Normal banking as we know it may bring to mind brick-and-mortar, ATMs, and huge chunks of paperwork. Yet a new harvest of non-bank fintech startups, known as neobanks, are fighting these stereotypes in the shape of digital-first—often, digital-only—banking outlets that pledge to new seamless online experiences and low fee services and at times no fees at all. But what are neobanks?
Here we have a rundown of some of today’s most famous neobanks, how their business models work, and what you may want to think before making the switch to them.
Neobanks, at times referred to as “challenger banks,” are fintech companies that created apps, software, and other tech to facilitate mobile and online banking. These fintechs typically specialize in certain financial products, checking, and savings accounts for example. They also grow to be more agile and transparent than their huge bank counterparts, even though many of them join forces with such organizations to guarantee their financial yields.
In the United States, these fintechs are more generally referred to as neobanks. The term “challenger bank” was first made famous in the U.K. to direct to a number of fintech banking startups that occurred in the wake of the 2007-2009 economic crisis.
These companies are at times compared to digital disruptors in other enterprises. Today, these fintechs are changing the banking sector in the same way as Airbnb changed and transformed the hospitality industry, or Uber and Lyft changed the transportation industry as we know it. In the States, some huge-name neobanks are attracting clients in huge numbers. In February 2021, it was calculated that Chime had 12 million customers, up from eight million the year before.
In December 2020, Exton Consulting which is a strategy and management company for the financial services sector and the company is based in Paris, France, found there were 256 neobanks all over the world.
Neobanks normally use a distinct business model from incumbent banking organizations. They make huge part money of their revenue from interchange—fees paid by retailers when clients buy goods using their debit cards. Smaller organizations, neobanks are qualified to interchange rates up to seven times higher than those obtainable to banks with more than $10 billion in investments.
There’s also some debate about how much money challenger banks earn from customers utilizing out-of-network ATMs. When looking at Chime’s source of income in a current article, Axios pointed out this amount may be “huge”—upwards of 20%. In response to the report, Chime said this source of revenue only includes a “small percentage” of overall company revenue and repeated that they deliver 38,000 fee-free ATMs nationwide.
Venture capitalists have been investing money into neobanks for the last 10 years. In 2020, Chime received $485 million in Series F funding, causing its valuation to grow to $14.5 billion. Earlier this year, Varo increased $63 million, and now has total funding to more than $482 million in less than four years since its release.
This is not applied to all challenger banks and their success stories, and some people even ask the question of those very high valuations. The pandemic and its effect on consumer spending did a number of such banks, especially European darlings like Monzo. Australian neobank Xinja closed last year, mentioning the Covid-19 crisis and difficulties in getting capital.
In the United States, BBVA recently declared that two of its challenger bank purchases were shuttering: Simple, which was established in 2009, and Azlo, a fee-free bank for little businesses. The assumption is that PNC Bank, which is in the between of buying BBVA USA, hopes to bring Simple and Azlo clients back to its own core givings. The “strategic decision” demonstrates the nature of some neobanks’ courses for long-term development.