How Neobanks Are Challenging Traditional Banking
Making banking more modern and meaningful
You might not know what a neobank refers to, and that may be because it is a relatively newer type of banking model. Known sometimes as challenger banks, neobanks are offered exclusively on digital platforms, although not entirely synonymous with a digital bank.
Since the term “neobank” is used sparingly, it’s probably tied to its infancy as an industry; but can users eventually switch to these newer banks? Let’s understand neobanking and then look at a game-changer, Zolve ranked in the EDGE100.
What's different about a neobank?
Not to provide a comprehensive comparison but broadly, legacy banks differ from neobanks in their approach, execution, fee structures, and sometimes orientation.
The Economic Times positions neobanks as banking services that meet newer demands, adapt efficiently to modern pain points, and offer services that legacy banking has long overlooked.
Typically, traditional banks offer standardized banking products under a “one size fits all” model to a wide audience with little customization. In contrast, though some neobanks target a wide audience of consumers, others tend to target consumers with specific interests and needs. So, neobanks are more likely to be customer-focused and provide services that address the needs of underserved demographics like low-income groups. For instance, a neobank like Daylight, which serves the LGBT community, allows customers to create new accounts using their preferred name (as opposed to their legal form of identification), helping transgender and nonbinary individuals create bank accounts, without needing to change legal documents.
Neobanks also tend to have a lower cost base than traditional banks as they don’t have brick-and-mortar or facility-linked fixed overheads. Since processes like creating and maintaining accounts are entirely digitized, unlike traditional banks that rely heavily on paperwork, neobanks offer a quick and easy way for consumers to create accounts and access banking facilities. These advantages come into play, especially when attracting tech-savvy younger demographics such as millennials and Gen Z.
The push and pull factors that propel neobanks range from regulatory forces like open banking enabling third-party platforms (TPP) to access financial information, nudged by regulations like the EU Payment Services Directive (PSD2), which specifically targets the payment landscape and promotes new online and mobile channels usage through open banking mechanisms, to factors like minimal fee structures.
You can explore the ins and outs of the neobanking industry through our hub.
However, the game-changing banking style is not without risk. Trust and security are still chief concerns. In July 2020, Nubank faced a data breach that resulted in the exposure of sensitive customer data. Additionally, without a comprehensive product suite, such as savings accounts, credit cards, loans, or mortgages, neobanks find it difficult to compete with traditional banks, as customers would still need to rely on incumbent banks to gain access to any additional products.
We can’t, however, ignore how neobanks are becoming more popular as awareness increases and benefits seem more appealing.
In the recent EDGE100 report, two neobanks are featured in the top 100 promising startups. Greenwood caters specifically to African American and Latino Customers, and Zolve enables cross-border banking. Let’s take a quick look at how one of these players challenges traditional banking.
Zolve is based in San Francisco and Bangalore. The company’s origins are rooted in everyday difficulties for migrant communities; some as simple as not being able to pay for a meal using a credit card! The CEO of Zolve recognized that twenty million migrants travel across the world to different countries, and a lot of cross-border activity happens, but cross-border payments haven’t been innovated to capture this massive market. Today, Zolve is a cross-border neobank that provides incoming immigrants to the US with bank accounts via a web portal and a mobile app.
Seeing that the migrant community faces many struggles, such as in securing social credit scores to apply for basic banking services, the company provides high-limit credit cards (up to USD 10,000), and debit cards based on their home country credit score, without needing social security numbers or US credit history. The app also facilitates direct deposits and mobile payments.
The service also doesn’t charge upfront fees, such as application fees, credit card fees, or monthly bank account fees, and doesn’t impose minimum balance requirements. The company’s credit card offering also provides cashback rewards of up to 10% at over 10,000 merchants.
Zolve’s work goes to show that for years banking has focused on dominant communities while major minorities’ needs have gone unmet. Today, it is a successful disruptor that focused on solving a common pain point within a demographic, and its sensitized perspective, in problem-solving and in seizing opportunities, has shown results.
By October 2021, Zolve stated that it had a customer base of over 70,000 from countries like Australia, Canada, Germany, India, and the UK. In October 2021, the company raised USD 40 million in Series A funding, led by DST Global, at a valuation of USD 210 million.
To compare Zolve with other disruptive companies, see our competitive analysis modules.
When traditional banking is simplified, digitized, sensitive to nuanced needs, and bridges gaps, such as under-addressed markets, it describes what a neobank does and aims to do, to a degree. Leveraging digital tech and a better understanding of customer pain points make neobanks more inclusive. They are indeed challenging the ‘way things are done.’ So, we’re fairly optimistic in our stance about neobanks because, for a long time, banking was accessible to a privileged few and neobanks are challenging norms so that everyone gets a seat at the table.
To get a comprehensive understanding of the business models, approach variations, and segments within the neobanking industry, as well as how fintech fits into the ecosystem, explore our industry hub or book a demo to chat with our team!