What is a neobank? How does it differ from traditional banks?

What does neobank mean? It’s a new classification that is more general than hardline, although most people have some idea of which banking solutions are ‘neo’ or traditional. Let’s define the term, compare with traditional banks and give some examples.

Neobank definition

Neobank literally means “new bank”, derived from the Greek word νεος (neos) meaning “new”. It is an umbrella term for the new generation of cutting-edge, fully digital banking services aiming to be more accessible than traditional banks.

The range of offerings by neobanks varies, as does the level of licensing and limitations.

But they all operate online or through apps, so neobanks are classed as a type of financial technology (fintech) solution.

Typical neobank services include current accounts, mobile apps, payment cards, money transfers, loans, savings accounts, analytics to improve spending behaviours, among many other financial services similar to – or in extension of – traditional banking services.

Neobanks appeal to the technologically savvy, typically young or unbanked populations who would benefit from low-entry financial solutions in place of the more bureaucratic, established banks.

Neobank vs. traditional bank

Neobanks fundamentally try to be different from traditional banks, usually to be more convenient for those deterred by the long-established banks dominating the high street. That is why neobanks are also referred to as ‘challenger banks’.

By and large, traditional and neobanks have the following differences.

A neobank is also classified as a type of direct bank, meaning it is fully digital through the internet (online banking) and/or a mobile app. This is in contrast to the decades-old traditional banks with physical bank branches in the countries they’re based in, although most established banks also have online banking options today.

Customer support is usually more personal with traditional banks, which can mean slower. For instance, a mortgage application may require in-branch meetings in your local bank as well as a lot of paperwork and submissions of proof and documentation, plus thorough checks of your account.

Neobanks bypass laborious applications through quick sign-up forms and automatic checks of credit history, identity and more, not requiring personal contact with anyone to get approval for a loan, overdraft or account creation.

While all traditional banks have full bank licences, licensing is a bit of a mixed bag for neobanks. The type of licence (or lack thereof) determines what services the neobank provides themselves or through other banks, and the level of protection for your savings. Some neobanks may, for example, not have deposit insurance, or provide enough consumer protection if a payment dispute happens.

Neobanks are usually cheaper, with no monthly costs. Pricing is shown and simplified upfront so you don’t have to worry about hidden fees. Traditional banks can charge many different fees that can seem invisible on a bank statement, with monthly fees for certain account types. That said, traditional banks have a wide range of services and account types, personalised for your financial position and needs.

Neobank examples

Although many neobanks look the same with their flashy marketing and fintech angle on money management, there are crucial differences dependent on their licensing structure. Let us define some popular types with examples of each.

With own bank licence: Many of the popular neobanks have their own bank licence, whether specialised or full-range. With the right licence, they can provide their own current accounts, prepaid, debit or credit cards, currency exchanges, cryptocurrencies, money transfers, peer-to-peer payments, savings accounts and loans.

• Examples: Monzo, N26, Revolut, Starling Bank, Atom Bank

Without bank licence: Neobanks that offer financial services, but under other banks’ licences. Customers may already have an account at another bank, which is linked to the neobank service providing their own interface and unique tools to your bank account activities. Tools could be transaction analytics, budget management and automated prompts to help you reach financial goals. Other neobanks may also use a partner bank’s (parent company) licence to provide their financial products.

• Examples: Yolt, Simple, Chime Bank

With alternative licences: Companies that meet the criteria of bank-licensed services, but with alternative licensing e.g. for providing e-money services. Such companies may offer accounts that act like bank accounts, but with limitations that set them apart from full-fledged bank accounts.

• Examples: Monese, PayPal

Beta banks: Subsidiary financial services of a larger, established bank that wants to reach more customers or develop new products under a different brand. Beta banks can provide their offerings under the parent bank’s licence and expand to other countries under licences of partner banks. Services may be limited initially and expand as popularity grows.

• Example: Mettle, Sperbank Direct