What are neobanks and what's different about them?

Neobanks are a new breed of online-only banks that offer financial services without traditional physical branches. Since they can only be accessed through mobile apps or websites, it allows them to offer cheaper, more convenient, and personalised customer experiences.

The worldwide adoption of neobanks has been astonishing, with over 19.1 million account holders in the UK alone. With benefits such as 24/7 banking, higher interest rates, and other perks, who wouldn’t open an account?

While we’ve given you a simple neobank meaning, is it enough to make the switch? Let’s explain why neobanks are becoming popular and what differentiates them from traditional and other banks.

Why are neobanks popular?

By the end of 2023, one out of three people in the UAE will have a neobank account. What’s behind this growing popularity?

For starters, neobanks offer a modern take on banking that appeals to many due to their convenience, speed, and flexibility. Being able to manage all your transactions from an app makes them adaptable to any lifestyle. There is no need to visit a branch or wait in line for hours to speak with a customer service representative when you have a neobank account; you can do all of your banking online.

Neobanks are also popular because they offer lower-to-zero account fees, competitive interest rates and a lot of additional features depending on the provider. The lower operating costs are the primary driver of this, allowing their customers to save money too. Plus, real-time notifications on spending can improve your budgeting habits.

How neobanks work?

So, we’ve given you a clear meaning of neobank, but how does it work? The basic features that define a neobank are its fully digital offering and its focus on single products. This means that most neobanks don’t offer as wide a range of financial services as traditional banks do. Instead, they pick out a market section and carve a niche for themselves.

Some neobanks focus on providing superior personal finance management tools, while others might concentrate on catering specifically to freelancers, expats, or other specific customer segments. Some are targeting businesses, and there is even more segmentation here with solutions tailored to specific industries, business sizes and markets. This selective offering allows neobanks to operate efficiently while uniquely addressing customers' specific needs.

Some examples of neobank services include:

  • High-yield savings accounts
  • Alternative credit-building solutions
  • Checking accounts
  • Financial education tools
  • Peer-to-peer money transfers
  • International transfers
  • Payment cards
  • Corporate expense management and more

The range of services offered is dictated by the type of license the neobank holds. Although some neobanks are registered as traditional banks, the majority of them hold electronic money or payment institution licenses.

Since most neobanks aren’t licensed banks, most of them in the UK collaborate with established high-street banks that are FSCS-insured to hold deposits. You can find equivalent schemes in other countries as well.

So, while you are using the slick neobank app, your funds are actually being held by a regular bank. As a result, in some cases, you still have the same £85,000 in FSCS insurance protection while in others – your money is protected through alternative FCA-approved means such as safeguarding, investing in low-risk liquid assets or insurance policy.

Pros and cons of neobanks

Knowing the advantages and disadvantages of neobanks can help you decide if they’re best for you.

pros and cons of neobanks table

How neobanks make money

One major difference between neobanks and traditional banks is how they generate revenue. This often comes down to cost structure and innovations in service delivery.

Due to their fully digital nature, neobanks have fewer expenses. Firstly, they don't have brick-and-mortar branches to maintain – this is where the majority of savings vs. banks come from. In addition, the application fees and initial capital requirements for registering a neobank are significantly lower. Neobanks frequently pass on these cost savings to their customers through lower fees and more benefits.

As to revenue streams, many neobanks make money through interchange fees, which are small percentages charged on every transaction made with their debit or credit cards. When customers use their cards, the merchant's bank pays these fees to the neobank.

Here's a breakdown of how neobanks make money:

  • Interchange Fees: For every debit or credit card transaction, neobanks earn a percentage.
  • Payment and FX Fees: Many neobanks earn commissions on transaction and exchange services.
  • Premium Features: Neobanks may charge for premium or additional services such as financial tool integrations, payroll services, higher spending limits and many more.
  • Account Fees: Some neobanks charge fees for account opening and management.
  • Loan Interests: If a neobank has a license that permits credit operations, then, just like any bank, money can be earned from interest on loans provided to customers.
  • Third-Party Partnerships: Neobanks often partner with other companies to offer services and collect commissions.

Examples of neobanks

Since neobanks don’t fall under strict regulations like traditional banks, we’ve seen many new entrants in the market. Here are some popular neobanks you may already know about or have used:

  1. Revolut: Founded in 2015 in the UK, Revolut is a global neobank offering services such as daily accounts, prepaid debit cards, currency exchange, and peer-to-peer payments. Revolut has a traditional banking license in the EU and an EMI license in the UK.
  2. Wise (formerly TransferWise): While Wise started primarily as a low-cost international money transfer service, it has since evolved to offer features commonly found in neobanks. With Wise's multi-currency account, you can hold and manage money in several different currencies. Wise has e-money licenses in most locations where their customers are based.
  3. MultiPass: In contrast to the previous solutions, MultiPass centers solely on business solutions. It is a UK-based, FCA-registered EMI offering dedicated corporate IBANs, local accounts in the UK, EU and US and additional money management services that help businesses streamline their operations with foreign suppliers, partners and clients in over 30 currencies.
  4. Curve: Curve is a UK-based fintech company that offers a platform which consolidates all your bank cards into a single smart card and app. It allows you to switch the bank card you paid with after each transaction is complete, giving you great flexibility and control over your finances. In addition, Curve offers instant notifications of your payments, zero foreign exchange fees when spending abroad, and cashback from selected retailers. Curve is registered as an EMI.

Benefits of neobanks: why make the switch?

There are lots of benefits involved with switching to a neobank, some of which we’ve covered. Here are the different advantages of a neobank compared to other banking options:

Neobanks vs. traditional banks

Compared to traditional banks, neobanks are often more agile, offering innovative banking features quickly in response to changing customer needs.

Challenger banks vs. neobanks

When compared to challenger banks, neobanks typically provide a more comprehensive suite of services.

Neobank vs. fintech

While a financial technology company may offer innovative solutions in a specific area, a neobank aims to replace your traditional bank by providing all the necessary online banking services on one platform.

Digital bank vs. neobank

Digital banks are often just digital arms of existing banks. Neobanks, conversely, are typically stand-alone start-ups, free from the constraints of outdated technology that can slow innovation and implementation of new services and features.

Conclusion

No matter the technical differences between these terms, in day-to-day life most people use them interchangeably when referring to financial institutions with a digital-first focus.

Switching to a neobank can offer a host of benefits that make them an attractive choice, particularly for businesses. For example, at MultiPass we focus on helping businesses reduce the costs of international payments, and we're good at it! Whether you need to pay office rent locally in GBP and EUR, purchase a stock of goods in China for CNY or collect money from your American customers in USD quickly and for a low fee, you can do it easily with a single MultiPass account. All this while enjoying professional branch-like personal support over the phone or online. To identify your cost-saving opportunities with MultiPass, contact us today for a free consultation or apply for an account, and we'll reach out to you.

Not sure if a neobank is the right choice for your business?

Apply for a free consultation with MultiPass banking specialists!