We all know how Uber is one of the largest taxi companies that function without owning any vehicles. Do you think that the same can be done in the banking sector? Well yes, Neobanks are doing it, and it is going to be the next big disruption in the Banking Industry.
What is Neobank?
A neobank is an online bank, digital bank or an internet-only bank that operates without any traditional physical branch networks. It emphasizes on the latest technology and doing away with conventional means of banking. Neobanks typically focus on a limited range of products. After identifying problems within existing offerings, they engineer more complex services to attract clients and improve customer satisfaction. Neo banking has recorded a Compound Annual Growth Rate of 50.6% from 2016 to 2020 and valued at US$ 50.2 million in 2020. It is forecasted to grow to reach a market size of US$ 394.6 billion by 2026.
The advent of neobanks has challenged the traditional banking model. The race to gain market share and exceed customer expectations has become intense. People have started accepting digital banking as the new normal, primarily due to the COVID-19 pandemic. They don’t want to visit bank branches or stand in queues anymore. Neobanks are here to do away with outdated banking processes and the traditional financing sectors are striving to the same to be in the competition.
What makes neobanks an attractive option as compared to the 100-year-old monopolies in the banking sector? Let’s take a look:
- Lower Costs: No monthly fees and no withdrawal costs
As everything happens online, customers don’t have to travel anywhere and control their finances on their apps, which means lower overhead costs, resulting in lower fees. Neobanks don’t have to incur the humungous expenses of running physical branches so they can offer their services for free. They offer a wide range of digital and mobile financial solutions like checking and savings accounts, payment and money transfer services, budget support and loans for individuals and companies.
- Improved Customer Service
The 24*7 customer support and advanced chatbots are something the traditional banks don’t provide. Neobanks aim to give their customers a superior experience.
Neobanks can’t function by providing freemium or low-cost services if they wish to maintain a good customer service reputation. Hence, they increase their per-customer revenue by proposing premium services or more profitable products. These banks use an interactive user interface design and smart artificial engine to power the chatbots and support their customers.
- Advanced Technology
Nowadays, it has become imperative for companies to embrace and leverage the power of technology, no matter how big or small. Fintech is disrupting the banking sector at a rapid pace and traditional banks are still coping up. Their conservatism and bureaucracy come in the way of adopting new technology and making way for change. Only a few of them offer mobile banking and with limited services. Neobanks, on the other hand, have a robust database and can improve their services continuously, to adapt to the needs of their clients.
As most people prefer to manage their banking from the palm of their hands, neobanks are offering it with their app-only focus. Some of them are incorporating the latest mobile technology into their apps, such as using voice banking through assistants like Siri and Google, biometric security measures, two-factor authentication etc.
Challenges faced by Neo-banks
- No Branch Access
Everything is indeed going digital in today’s world, but many people still prefer the in-person interacting offered by traditional banks. It gives them a sense of trust and security.
Not having physical branches means that neobanks cannot attract the types of customers who prefer to be able to manage their banking needs in-person, especially when dealing with huge amounts of loans, mortgages.
- Limited Products and Services
Neobanking is just getting started. With a narrow range of offerings, you can’t expect car loans, mortgages, etc. from these banks. In the future, we might see some more products such as term deposits, credit cards and home loans provided by neobanks.
Even though Neobanks employ security measures to protect their customers from fraud, that might not be enough to gain their trust. The concerns over online fraud and cybersecurity have been growing and with that, the fears over privacy and security risks remain high, especially when people’s money is in question. In the end, the responsibility also falls on the hands of the users of the app. They also have to be vigilant and ensure their phones are protected from third-party attacks.
With the increasing expectations of a more seamless and faster banking experience, the demand for neobanks is undoubtedly rising. These banks have an opportunity to capitalize on the gaps in the traditional banking sectors and make customer interaction easier and cost-effective.
However, neobanks currently lack the financial muscle to compete at large scale. As they are providing low-cost services, many of them have not been able to become profitable yet. If they try to compete with traditional banks by providing a wide range of financial services, they might face the danger of over-burdening and face losses. But if they focus on a particular service, there is a high chance that they will be able to outperform banks in terms of costs, customer service and product innovation.
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