Instead of using traditional brick and mortar banks for
financial transactions and investments, consumers seem to increasingly be using
So what exactly is a neobank? I would define it as any
service that holds your money. Many neobanks exist in the space between
traditional banks and check cashing or payday loans, even if that isn’t really
how their marketing portrays them. They started to become popular over a decade
ago, though they weren’t called neobanks back then. It began when retailers and
non-financial-institutions started getting into financial services. An example
that stands out is Wal-Mart partnering with Green Dot and offering some light
banking services to their customers and employees. Likewise, some neobanks
today partner with traditional banking institutions behind the scenes.
More attractive to a younger generation
Neobanks are popular among younger consumers because the old
model of traditional banking doesn’t make sense for the post-millennial
generation. For example, they don’t often, or at least not yet, feel the need
to have multiple accounts in the way people in their 30s or older may have a
checking account, savings account, and money market account or even possibly, a
stock trading account. This may change over time as the generation most often
targeted by neobank marketing start building their savings and long-term
In terms of marketing, these neobanks often focus on a
younger demographic. They seem friendlier and more “human” than, say, a Wells
Fargo or Bank of America, which tend to skew more aspirational in their
messaging. To attract customers, some neobanks may also try to add a veneer of
social messaging, whether it’s environmental or social justice.
Why “risky” may not be a problem
Neobanks are often considered a “riskier” approach to
investing than traditional banking. For
example, one risk associated with neobanks is that assets may not be insured
through a program like the FDIC. This, however, wasn’t a major issue during the
2008 financial crisis, so it may be that today’s newest bank customers aren’t
worried about it. This is certainly not the case with stock and crypto trading
apps, though, which are riskier and tied to the market rather than the
financial solvency of the bank itself.
Some neobanks, like Robinhood, combine regulated and
unregulated financial services in one place. Consumers should always read the
fine print and figure out which investments best fit their risk profile --
crypto being at the least regulated and riskiest and cash in an FDIC-insured
account being highly regulated and stable.
That said, these apps make it really easy for individual
investors to dip their toes in the water of investing in intangible assets.
It’s substantially easier now for a Robinhood user, for example, to buy a
fraction of a stock, or try investing in cryptocurrencies. This is a huge
democratisation of investment opportunities, and it’s also something that
traditional banks can’t offer.
For younger adults who can’t or won’t be able to buy a home,
they may find these potentially riskier investments more attractive as well and
may have more capital to experiment with.
Overlapping customer segments
The idea that these neobanks serve the “underbanked” -- and
therefore don’t overlap in their customer base with traditional banks -- may be
overhyped. It’s true that it’s certainly more convenient than going to a bank
branch to open an account and fill out a form (or filling one out online), but
traditional banks generally don’t require much more information than, say, Cash
App or Venmo. Neobanks still need to comply with US laws, including identity
verification, anti-money laundering and know your customer rules.
They also often offer lower or fewer fees and sometimes
higher interest rates on their checking and savings accounts because of their
lower overhead costs, which can be appealing to a broader consumer segment.
Luckily, this has forced some traditional banks to get competitive with their
fees as well, so it’s been a win-win for consumers overall.
Customer service may be Achilles Heel
One perhaps surprising area where traditional banks still
may edge out neobanks? Customer service. Granted, there are plenty of horror
stories for both. But with a conventional bank, there’s often a physical branch
a customer can visit if they have an issue. With neobanks, you may not even be
able to call someone when you encounter a problem. Before customers sign up,
they should see what their customer support options are -- and see what the app
store customer reviews say.
In conclusion, it’s fair to say that neobanks are here to
stay. They’re an excellent option for consumers, and they have revolutionised
investing in particular. As these neobanks evolve and their customer base ages
and starts to accumulate more wealth, traditional banks should get worried. The
switching cost of moving banks isn’t tremendously high, but it’s also not just
a few clicks. And if customers are used to, say, free stock trades, they
probably won’t suddenly get comfortable paying for them without some robust and
clearly articulated benefits.
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