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Neobanks are helping many entrepreneurs both in Singapore and around the world manage their finances. Although traditional banks remain the dominant players in the industry, many people have chosen neobanks for their banking services instead, leading us to ask:
Are neobanks the future of banking?
In this article, we address this question as other relevant ones. We define neobanks, discuss their advantages and disadvantages, and compare the differences between traditional banking and neobanking.
What is a Neobank?
Neobanks are financial technology firms that provide online-only financial services. They do not have physical branches, and customers therefore manage their finances through the website and/or app.
What are the Key Differences between Neobanking and Traditional Banking?
Most neobanks rent their bank licenses from big banks because the cost of becoming licensed is too high and the process too bureaucratic, given the small size of neobanks. Traditional banks, on the other hand, are fully licensed and chartered.
Another difference can be found in the ease of onboarding. Signing up for a neobank is incredibly easy and can be completed in a few minutes through the app or website. Becoming a customer at a traditional bank takes longer and often requires you to submit lots of paperwork.
Lastly, traditional banks use a combination of physical branches and online services. In contrast, neobanks are completely digital, which means that you can manage all your finances from your smartphone or computer, making this ideal for today’s tech-savvy customers.
What’s Behind the Popularity of Neobanking?
It is easy to see why neobanks have attracted so many new customers and given traditional banks a run for their money (pun intended).
First, given that they are technology-first companies, the technology on neobanks’ apps is of the very highest quality. Their use of artificial intelligence (AI) and cloud analytics allows them to offer more superior products and customer experience than those of traditional banks. If you are tech-literate and prefer to use apps rather than deal with people, it makes sense to switch to a neobank.
Another advantage is that since they are not chartered banks, they are subject to fewer regulations. This makes them nimbler, reduces their credit risk, and allows them to keep their costs low. They then pass these savings on to customers through low-fees and even free products at times.
Lastly, neobanks tend to offer higher interest rates on their accounts than traditional banks do. This is because they have lower overhead costs than big banks do (i.e. rental costs), thus giving them the financial flexibility to offer their customers more competitive rates.
What are the Downsides of Neobanking?
Neobanks can be frustrating for people who are not very tech literate. If you do not have the patience to keep up with the latest tech trends, neobanks are probably not for you.
Secondly, because neobanks are not fully chartered or licensed, you might not have legal remedies or official protocols to help you if you have problems with the app, their services, or non-regulated third-party service providers. This can get especially risky if your selected neobank runs into financial trouble, and it is thus highly important that you research your neobank’s security protocols to ensure that your money will be insured.
Third, if you need business loans, neobanks are unlikely to give you what you need. While this is slowly changing, neobanks do not offer large business loans to their clients, which means that you will have to go to a traditional bank to obtain such financing. Additionally, if you often find yourself carrying out complex financial transactions, it may be easier to go to a physical banking branch to do so.
Are Neobanks the Future of Banking?
Based on current trends, neobanks are very well-positioned to become industry leaders in banking. The future of our society is one in which technology will be present in almost all aspects of our lives. This means that businesses that place technology at the centre of their product offerings will likely become dominant players in their respective industries.
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