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What Is Neobanking and How Does It Work?

What Is Neobanking and How Does It Work?

Published on: 07 Feb 2024 9 min read

Traditional banking institutions have faced increasing challenges in the past years. This is especially true in terms of meeting the demands of tech-savvy customers. The need for fast, convenient and more cost-effective banking is what led to the emergence of challengers.

What Is Neobanking and How Does It Work?

The short answer to what is a neobank? A company that offers digital banking services whose online-only approach is disrupting the financial industry. The emphasis on seamless user experience and innovation makes these FinTechs a true financial force. In this blog post, we will dive into why neobanking is becoming an increasingly viable alternative to traditional banking.

What is a Neobank: Definition

Neobanks are financial technology companies that provide banking services primarily through mobile apps and online platforms. Neobanks operate without physical branch networks, unlike traditional banks. This allows them to deliver user-friendly digital banking experiences. Some of the more popular products and services they offer are checking and savings accounts, payments, loans, and investments.

The term ‘challenger’ emerged as a way to illustrate how neobanks challenge the reign of traditional banks. They offer low fees, personalized customer experience and in-demand features. Neobanks don’t usually hold banking licenses, instead, they partner with incumbents. They do this to secure deposits and have a better regulatory infrastructure while remaining agile.

Infographic illustrating the definition of a neobank as opposed to traditional banks and digital banks.

How Does Neobanking Work?

What sets neobanks apart from their traditional counterparts is the first’s unique business model and financial products. Also, their value propositions are highly customer-centric. Let’s dive into the details of what makes them a mighty competitor.

1. Seamless digital experience

One of the primary benefits of neobanks is the seamless digital experience they offer. Their mobile apps allow customers to open bank accounts, get a credit card, and send and receive payments without the need to visit a branch. They manage a wide range of transactions with only a few clicks on their smartphones. There is practically no need for paperwork as the smooth onboarding process doesn’t require it.

2. Lower fees and competitive rates

Neobanks have a customer-centric approach. They typically offer lower fees and higher interest rates compared to traditional banks. By operating digitally, they can eliminate many of the overhead expenses associated with maintaining a physical location. Cost savings translate to smaller or no overdraft fees and better interest rates on deposits. This in turn offers better conditions to customers interested in minimizing expenses and maximizing savings.

3. Enhanced financial management tools

Neobanks go beyond basic banking services by providing users with advanced financial management tools and features. Users can stay on top of their spending, get real-time notifications, and set financial goals. Additionally, they can learn details about their payment and budgeting habits. In this way, customers can make better money management decisions and have a clearer understanding of their finances. 

4. Personalized customer support

While neobanks may lack physical branches, they prioritize customer support and provide personalized assistance through various other channels. Many of them offer responsive customer service through in-app chat, email, or phone support.

This enables them to resolve customer issues whenever they need guidance or support. To provide the best customer experience, neobanks also use automation and AI. This way they can speed up the process and add an extra level of efficiency.

5. Innovative partnerships and integrations

Neobanks often form strategic partnerships and integrations with other fintech companies. This allows them to expand their service offerings and provide a comprehensive financial ecosystem. Neobanks work with investment platforms to enable their customers to access investment opportunities and diversify their portfolios. Such collaborations allow users to manage their finances through a single platform without different accounts or logins.

6. Focus on financial inclusion

Another notable aspect of neobanking is its emphasis on financial inclusion. By leveraging technology and offering accessible digital solutions, they aim to reach underserved populations that may have limited access to traditional banking services. Local restrictions, bad credit, and insufficient documentation often prevent people from receiving adequate financial services. Neobanks are an excellent alternative for this segment of the population.

Neobanking vs. Traditional Banking: A Comparison

After going over the main characteristics of neobanks, let’s put them up against their traditional counterparts. Our team has analyzed the pros and cons of each:

A breakdown of the advantages and disadvantages offered by neobanking

An overview of the advantages and limitations of traditional banks

Both online banking and traditional banking have their own strengths and weaknesses. The choice between them ultimately depends on individual preferences and banking needs. Neobanks are a good choice for people who are interested in lower fees, increased convenience and better digital experiences. In comparison, traditional banks have more comprehensive offerings and physical branches for users who prefer in-person assistance.

The Future of Neobanking

Evolving customer expectations and advancements in technology led to the rise of neobanking. This caused a significant shift in finance. It is one of the most fast changing sectors and neobanks are already playing a significant role in shaping that change. Below we talk about some of the main trends that will in turn shape neobanking:

1. Global expansion

Neobanks have gained significant traction across different regions, with both established players and new entrants vying for market share. Neobanks started in the U.S. and Europe but have now expanded to all parts of the world. The demand for innovation in financial services, as well as better internet and smartphone penetration, allowed this global adoption.

2. Regulatory challenges and partnerships

As neobanks continue to disrupt the banking landscape, regulatory authorities are trying to adapt existing frameworks to accommodate these innovative fintech firms. One of the main challenges regulators struggle with is balancing between innovation and ensuring top-tier security for users. To tackle this, neobanks often partner with licensed banks. This is how they manage to provide insured deposit accounts while complying with regulatory requirements.

3. Integration of artificial intelligence and automation

Artificial intelligence (AI) and automation are enabling personalized and intelligent financial services. AI-powered chatbots and virtual assistants are the main tools neobanks use to improve customer interactions and resolve issues. They help them provide efficient support to customers in addition to more personalized financial recommendations. Automation is also instrumental in cutting costs and streamlining back-end operations.

4. Expansion into niche markets and verticals

Neobanks are increasingly targeting niche markets and specific customer segments to set themselves apart and offer tailored financial solutions. These specific demographic groups include small businesses, freelancers, individuals with поор or no credit history.  Neobanks specialize in identifying and serving the needs of markets that are of no particular interest to incumbents.

5. Collaboration with traditional banks

In some cases, neobanks and traditional banks are collaborating to leverage each other’s strengths and deliver hybrid banking experiences. Neobanks offer a variety of digital capabilities and their agility can greatly benefit traditional banks.

At the same time, traditional banks have better infrastructure and greater regulatory expertise. The collaboration benefits them in different ways. On the one hand, incumbents gain access to innovative digital products. On the other hand, their more flexible counterparts can serve a broader customer base.

A Venn diagram of the strengths that traditional banks and neobanks share


Neobanking is a disruptive force in the financial industry, changing the way individuals and businesses manage their finances. Their digital-first approach, lower fees, and advanced financial management tools make neobanks an attractive alternative to traditional banking. Switching may seem the obvious choice, but one must consider personal preferences, financial needs and the limitations of neobanks.

The neobanking landscape is rapidly evolving and we are seeing constant market expansion, regulatory changes and unprecedented innovation. This has already led to a shift in financial inclusion and improved customer experience. Deciding which financial institution to go with boils down to your financial goals and who best aligns with them.

About the Author:

Velina has been writing in one way or another most of her life. In 2020, she took a leap of faith and left advertising to explore the unlimited potential of the technology world. She is interested in topics such as FinTech, Digital and Neobanking, Payments, and Embedded Finance among others. Outside of technical writing, she enjoys vegan food, films, and creative storytelling.

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