Neobanks vs Traditional Banks: Everything you need to know!

Neobanks vs Traditional Banks: What are the key differentiators?

Neobanks are a modernized form of a traditional bank which functions purely on a digital platform, without a physical branch.

The core premise of the Neobank is that the level of understanding of technology and different value systems of millennials is remarkably different from the generation just a decade ago. Hence millennials deserve banking products that are very specific to their needs

Due to their purely digital nature, and low-cost model, Neobanks typically charge no or very low monthly fees on banking services such as minimum balance maintenance, deposits and withdrawals.

But is there anything different in their product offering? Or is it purely packaging the product to make it attractive to a segment?

1. Relentless focus on User Experience:

 No one loves going to a bank. Simple interface, minimal hoops to jump through, intuitive user journey flows is the biggest carrot being dangled from neobanks to millennials.

 2. Help Customers build credit:

Young users often struggle to build a credit history. Chime noticed this gap in the market and acquired Pinch, a company helping millennials build credit history. Pinch basically reported the payment of monthly rent by its users to credit bureaus, and essentially signaling that users with history of on-time rent payments could be trusted as future borrowers

3. Social Payments:

Venmo pioneered instant transfer among friends, a good 10 years ago. It is essentially a peer to peer marketplace which eliminated the friction of adding someone’s account as a payee and then transfer them money. So much so that VenMo became a verb

4.  Easy currency conversion:

Revolut was originally set up to help travellers avoid expensive foreign exchange fees by offering a mobile phone app and card that let them change money into about 30 different currencies at market rates.

5.  Micro Loans:

The advent of the Buy Now, Pay Later has truly come. Everyone from Affirm to Cred is offering mini loans to help tide over the an immediate cash crunch. These startups allow you to split purchases into EMIs and charge either simple interest or no interest at all.

 6. No deceptively hidden fees:

Pretty sure we have all had a mini-heart attack discovering an incomprehensible charge on a credit card statement, which after many hours of investigation turns out to be a charge for some service you never ordered. Most neobanks/challenger bank play on never charging any hidden fees

7. Reaching the underbanked:

 Almost every fintech worth its salt is using AI to validate that a user is trustworthy and to accelerate the KYC for first-time customers

 8.  Dashboards and Personal Financial Assistant:

Every user has unique needs and requirements. I want to open my banking app and see my spend analytics first. Another user may want to see their stock returns and distribution. Essentially the Neobank becomes a handy financial assistant that provides truly unique insights.

 

Who are the market leaders?

The British and European were the frontrunners in the space, with Revolut, N26, Monzo etc. However, off-late American neobanks have been raising money left right and centre, at soaring valuations and as a result gained tremendous momentum.

This isn’t just because of the US market being a lot larger and more homogenous than the European market. It actually boils down to Interchange fees – the fees charged by credit card companies whenever a credit card is swiped.

American merchants pay 1.76% in interchange fees, compared to 0.96% in most of Europe. This means it's much easier for an American Neobank to grow and become profitable on the back of the volume of transactions.

So Off-late, all the major European neobanks are queued up to expand business to US

 

Who are the Neobanks in India?

  •  Niyo offers savings and wealth management services to salaries professionals
  • Razorpay started as a payment gateway and is moving towards banking services
  • Walrus is targeting Indian Genz

None of the neobanks in India have banking licenses, so they have to rely on partnerships. However, traditional banks have also woken up and don’t want the Neobanks to chip away on its customers. For instance, Yono by SBI is 811 by Kotak Mahindra are targeting the same segments, with a banking license.

In the Neobanks vs Traditional Banks battle, it remains to be seen whether a traditional bank will get digitized first or a neobank will get distribution faster.