Neobanks are the talk of the town, and South Africa has been producing plenty of them recently. The most notable of the bunch is TymeBank, which has achieved success in its brief existence. Many other fintechs are expected to emerge in the 2020s.
NeoBanks gained popularity during or after the financial crisis of 2006-2009, and their number has been growing globally ever since. Their services are provided virtually, with no face-to-face interaction.
The term NeoBank was coined in 2016 to describe fintechs that were competing with traditional banks. The term “challenger bank” was coined to describe banks that arose in the aftermath of the 2007-2009 financial crisis.
Many people are perplexed by the term “NeoBank.” What exactly is a NeoBank? Let us address this question as we continue with the article.
What is a NeoBank?
A NeoBank is a fintech company that offers banking services via a website and/or a mobile app, allowing the company’s service delivery to be completely contactless. NeoBanks occasionally collaborate with traditional banks to insure some or all of their services.
NeoBanks have a limited product line and can only provide checking accounts, savings accounts, and credit. Customers can use the app to transact using their accounts by paying bills, receiving money, and sending money.
Neobanks are distinguished from traditional banks by their reliance on technology. They are known to be more transparent than traditional banks, and their low-cost services are seen as a threat to traditional banks.
Since some NeoBanks are not required to register with the Financial Sector Conduct Authority, they can lend and conduct business with little oversight. NeoBanks that lend must, however, register with the National Credit Provider.
Characteristics of a NeoBank
- They aren’t regulated like traditional banks.
- Services are issued via a mobile app or a website.
- They partner with traditional banks to insure customer deposits.
- Not many of these banks extend lines of credit to individuals.
How NeoBanks Work
A NeoBank is much more than the software that powers its mobile app and website. When compared to a traditional bank, it incorporates a number of features like that of a traditional bank but provides fewer services. More than anything else, NeoBank provides convenience.
NeoBanks are well-known for providing online services that enable clients to open a bank account online without leaving their homes. There is no paperwork required to open an account. To open an account, one will need an ID number to complete an application. The account opening process is quick, and it can take up to 5 minutes to get a working account.
Credit-granting Neobanks uses a sophisticated algorithm to determine whether a customer qualifies for a credit. A credit facility or revolving loan is not applied for; rather, it is made available via a simple button built into the app. Those who do not qualify for credit do not have access to the same button as those who do.
Neobanks also provide financial tools like calculators and budgeting software. However, the bank’s product offering is limited, with many only providing checking and savings accounts. Their service limitations make them much smaller than traditional banks, which provide investment, trading, financial advice, and other services.
Should You Consider Neobanks?
NeoBanks may not offer as many services as traditional banks, but they do serve a purpose. Neobanks have done an excellent job of assisting the unbanked for the first time, and they offer a paperless application process. If you want a full-service banking experience with access to a private banker, Neobanks are not for you.
Neobanks is a good option for those looking for low-interest savings accounts. They are best suited for young people, particularly those who are still in university and have few banking needs. Some Neobanks do not charge bank fees on accounts and instead only charge on transactions.
If you have fewer banking needs, want to save money on transaction costs, enjoy using mobile apps, and have access to limited credit, Neobanks may be a good fit for you.
It is important to note that ATM transactions are not prioritized by Neobanks, and withdrawal fees can be high if you use a third-party ATM. To save money, you clearly need to appreciate transacting online or using your bank card to make withdrawals at tills.
Pros and Cons of Neobanks
Neobanks have their own set of advantages and disadvantages. Since they are relatively new, they have their own set of drawbacks. Let us examine the pros and cons of neobanks.
- For accounts that do not require any paperwork, it includes a quick application process.
- Application for a new account can be completed remotely, without the need to visit an office.
- The cost of keeping a cheque or a savings account is low; if you leave an account doormat, you will not incur any charges.
- The mobile app and/or website include financial and budgeting tools to assist you with your personal finances.
- Anyone with a valid ID can open an account.
- Business bank accounts are available, but are provided by a few NeoBanks.
- Types of accounts that can be opened are limited.
- There is no private banking facility.
- The banks are still new with no proven track record.
- Neobanks are less regulated than traditional banks.
Neobanks, which are currently expanding their service offerings, maybe the banks of the future. Their regulation, on the other hand, may impede their growth, causing them to grow more slowly. Furthermore, these banks are up against decentralized banks, online banks, and traditional banks.
Neobanks have a sizable market share and are unlikely to disappear anytime soon. Their technology has evolved over time, and millennials have proved to prefer Neobanks over the traditional banks.