Digitalisation has made our life easier like never before. You can order your favourite food, fix your ride to work, watch your favourite content online, all using your smartphone. But to operate bank accounts, we still need to go out there, right? Well, neobank can be a solution here.
Have you ever heard of the term Neobank? It is definitely not a part of the traditional banking system nor a synonym of digital banking. Neobanks have made a splash in the fintech industry quite recently with considerable new players. Their uniqueness is, they simplify financial services to meet the expectations of today’s digital generation.
What is a Neobank and how does it differ from traditional banks? The answer lies in the definition. A neobank is a digital bank that does not have any branches. Instead of having a physical presence at a set location, neobanking is entirely online. A broad collection of financial service providers, who primarily target tech-savvy customers, comes under the umbrella of neobanking. Basically, a neobank is a fintech firm that provides digital and mobile-first services like payments, debit cards, money transfers, lending, and more.
Neobanks bridge the gap between the services that traditional banks offer and the evolving expectations of new-age customers. They do this by providing personalised experiences, employing data-driven insights and offering value-added services.
While traditional banks continue to struggle with bringing their legacy-based infrastructure into the digital age, neobanks leverage its modern digital platforms to analyse customer data and make data-driven decisions.
Neobanks can also afford to slash customer fees by a significant amount since they don’t have to bear the expenses of running physical locations.
The most lucrative advantage of neobanks might be the extensive digital presence. Besides, neobanks can offer lower fees and higher interest due to less pressure in investing in infrastructure.
Among the user experience enhancements that neobanks offer because of their tech-driven nature, is hassle-free account creation. Consumers can create their accounts from their mobile devices from the comfort of their home. And, given their technology-driven KYC (Know Your Customer) process, the account can be ready in just a couple of minutes.
And, how do you avail of a neobank’s service? The same way you order food over FoodPanda or book an Uber cab. By using an app. Neobanks provide services via its mobile application. It gives you an overall smooth and hassle-free experience.
Neobanking and Digital Banking are both similar in being banking services that operate through mobiles and other devices. That is where the similarities end, though. There is a pronounced difference in how neobanks are set up and what they offer: a simpler, intuitive and enjoyable user experience.
In the traditional system, it takes about 15 working days to open an account. With neobanks this procedure is much shorter, from a few minutes to a few days depending on the offers of each bank. The aim is to make the opening and management of financial accounts more flexible, for individuals as well as for professionals. And you know what? No proof of income is required to open an account.
In terms of operating models, neobanks may follow one of these three approaches:
❖ Non-licensed fintechs that collaborate with traditional banks and provide a mobile/web interface and wrapper around the products of their partner banks,
❖ Traditional banks with their own digital initiatives, (I.e., Bank Asia is setting up a neobank service for its customers)
❖ Licensed neobanks that exist as their own entity without tying up with a traditional bank. This is usually with digital banking licences in countries that allow it. Which is yet to be allowed in Bangladesh.
Currently neobanking in Bangladesh mostly falls in the first category. While some neobanks carry banking licences, a majority partner with traditional banks instead of obtaining their own banking licence. In this operating model, the banking partner provides the overall platform for managing customer accounts, holding customer funds and the rails for interbank payments and settlements. The neobank is responsible for product distribution and managing the end-to-end customer journey from customer acquisition to servicing. Finally, the mobility provided by the mobile applications available to users makes consulting and managing finances intuitive and accessible everywhere. There is no need to go to an ATM to check your account balance: everything is directly accessible on the dedicated applications. It is even possible to make transfers directly from this application.
Can neobanks replace traditional banks? Although neobanking is a newer concept all around the globe, it has gained momentum of growth ever since its creation in the 2010s. According to Statista, the market size of neobanks was estimated at nearly 47 billion U.S. dollars in 2021. Estimates projected the sector’s market size to grow at an average annual rate of 53.4 percent until 2030, reaching a value of 2.05 trillion U.S. dollars that year. The industry is growing exponentially and many of the largest neobanks around the world have more than tripled their market value between 2020 and 2021.
