A neobank is a type of direct bank, that operates exclusively online without traditional physical branch networks. It's a wide umbrella of financial service providers. Neobanks can be called financial technology firms that provide digital and mobile-first financial solutions payments and money transfers, money lending, and more.
Neobanks don't have a bank license of their own but count on bank partners to provide bank licensed services. Unlike a traditional banking system, neobanks have an online and mobile first business model. But, like traditional banks, neobanks do make money marginally between money inflow and lending.
Since neobanks are completely digital, they open up a wide window of advantages to a customer.Most Neobanks focus on providing customers with a single product or service, competing with banks on customer service, products and margin to bring the offering to market. As they gain customers, neobanks often expand their offerings.
The term "Neobank" became prominent in 2017 to describe Financial Technology-based financial providers that were challenging traditional banks and the traditional banking model. There were two main types of neobanks that provided services digitally to customers:
- Neobanks that applied for its own banking license to provide financial services.
- Neobanks that partnered with traditional banks to provide those financial services.
Early Neobanks, such as Monzo or Starling Bank in the United Kingdom, quickly grew by launching beta products with an e-Money license (a license authorized by the FCA that ringfences customer deposits so they can't be used to generate profit). As they have grown, some neobanks applied for full banking licenses with the FCA while others have acquired fully-licensed banks to develop their products and services.
Neobanks are set to have a similar impact on the banking industry that robotics have had on the manufacturing industry. Neobanks use automation tools, artificial intelligence algorithms, and chatbots to cut down on upfront costs and provide a similar or better user experience of traditional banks at a lower cost. They have also provided greater transparency for those customers and reduced the hidden penalties consumers associate with traditional banks. And, in the case of credit, loan, or mortgage approvals, neobanks often cut down on the time for application and approval. This is often done through innovative or new ways of evaluating an individuals credit or automation of the credit application process. Neobanks, in some cases, allow users to pre-qualify for a loan and see interest rates within minutes.
At the same time, as traditional industries found new ways to use robotics in their industries to automate or compete, traditional banks are increasingly adopting the principals and products developed by neobanks or are acquiring the neobanks. And in the same way robotics and automation has reduced jobs in traditional manufacturing industries, Neobanking has reduced the roles of bank tellers, investment brokers, wealth managers, and others throughout the banking industry.
Some 60 percent of Singaporeans will migrate services from their current bank to new digital banks, citing sign-up promos and more innovative products and services as a key driver.
In its annual report for the 12 months leading up to February 2018, UK-based neobank Monzo revealed that it had increased its user base to 750,000 customers, but across the same period its losses more than quadrupled from £7.9m ($10.05m) to £33.1m ($42.1m).
The term, derived from the Greek νεος (neos) meaning "new" bank, is used to describe banks challenging traditional banking models with online and mobile application focused services.
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