- June 2, 2021
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For the average consumer and businesses, the banking sector, unlike other industries, has not undergone significant changes in the last few decades. For example the way we use accounts, credit cards or mortgages are the same as those of previous generations.
However, the way we use transportation has changed significantly thanks to Uber (https://www.uber.com) and also the way people face hotels has changed thanks to Airbnb (https://www.airbnb.com). Banks like JP Morgan Chase (https://www.jpmorgan.com/global) and HSBC (https://www.hsbc.co.uk/) with a tradition of more than 150 years and capitalizations of hundreds of billions, make the banking market impenetrable.
A Neobank is a kind of digital bank without any branches. Rather than being physically present at a specific location, Neobanking is entirely online.
It is a wide umbrella of financial service providers who beseech today’s tech-savvy customers. Neobanks can be also called FinTech firms that provide digital and mobile-first financial solutions payments and money transfers, money lending, and more. Yet, Neobanks don’t have a bank license of their own but count on bank partners to provide bank licensed services.
The trend of Neobanking, that is the development of institutions that provide financial services through digital channels, emerged as result of the general dissatisfaction in the banking sector after the global financial crisis of 2008.
The European Union’s command on payment services which broke the decades-old domination in the banking sector and subsequently the revised PSD2 Directive, created the conditions of an easy disruption of FinTech companies to the already existing banking market. In particular, they gave the latter the opportunity to gain access to customer data traditionally managed by Banks and to aim at transforming banking services.
The consolidation of this new trend was also facilitated by the ineffective advertising of advantages, malfunction and security problems of digital applications of traditional banks. In addition, the rapid growth of the customer base of new entrants and their full harmonization with regulatory standards was also a factor that allowed companies such as those to not only intrude the traditional banking sector but also be more competitive.
Neobanks are not banks in the strict sense of the term. They are usually small businesses, often with roots outside the banking industry that introduce new, improved ways of providing banking services. They do not have a bank license but an electronic credit license. They provide their services via internet or mobile devices. They are not independent but rely on traditional banks.
With a structure based on Traditional banking and with products such as current accounts and debit cards, they offer different kinds of user interaction and therefore a different user experience such as the ability to predict cash flow or acquire a virtual digital wallet. They attract customers through low charges or free services as they are not charged with operating costs of physical stores.
A Neobank offers retail services, such as money transfers, account opening, debit cards, direct and international payments, faster than a traditional bank. Finally most Neobanks offer support 24 hours a day, 7 days a week.
Those new competitors are highly adaptable to the new business environment due to their small size, skills and know-how. With the help of technology and resources and sometimes with the contribution of other FinTech companies, they aim at the development of innovative products with the ultimate goal of satisfying their customers. The technological changes they adopt focus on the use of clouds, the development of digital wallets and the use of big data and biometric data.Their theory focuses on three key areas:
- Improving the customer experience offering them alternative, customer-centric and better organized financial services.
- The convenience provided by the possibility of mobile transactions without the need to visit a physical location or the presence of staff.
- The creation of new banking platforms that will offer lower costs and simplified transactions.
Two of the new financial business models are the Neobanks and the Challenger Banks. Challenger Bank is a relatively small retail bank set up with the intention of competing for business with large, long-established national banks. This categorization should allow us to understand this new model of banking services but again it is completely subjective. For example, Fidor Bank (https://www.fidor.de/en/) can be considered a challenger bank as it holds a banking license but is not a simple substitute for a traditional bank with the peer-to-peer lending services offered. Even Monzo (https://monzo.com/) is difficult to be categorized as it is a completely mobile bank that holds a banking license.
Factors that lead to the Neobanks’ success include the constant information given to the customers regarding their purpose of operation and the adoption of a strategy that does not aim exclusively at attraction but also at profitability. Then the consolidation of their brand, which leads to loyal customers and which in many cases, requires working with better established players. Also the use of standard computing clouds, APIs, AI (artificial intelligence) and new emerging technologies for creating platforms that will provide flexible applications, controlling infrastructure costs and new ways of approaching customer problems.