The objective of neobanks is definitely to compete with traditional banks by making the means of accessing financial services more flexible while relying on technological progress for new and innovative offers. This approach has convinced tens of millions of users in Europe, making neobanks a real alternative to the traditional banking system. Their impact in the professional field is also undeniable and we will have to carefully observe the evolution of the commercial world in correlation with that of neobanks. But It’s highly unlikely that neobanks can entirely replace the traditional banking system. Considering neobanks are a newer concept and they offer a limited range of products and services, they still have a long way to catch up with the spectrum of services offered by the traditional banks. Since neobanks are entirely digital, they may not be able to relate to the non-tech-savvy segment of the country that still believes in face-to-face interactions with their financial representative. Besides, without a full-fledged banking licence, neobanks are still dependent on their partnerships with traditional banks.
How implanted are neobanks now in the world? After almost 10 years of the inception of the concept of neobank, some 273 are found up to August 2022 . The number is considerably accelerating due to the intention provided by the people as they find the system pretty convenient. As there is a system like neobank, it’s sort of foolish not to use it. The United States and The United Kingdom are dominating the neobank implantation competition from the very beginning.
Let’s have a look at some of the most prominent neobanks of this convenient world of the banking system:
1. Revolut, a UK-based neobank that started its journey in 2015. Having more than 50 million customers, Revolut accepts 150 currencies
2. Monzo with around 6 million customers, is another UK-based neobank
3. Chime a US-based neobank, assuring 24/7 human service with two-factor and fingerprint authentication.
4. Sable, another US-based neobank is this, Sable. It’s prominent for the easy signup process and very low fees and exchange rates.
5. N26 is a German neobank, having over seven million customers across the EU. It can be a handy option for low-cost accounts.
Are Neobanks safe? Pretty solid question. As long as the banks maintain higher surveillance authority to regulate the system, there is nothing to worry about. Consequently, the money deposited in the neobanks is as safe as it stays in the standard account. People lose interest in unsafe options of today’s technology. As you can observe from the number of customers in the above list of neobanks, millions of people think neobank is a safe option, then why won’t you use a bunch of services staying home or anywhere, anytime?
Bangladesh, a part of neobank or not? Bangladesh is yet to come up with neobanks in the growing neobank competition. According to NeoBank.app, there are three such types of banks available in this developing country. Neat, TransferGo, and Wise (Transfer Wise) are operable in Bangladesh currently.
Each of those is directed from the origin of those banks. It can be mentioned that Wise has only the option to send currency, no money receiving system is available in this region. People of this country are ardent about handy technology. Although the nearest neighbour of Bangladesh, India has progressed in this regard quite well, it’s not very far away to have access to neobanks for the people of Bangladesh.
Are traditional banks going to lose the competition in BD? It’s quite evident now that neobanks are taking positions in the comfort zones of people which is commendable. Again, in this world of easy-finding people need more things like ordering food from home and getting it within a short period of time or fixing a ride before exiting the home. Statista.com says, the global neobanking market size is $47.39 billion in 2021 and is expected to grow by $77.87 billion in 2027. Since the pandemic, ordinary or traditional banks have not been able to stand back on their previous position. In that case, neobanks have a better possibility to acquire a safe position in the minds of people. People tend to be little concerned about the risk of depending totally online, the tendency is lessening gradually due to the convenience of neobanks.
The Bangladesh Bank is drafting regulatory guidelines on the operations of digital banks in the country. Once the guidelines are finalised, the central bank will be ready to issue a licence to operate a digital bank, Bangladesh Bank deputy governor Abu Farah Md. Nasser told the media recently. Assessment would be carried out first before issuing licences, he added.
The guidelines would be formulated under the Bank Company Act and compliance with all the instructions of the act would be a must for a digital bank, as per other central bank officials.For instance, the paid-up capital requirement for a digital bank would be Tk500 crore as it is required for a conventional bank. Strict implication of a realistic and industry supporting policy can take neobanks a long way in Bangladesh.
Ishrak Farhan Bhuiyan, Executive|Editorial, Voice of Business
Md Minhazul Hoque Apon, Executive|Editorial, Voice of Business
Jubayear Mahin, Executive|Publications, Voice of Business