The rise of neobanks is clearly one of the most remarkable developments in recent years in the banking landscape. These are fully digital banks that operate without physical branches, delivering financial services exclusively through mobile apps and web platforms. Possessing features like fast account setup, low fees, and intuitive money management tools, neobanks stand as a compelling alternative to traditional banking institutions.
Having reached $143 billion in 2024, the global neobanking market is expected to sore from $210 billion in 2025 to soar to $3,406.47 billion by 2032, growing at a compound annual growth rate (CAGR) of 48.9% throughout the forecast period.
In this article let’s explore what is neobanking, how does a neobank work, and what exactly sets them apart from conventional banks. Additionally, we will also look into neobank business model, the benefits and potential risks associated with using neobanks to gain a clearer understanding of how they are transforming the way we manage our finances.
Introduction to Neobank Definition
So, what is a neobank? Neobanks are digital banks that don’t have physical locations. The main difference from traditional banks is flexibility and technological sophistication. Thanks to automated processes, artificial intelligence and cloud technologies, neobanks significantly reduce operating costs. As a result, they can offer more favorable conditions: minimal or zero fees, quick registration and a convenient interface for managing the account. Neobanks also tend to have lower barriers to entry, making them attractive to people who are just starting out in investing or don’t want to deal with a lot of paperwork. Among the most famous examples are monobank, N26, Monzo and Revolut.
Neobanks can be divided into two main types:
Full-fledged digital banks – have a banking license and can independently provide financial services, including deposits and loans.
Fintech companies – operate on the basis of partner banks, using their infrastructure to process payments and provide financial services.
Neobanking is a great alternative to traditional banking for those looking for more cost-effective solutions and convenience. Neobanks offer the same services as big banks, from credit cards and bank accounts to loans, but without any fees. They exist exclusively online, so you don’t have to put in the effort to make deposits or manage transfers – for neobanks, just tap the app on your phone and you’re done in minutes! With neobank, you don’t have to worry about long customer service waits or high minimums – everything happens quickly, and you can have extra money in your pocket every month.
How Neobanks Work
So how do neobanks work? Neobanks are entirely digital institutions that provide banking via smartphone apps or web-only platforms. Neobanks provide customers with all the standard banking services like checking accounts, savings accounts, personal loans, payment tools, etc. Neobanks provide intuitive and simple around-the-clock access to core banking services. Neobanks offer cloud-based technology that makes it easy, safe, scalable, and efficient to consume banking services.
Legally, some neobanks hold their own banking licenses, and some neobanks will partner with traditional banks to provide banking services through the traditional bank’s license. These partnerships will enable the neobank to offer insured deposit accounts and provide other regulated banking services without the need to have a bank charter. Regardless of the licensing set-up, neobanks must adhere to the financial regulations set out in the jurisdictions they operate in, including Anti-Money Laundering (AML) laws and Know Your Customer (KYC) laws, ensuring your money stays safe — answering the question: are neobanks safe? Yes, when regulated appropriately.
And how do neobanks make money? They generate income from transaction fees, charges for premium features, interest on loans, and infrequently capturing customers’ deposits back in the interbank lending market.
Traditional banks typically offer a broad range of financial services, including checking accounts, savings accounts, auto loans, mortgages, credit cards, and investments. Neobanks differentiate themselves by minimizing or eliminating fees and providing features that facilitate and promote financial well-being, such as overdraft protection that is free.
Neobanks have similar services to traditional banks including personal loans, payment services, checking, and savings accounts. Neobanks often include features that digital banks do not, such as real-time balance updates, automatic classification of expenses, and instant notifications for transactions. The following are the basic components of Neobanks.
Account setup:
Account institutions that are neobanks usually require downloading the app, entering some personal information, and completing a method of identity verification which can include biometrics or electronically uploading documents.
Customer service:
Typically through in-app messaging, email, or in some cases the phone. AI-based chatbots can often respond to frequently asked questions.
Financial instruments:
Neobanks, through the use of analytics, will provide personalized financial suggestions and product recommendations to their customers. Neobanks will also often engage customers through budgeting tools and other goal-oriented features to support efficient financial management.
