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In many countries, the banking sector is under the monopoly of traditional banks. This stranglehold is gradually easing due to the influence of neobanks and challenger banks.
Therefore, new modernization efforts by traditional banks include releasing mobile banking applications to enable customers to access banking services at all times.
However, traditional banks understand the threat that neobanks represent.
These 100 percent digital banks are leveraging the power of artificial intelligence, also known as AI, to offer personalized banking services to individuals.
Neobanks are not brick-and-mortar operations but rely on digital technologies to deliver app-based banking experiences. Ultimately, the customer enjoys a new, efficient, and modern way to bank.
So, what are “neobanks?”
We need to acknowledge that they are banks in many senses of the word. They can keep your money, lend you money, and receive interest repayments. But, neobanks have no physical operations; they are wholly online.
Neobanks have no connections with traditional bank entities, and they have no branch operations to attend to customer issues. Now, that’s an interesting model.
The foundations of every neobank are new technology, as they depend on platforms that allow integration with artificial intelligence. These banks are then able to offer customized apps and personal banking experiences. Consequently, they continue to win over vast swaths of the consumer market.
The current pandemic has helped neobanks gain even more ground; their infrastructure has proved suitable for a crisis like this.
How Challengers Became an Indispensable Force in Banking
1995 was the year when Security First Network Bank became available to customers in the US. RBC bought the bank three years later. The technology operations of the bank became S1 Corporation that ACI eventually bought. Such were the humble beginnings of challenger banks.
More neobanks now exist than ever, and they’ve mostly disrupted the traditional banking industry. They primarily offer convenient online services, including consumer loans, credit and debit cards, deposits, payments, point-of-sale financing, and a few aggregated services.
Since many financial service providers offer these products or services as their sole offerings, one might expect them to improve their market share horizontally eventually. Thus, credit cards could add consumer loans, deposit accounts add loans, or lenders add deposit accounts. The trend then is that these banks are increasingly assuming more traditional banking roles without running any branches.
Note that neobanks are not necessarily fully licensed banks. However, they may have alternative licenses or partner with licensed institutions to deliver their services to customers. Monese (UK), Neat (Hong Kong), and Simple (US) are examples of neobanks.
Another Look at Traditional Banks
A traditional bank is a physical banking establishment.
Some aspects of their operations are digital, but they have a physical presence that customers may choose to experience. They often have a long history of at least several decades. For the most part, clients trust them.
In a push to modernize, traditional banks now birth neobank subsidiaries, giving the neobank some trust index to build upon.
Traditional Banks Are Traditionally Slow to Meet Evolving Customer Needs
While traditional banks are increasingly adding new features and services, they’re not as agile at responding to customers’ changing needs.
Even when these banks offer digital experiences such as mobile apps, something feels off. The platform experience often mirrors the monolithic operations at physical branches. They find it difficult to harness the immense power of smartphones and internet connectivity.
The sheer inability of traditional banks to innovate at the pace of neobanks puts them at a sore disadvantage. Yet, their history gives pointers as to why this is so. Throughout their history, these really big banks have primarily functioned within oligopolistic structures where they could easily crush small-time competition. However, technology seems to be the great equalizer.
Consistent innovation endears neobanks to customers, but other critical factors ensure customer preference for traditional banks. One of such is the unethical behavior of the biggest traditional banks.
The slew of scandals over the decades keeps customers wary of these behemoths. Besides, they are adept at finding loopholes in regulations to sustain their profit model.
The World Economic Forum reports that over 45 percent of respondents disagree that they trust their banks to be fair and honest. These customers are only happy to embrace the more transparent neobanks as alternative banking platforms.
Crystallizing the Differences Between Neobanks and Traditional Banks
Here are a few more differences that neobanks and traditional banks share:
- Unlike conventional banks, neobanks are convenient for the customer and the operators.
- Neobanks do not maintain physical offices, so they incur zero real estate costs. Customers benefit from this as lower interest rates on loans.
- There are fewer bottlenecks when dealing with neobanks. Customers can get faster loan approvals, for instance.
- Neobanks thrive on a digital-first environment featuring an intuitive interface, sitting on modern APIs. The best traditional banks only use bits and pieces of these platforms.
- Neobanks have highly automated and scalable systems. Open infrastructures ensure the company can extend the basic banking platform to deliver creative banking solutions.
With market share at stake, traditional banks are right to be jittery over the unrelenting surge of neobanks. It’s not to say, however, that neobanks will overtake traditional banks just yet. It does mean, though, that traditional banks need to rejig their business model to be primarily digital instead of treating digital as an add-on or secondary option.