segments like freelancers, the self-employed, and workers in the gig economy. With low remittance transfer fees, neobanks are attractive to remote workers who may need to regularly exchange and send small amounts of money around the world.
Popular neobanks
There are now hundreds of neobanks to choose from, each with unique advantages and disadvantages. Below are some of the market leaders in the United States and worldwide.
Chime
Chime, considered the world’s largest neobank, has an estimated 22 million users. With speculation that they will be going public, they offer a blueprint to neobanks on how to effectively capture an overlooked market. Chime offers users fee-free savings and checking accounts, and a secured credit card that can be used to build a credit score.
With no minimum account balance required, no maximum ceiling for interest-bearing accounts, and no monthly service fees, Chime appeals to a very particular section of the market. Chime also blows their competition out the water when you consider that they still offer customers access to ATMs and cash deposits are made possible through partnerships with big retailers.
Varo
Varo Bank was founded in 2020; in some ways it’s quite poetic that a neobank emerged alongside the pandemic, heralding a new age of business unusual. With only four years on the market, Varo has made fintech history this year (2024) with the granting of its de novo banking charter. This essentially recognizes the formation of a new bank; one that hasn’t attained a license through mergers, sales, or acquisitions, and acknowledges that the bank has started “from the beginning”, or de novo.
Serving approximately 7 millions users, Varo offers checking and savings accounts as well as credit building facilities.
SoFi (Social Finance)
SoFi has its origins in the student loan refinancing sector, but pivoted into a neobank. While they may not be considered the biggest bank, they certainly are one of the fastest growing, having increased their member base by 41%. At last count, they had a total of 8.4 million customers in their database.
As a neobank, SoFi provides combination accounts used for spending and saving, with no account service fees for the overdraft facilities, ATM, or monthly maintenance. In retaining the student demographic it first appealed to, SoFi offers crypto trading facilities, loans, and retirement accounts as well.
Dave
Originally a paycheck advance company, Dave now offers checking accounts and interest-free small advances on paychecks. It has attracted over 10 million customers by providing more than just a friendly name—Dave also helps customers budget and search for side jobs to supplement their income.
Revolut
Taking a more global outlook, Revolut is one of the strongest neobank brands and providers outside of the US. Founded in 2015 in the UK by partners Nik Storonsky and Vlad Yatsenko. Having raised over $2 billion in funding over 12 rounds, Revolut continues to expand into new countries, growing their international transfer offering. Customers can now exchange money in over 160 countries with 36 currencies.
As a neobank, Revolut have focused on creating a seamless banking process; their value proposition is all about transacting with a few taps. They boast a UK customer base of 10 million, and a global database of 45 million.
Nubank
The prevailing belief with neobanks is that they exist to serve the unbanked and the underbanked. This market is typically prevalent in developing countries, and among low-income communities. It should come as no surprise that one of the biggest neobanks in the world is in Brazil.
This year, Nubank reached the 100 million customer milestone, something that hasn’t been done outside of Asia. It speaks to the idea that emerging markets are early adopters of fintech, as well as the need for seamless banking processes.
Nubank provides its customers with digital accounts, loans, insurance, investment options, and a credit card. Managing transactions and activities is done solely through the Nubank app which houses everything from customer support to real-time tracking of account activities,
Conclusion
Neobanks are redefining the banking landscape by offering accessible, affordable, and highly personalized services. Their agility, innovative use of technology, and focus on niche markets allow them to cater to underserved segments, such as freelancers, gig workers, and the unbanked.
While traditional banks still hold key advantages, including public trust, financial stability, and a broader service portfolio, they must recognize the competitive edge that neobanks bring.
As neobanks grow and attract customers worldwide, traditional banks must adapt by modernizing legacy systems, enhancing digital experiences, and exploring partnerships with fintechs.
Ultimately, the future of banking may not be a battle between neobanks and incumbents but rather a convergence of the two, where collaboration and innovation shape a more customer-centric financial ecosystem.
Business as usual is no longer an option in this evolving landscape—both neobanks and traditional banks must embrace change to meet the rising expectations of today’s digitally empowered consumers.
