Neobanking is a new trend in the financial technology world, which has exploded in popularity amid the COVID-19 pandemic. To ensure their safety, people started looking for ways to buy things and pay for services remotely. And neobanks have become an excellent answer to this challenge.
Digital banks do not use branches for customer service, they are available exclusively through gadgets (mobile phones, computers). And if you want to know what are the prospects for this type of financial service, you are in the right place. In this article, we will tell you how to create a digital bank and what the future holds for neobanks.
Table of Contents
- 1 What is Neo Banking?
- 2 How Do Neobanks Work?
- 3 Neobanks vs Traditional Banks
- 4 Market Overview
- 5 Main Players on the Market
- 6 The Key Features of Neobanks
- 7 How do Neobanks Make Money?
- 8 How to Build a Digital Bank from Scratch?
- 9 Required Technologies for Neobank App Development
- 10 How Much Does It Cost to Start a Digital Bank?
- 11 Bottom Line
What is Neo Banking?
Neobanks make money by offering their clients various convenient digital services such as checking accounts, consulting on expenses, and sometimes even calculating payroll; startups like to use neobanks just for this. Since they don’t have a physical presence that requires paying rent or mortgages, and things like the salary of a cashier or security guard, they can charge much lower fees.
However, there is a small catch: Neobank may not be a licensed bank. Unless they do business with a traditional bank or are not an applicant bank, they cannot offer loans, loans, or even FDIC deposit insurance.
How Do Neobanks Work?
The first thing to consider is that neo-banking should not be mixed up with digital banking. Both are similar in that they are banking services that work through mobile phones and other devices and use technological solutions to reduce expenses. But that’s where the similarities end. There is a clear distinction between the way neobanks are built and what they offer: a simpler, more intuitive, and nicer user interface.
When it comes to operating models, neobanks can follow one of three approaches:
- Unlicensed fintech companies that partner with traditional banks and provide a mobile/web interface and shell for their partner banks’ products.
- Traditional banks with their digital initiatives.
- Licensed neobanks exist as independent entities without being associated with traditional banks. It happens with digital banking licenses in countries where it is allowed.
While some neobanks hold banking licenses, most of them partner with traditional banks instead of obtaining their banking license. In this operating model, the banking partner provides a common platform for managing user accounts, storing user funds, and rails for interbank payments and settlements.
Frequently Asked Questions
Questions you may still have
What is neobank?
Neobank is a digital bank with no physical branches, accessible entirely through a mobile app and online banking. Neobanks allows customers to directly manage their finances, order new products and receive 24/7 support with just a few taps, no matter where they are.
How to prevent the failure of a neobank?
To be profitable, neobanks need to find a way to stay ahead by continuing to innovate. They need to continually identify, create, and implement new features that customers need. The technical infrastructure must continue to provide a platform that truly supports scalability and innovation, and stay away from legacy technology challenges that have hampered the development of traditional banks.
What should be considered before opening a digital bank?
It is difficult to overestimate the importance of technology for a digital bank. Starting from scratch requires significant investment and a lot of uncertainty, but provides unmatched control and flexibility over the platform. The partnership with an experienced technology provider offers a ready-made foundation for creating financial products and services without the need for large capital investments.
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