Neobanks vs Traditional Banks: Guided Comparison

In today's digital world, banking is more than just a location to save and withdraw money. With the advancement of technology, new types of banks have emerged, offering unique features and services in addition to those provided by traditional banks.

 

These banks are known as neobanks or challenger banks. However, with so many choices accessible, it can be difficult to distinguish between these banks and regular banks.

 

What is a Neobank?

 

Neobanks, often known as "challenger banks," are fintech companies that provide applications, software, and other technologies to improve mobile and online banking. These fintech companies typically specialise on specific financial products, such as checking and savings accounts. They are also more agile and transparent than their megabank competitors, despite the fact that many of them work with such institutions to insure their financial products.

 

In the United States, these fintechs are usually referred to as neobanks. The term "challenger bank" was initially used in the United Kingdom to describe a group of fintech banking firms that arose in the aftermath of the 2007-2009 financial crisis.

 

Neobanks are mostly online-only banking platforms with no branches, although they should not be confused with online banks. Online banks typically have a bank charter and offer a greater range of services to their consumers, including loans. Ally Bank, for example, is classified as an online bank.

 

Neobanks collaborate with Chartered Banks to provide deposit accounts, loans, and other financial services. Unlike traditional banks and credit unions, which may have both digital and physical branches, neobanks only provide services and goods online or via a mobile app.

 

Neobanks often operate differently than traditional financial institutions. They generate a significant portion of their revenue through interchange fees, which merchants pay when clients use their debit card to make purchases. As smaller organisations, neobanks can have interchange percentages up to seven times greater than banks with more than $10 billion in assets.

 

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What are Traditional Banks?

 

Traditional banking refers to banks that provide conventional financial services such as savings accounts, checking accounts, loans, and so on. These banks have physical branches, an ATM network, and a long history spanning decades or even centuries. J.P. Morgan, Wells Fargo, and Santander are among the most well-known names in traditional banking.

 

A bank's traditional revenue model is to charge transaction fees for financial services and interest on loans. With historically low interest rates restricting banks' capacity to earn money by lending deposited funds, overdraft fees and risky investments have been a key source of income in recent years.

 

Most states and territories control banking, and banks are required to acquire permission to trade. Bank regulatory bodies give trading authorisation, which allows banks to perform basic banking activities such as collecting deposits and providing loans.

 

Traditional banks are those that have a physical location and a domestic banking licence. To open an account, you must visit the bank's physical facility. Although some traditional banks will let you open an account online, you may still need to come in to verify your identity or submit papers.

 

While traditional banking has advanced to the point where you can conduct the majority of your transactions online or using a smartphone app, you will almost probably need to visit your local branch at some time. While some people prefer to communicate with a real person when necessary, others find it inconvenient.

 

Key Differentiating factors between Neobanks and Traditional Banks

 

Neobanks and regular banks are like two sides of the same coin. Although they are connected, they differ. Listed below are the key differences.

 

1. Banking licence

 

While all financial organisations are regulated, not all hold banking licences. Unlike regular banks, most neobanks do not hold banking licences. Those that do may hold speciality, partial, or full-range licences. As a result, neobanks are not strictly speaking banks.

 

Traditional banks, on the other hand, have the necessary licensing to function as conventional banks. This results in increased restrictions, limitations, and services.

 

2. Quality of services. 

 

Another distinction between neobanks and regular banks is the breadth and quality of their services. Traditional banks offer a wide range of financial goods and services to meet the diverse demands and preferences of its customers. 

 

Neobanks provide a more limited but specialised collection of financial goods and services that solve market pain points or shortages. They combine cutting-edge technology and data analytics to deliver seamless, personalised user experiences that please their customers. 

 

3. Physical Presence

 

Neobanks do not have physical offices like traditional banks because they are based on the concept of resource management. They avoid spending money on brick-and-mortar stores and instead invest in talent and new products.

 

Traditional banks, on the other hand, have physical locations in various places. Their physical presence enables them to establish trust and quality relationships with their clients.

 

4. Range of Services

 

Generally, conventional banks provide a wide range of services. They offer physical debit and credit cards, cheque books, ATMs, and other services in addition to remittances. Eight out of ten traditional banks offer similar broad-based services.

 

However, neobanks provide fewer and perhaps inconsistent services. This implies that some provide more (or differently) than others. However, despite the fact that commercial banks have more offerings, neobanks provide many of these services on a larger scale.

 

5. Services

 

Another distinction between neobanks and regular banks is the breadth and quality of their services. Traditional banks offer a wide range of financial goods and services to meet the diverse demands and preferences of its customers. They also have access to enormous amounts of money and liquidity, allowing them to offer more credit and funding choices to their customers.

 

Neobanks provide a more limited but specialised collection of financial goods and services that solve market pain points or shortages. They combine cutting-edge technology and data analytics to deliver seamless, personalised user experiences that please their customers. They also use cloud computing, open banking, and blockchain to speed up transactions, reduce costs, and increase transparency.

 

6. Affordability

 

In all aspects, neobanks are less expensive than regular banks. They do not charge a cost to start an account, rarely charge fees for maintenance, and let you to withdraw all of your assets with no minimum amount. They also provide better interest rates on savings and no hidden fees.

 

However, traditional banks are more expensive. They frequently charge fees for nearly all activities, including maintenance. They sometimes fail to disclose some prices to new consumers.

 

Summary

 

To summarise, neobanks are disrupting the banking business by providing greater convenience, lower fees, better customer service, and more creative features than traditional banks. However, neobanks confront other obstacles, including regulatory uncertainty, profitability issues, client loyalty, and cybersecurity dangers. Neobanks may not completely replace traditional banks, but they will compel them to adapt and improve their digital offerings and customer experience in order to remain competitive in the marketplace. The coexistence and collaboration of traditional and neobanks will influence the future of banking.

 

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