How is a Neobank Different from a Traditional Bank?

As a 21st-century consumer living in a developed world, you would have probably spent a large portion of your life thus far on your smartphone and/or computer. Think about it: you order products and services through apps on your phone; store your photos in the cloud through Google, Dropbox, or Microsoft; and can even enjoy working from home.

Another example of the rapid digitalisation of an essential part of our lives – namely, how we handle our money – is the recent emergence of neobanks.

In this article, we define what a neobank and traditional bank are, how they are different, and what you need to consider before signing up with a neobank.  

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What Is a Neobank?

Neobanks are financial technology companies that offer online-only financial services and have no physical branches. Since neobanks do not have physical branches, customers can access their services through either an app or website, or as in most cases, both.

The root of the word “neobank” is derived from the Greek word “neos”, which means “new.”. Hence, “neobank” literally means a “new bank”, which aptly describes how they have challenged the traditional banking system.

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What Is a Traditional Bank?

A traditional bank manages the money that customers deposit into their accounts and provides customer service primarily through its physical branches. Traditional banks have existed for many millennia, which is why they have such deep financial, political, and social roots in the real world.

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What Are Some Differences between Neobanking and Traditional Banking?

·   As mentioned earlier, neobanks are completely digital, while traditional banks have physical branches coupled with online banking services.

·   Traditional banks are fully licensed and chartered, while very few neobanks have banking licenses. To insure their products, neobanks usually partner with traditional banks.

·   Neobanks charge very low fees for their services while traditional banks tend to overwhelm customers with various types of complicated fees.

·   Neobanks generally only offer checking and savings accounts, money transfer and payment services, and some financial education tools (e.g. budgeting apps). Traditional banks, on the other hand, offer a far wider range of services including, but not limited to lines of credit, financial advisors, credit cards, investing services, and more.

·   Traditional banks place a greater emphasis on building deep, long-lasting relationships while neobanks tend to have mostly flexible, short-term contracts and relationships.

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Why Do People Use Neobanks?

There are many reasons why neobanks have become so popular. First of all, they are extremely easy to use and their apps are very much designed with the customer in mind. Neobanks have also taken advantage of the digital revolution and how people have become increasingly comfortable conducting their entire lives via their smartphones. Having online-only financial services neatly fits into this trend because, instead of forcing people to change how they operate, it simply leverages their current behaviour.

Another advantage of not having any physical branches, and a huge reason why neobanks have attracted so many new customers, is that it dramatically reduces their overhead expenses. This allows neobanks to pass these cost savings on to customers by offering higher interest rates on their checking and savings accounts.

Neobanks also tend to have lower or no fees at all for their services because they earn the majority of their revenue through interchange fees that merchants pay them when customers buy products and services with their debit cards.

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Things to Consider about Neobanking

Even though neobanks are fantastic innovations that have challenged the traditional bank system and forced them to innovate, they are not a good fit for everyone. Here are a few things to consider if you’re thinking of signing up for a neobank:

·      If you prefer old fashioned, face-to-face contact, then a traditional bank might be better. While the lack of physical branches allows neobanks to offer cheaper products and lower rates, it also means that you can never talk to anyone in person if you need help with something complicated or have to execute a complex transaction.

·      If you are not very tech-savvy, a neobank might not be good for you. Remember, neobanks don’t have physical branches so if you have a problem but do not know how to use their app, the only way you can contact customer support is via email or a phone call.

·      Neobanks are less regulated than traditional banks. This means that they are more vulnerable during financial crises and that your deposits might not always be insured. Make sure to check if your neobank of choice has deposit insurance that protects your money in case it runs into financial problems.

·      They do not have many services. If you need more than your basic checking and savings accounts, neobanks probably will not provide you with what you need. For example, for loans, credit cards, wealth management, retirement funds, and other such services, you will l have to hire a financial advisor or go to a traditional bank.

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Sprout with Us!

Sprout Asia wants you to focus on what you do best, while we take care of the rest. That is why we offer budget-friendly accounting services, so that our chartered accountants can manage your finances with ease and accuracy.  

Feel free to reach out to us with any questions you may have about our services, and we will respond to you within 24 hours.