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Neobanks: what are they and what differentiates them from traditional banking?

The digital environment today is constituted as the primary means for most daily commercial and financial operations. As far as the banking sector is concerned, this represents a substantial improvement in operational capacity and in the quality of the services provided.

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It is precisely for this reason that we should ask ourselves: what are neobanks?

What is a neobank? Neobanks most used in Spain

Neobanks are services native to the digital environment. As such, they offer financial services and products entirely online. However, not all of them have a banking license that allows them to handle physical money. In such cases, their operational capacity is reduced to financial intermediation.

Digital banks use an IT and technology-based model to offer their services. Some operate as intermediaries between licensed banks and customers, while others are licensed and can handle physical money, open branches and perform all the same activities as traditional banks. The latter group is known as challenger banks.

The main characteristic of neobanks is that they originate online, and this is usually their main commercial channel for users. A licensed neobank can open a branch, but traditional banks that have an online management service are not strictly speaking considered neobanks.

Among the main neobanks in Spain we can mention N26, a challenger bank that offers most of the services of a traditional bank, without commissions and with many benefits for linkage. It is one of the most chosen for its large portfolio of services and flexible fee model.

Then there is Wise, a neobank whose license only allows it to operate with electronic money. It specializes in sending and receiving foreign exchange in an affordable and accessible way. Precisely for this reason, it offers a multi-currency account with no commissions and no ties.

Finally, Revolut is a fintech of English origin with a strong presence in Spain. It is a challenger bank that offers a multitude of banking services -from buying and selling cryptocurrencies to investing in commodities- and has a very useful commission-free account.

Main differences between a neobank and a traditional bank

The main difference between both types of entities is their origin: neobanks are born exclusively from the digital environment, while traditional banks that offer the same portfolio of online services are considered digital banks, but not neobanks.

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Neobanks base their operation on IT and data mining to offer personalized services of a financial nature. However, most of these banks focus mainly on personal services -with a few exceptions.

Also, because they do not have a physical infrastructure to support, they offer cheaper and more accessible services than their physical peers, although this also limits their management capacity vis-à-vis large companies and institutions.

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Advantages of using a neobank for the client

The advantages of neobanks are multiple and, for the most part, have to do with the general advantages of the implementation of information technology and telecommunications. The main advantage is the immediacy of operations at any time of the day.

Likewise, the automation of operations significantly reduces the cost associated with the management and maintenance of accounts, cards, etc. In general, all neobanks have fee-free accounts. In addition, most banks use data analytics to offer personalized services according to the user’s profile.

Personal online management simplifies application processes and ensures that the customer has an up-to-date overview of their accounts and finances. In addition, the constant improvement of interfaces ensures the user experience and ongoing technical support.

Neobanks and Challenger Banks: How do they operate?

As mentioned above, although all challenger banks are neobanks, not all neobanks are challenger banks. The main difference between one and the other is that challenger banks have a banking or credit license, so they can also operate as traditional banks.

Based on this difference, the challenger banks can handle cash transactions and open physical branches. They can therefore offer physical safe deposit boxes and deposit accounts and thus not only operate as financial intermediaries between other institutions and customers.

This is what happens with most neobanks that are only licensed to handle digital money. That is, they provide different types of services with money held in other banks’ accounts. On the other hand, the money deposited in a challenger bank is guaranteed by the Deposit Guarantee Fund or another bank.

Digital banks have established themselves as the main option for managing money and contracting financial services among young people and adults. The versatility of the products and the convenience of online access are fundamental characteristics for their definition and distinction.

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