Security measures:
Neobanks use advanced security technologies, like encryption, secure application programming interfaces (APIs), two-factor authentication, and sometimes biometric verification through fingerprints or facial recognition.
Business Model of Neobanks
Neobanks, like traditional banks, often choose to serve specific niches. And even countries. The critically important question is: what business model allows organizations to be competitive in this complex environment?
There are 5 neobank business model types:
Ecosystem-led model
The ecosystem-led model focuses on connecting and collaborating with multiple financial apps through API technology. This model allows interoperability and connectivity.
Interchange-led model
Interchange-led model neobanks educate their customers about transaction fees for ever dollar transaction that is made. For example, Chime in the USA and Neon in Brazil receive a portion of the fees charged by refining company Visa when transactions are made using their Chime Visa.
Credit-led model
The credit-led model is a growth and profitable basis for these neobanks to profit through credit card services. They earn income through transaction fees, but more significantly through the customer who carries a balance and pays interest rates. Nubank is an example of a credit-led model neobank in Brazil.
Asset-led business model
Asset-led business models allow neobanks to create savings accounts and deposit models, specifically high yielding savings accounts and offers for certificates of deposits (CDs). Marcus, of Wall Street by Goldman Sachs is an example of asset led business that started to niche its products, and focus on specialization than expand service offerings.
Product extension-led approach
Unlike the ecosystem-led model, product extension-led approach reduces the barriers to access to financial services. A good example of this is Robinhood, which released Robinhood Gold, a product extension that provides deep analytics of the markets through a paid subscription model. The strategy of product extension creates a better competitive position for Robinhood’s product offering.
Understanding and strategically moving into these different business models is essential if financial service providers want to compete in the rapidly evolving neobanking space.
Advantages and Disadvantages of Neobanks
Neobanks offer a more efficient and cost-effective way to manage personal finances and the ease of use that comes from a digital-first approach makes them attractive to today’s tech age consumers. Let’s have a look at the benefits they carry.
Lower Costs
Compared to traditional banks, neobanks tend to be cheaper and charge fewer fees. Many neobanks also offer free accounts, no minimum balance requirements, and no overdraft and ATM fees.
Digital Experience
Neobanks are typically more digital-first, so they offer modern and clean apps that are designed for money management. Most neobanks come equipped with features like budgeting tools, instant notifications, and up-to-date balances.
Speed and Convenience
A neobank may take minutes to open the account, nearly completely, online, no paperwork, and no visit to a branch required.
Unique Features
Neobanks frequently provide unique tools intended for various purposes to encourage financial wellness, including things like automatic savings, spending data insights, or early access to direct deposit paychecks.
Accessibility
Neobanks give you access to your account 24/7 via mobile apps and are great for people who want a digital interaction to manage their finances or live in an area where a bank branch might not be convenient.
Cons of Neobanks
Despite their convenience and innovation, neobanks also come with certain limitations. Understanding these drawbacks is important for anyone considering a shift from traditional banks to fully digital financial services.
Ability to Visit In-Person
Many customers would prefer to speak face to face, especially if they have varying complex banking issues that need to be resolved in person.
Limited Services
Although neobanks meet basic banking needs, they may not offer a full range of financial services typically found with traditional banks, such as business loans, wealth management services or cashier’s checks.
Varying Customer Service
Neobank users share stories of varying customer support, especially when there are issues requiring a human touch.
Reliance on Technology
As neobanks are entirely digital, app outages or glitches can mean your access to your money or services may be limited.
License Structure
Not all neobanks are fully licensed. Neobanks who operate in partnership rely on third parties for deposit insurance and regulatory compliance causing confusion or fear to the customer.
Conclusion
Neobanks are digital-only financial institutions that are reshaping the banking landscape with their mobile-first platforms, low fees, and user-friendly features. Unlike traditional banks, some neobanks operate without their own banking licenses by partnering with licensed institutions, yet they still offer regulated services like insured deposit accounts. Their cloud-based infrastructure allows for secure, scalable operations while innovative tools promote financial wellness. However, they also come with trade-offs, including limited services, no physical branches, and potential customer support challenges. As neobanks continue to grow, they present a compelling option for consumers seeking flexibility and modern financial solutions.