Everything You Need to Know About Neobanks
When you think about traditional banking, you will probably visualise men and women in perfectly tailored suits working in a skyscraper in your city’s downtown area.
However, traditional banking has recently been challenged by neobanks -- a rising newcomer that looks nothing like the old school model of traditional banking. In this article, we will explain what neobanks are, how they work, and their advantages and disadvantages. In addition, we, share some examples of Singapore based neobanking companies that you can engage.
What Is a Neobank?
Neobanks are financial institutions that offer online-only financial services, often referred to as “digital banks” or “financial technology firms”. Neobanks do not have any physical branches and generally operate through a website, smartphone application, or both.
How Do Neobanks Work?
In addition to bank accounts, traditional banks offer a variety of consumer banking services ranging from loans and wealth management to investment accounts and credit card services, among many others. On the contrary, neobanks target very niche markets with their products. Most of them offer no more than the basics: checking and savings accounts, payment and money transfer services, and sometimes even financial education tools (e.g. budgeting assistance).
Neobanks earn most of their revenue from interchange fees that merchants pay them when customers make purchases with their debit cards. Since they are smaller organisations, neobanks are allowed far higher interchange percentages than the big banks, which is why these fees become significant revenue drivers for them.
The key factor that distinguishes neobanks from traditional banks is that few of them are chartered banks. The process of becoming a fully licensed bank is extremely rigorous, which is why neobanks generally partner with traditional banks instead to insure their products.
What Are the Advantages of Neobanking?
· They have lower fees than traditional banks because they are not chartered, are fully online, and do not have physical branches. They are hence able to pass these cost savings on to consumers.
· Creating an account is easy. Given that neobanks operate entirely online, you can set up an account in minutes through an app or website. There is no paperwork involved and you do not have to visit a physical office.
· They are convenient. You can deposit checks, make peer-to-peer payments, and manage your finances entirely from your computer or smartphone.
· International payments tend to be cheaper. Since the Internet has a global reach, processing and conducting international payments tend to be cheaper with neobanks.
What Are the Disadvantages of Neobanking?
· You have to be a very tech-savvy user. If you do not enjoy doing everything from your smartphone or computer, a neobank might not be suitable for you.
· The lack of physical branches is both an advantage and a disadvantage. It is an advantage because it allows neobanks to offer cheaper products and lower rates. However, it becomes a disadvantage because many customers prefer to speak to someone in person when conducting complex transactions.
· They’ are less regulated than traditional banks. This means that you might not have any legal recourse if there ’is a problem with any of their services or non-regulated third-party service providers. Before becoming a customer of a neobank, always confirm that they have deposit insurance that protects your money in case the bank runs into financial trouble.
· They have fewer services than traditional banks. If you need a wider range of services such as credit cards, wealth management, retirement funds, and similar services, you will still have to go to a traditional bank or hire a financial advisor.
Now let’s discuss the three biggest neobanks in Singapore.
Wise (i.e. Transferwise)
Previously known as Transferwise, Wise is one of the biggest neobanks not just in Singapore, but globally. Thanks to its low international transaction fees and exchange rates, it has become one of the most popular financial institutions for both businesses and consumers that want to transfer funds overseas.
Youtrip is a neobank that is highly popular with young travellers. It offers a multi-currency travel wallet and allows users to make free international transfers in over 150 currencies. Youtrip offers very competitive exchange rates that tend to be better than the FX rates offered by banks because Youtrip links their rates to real-time exchange rates.
Aspire is a popular all-in-one finance operating system. They are a Singapore-based neobank that wants to become an “end-to-end financial operating system” for growing Southeast Asian businesses. Offering a wide range of services, from creating a business account to invoice management.
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