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The Rise of Neobanks and the Shift to Digital Banking

From digital-first philosophies to quicker turnarounds, this is why businesses have chosen neobanks over traditional banks.
Luke O'Neill
June 13, 2022
5 min

The rise of neobanks has accelerated in recent years. Publicis Sapient research shows 20% of the neobanks operating globally in April of 2021 were only launched in the previous 12 months. According to Bank Administration Institute (BAI) research, many small businesses would switch their primary bank to a neobank for lower fees and better rates.

Why businesses are choosing neobanks 

Neobanks continue to bolster their offerings, with some now offering business services such as invoicing, multiple currencies and payment processing. Neobanks want to be well-placed to support businesses as they explore new ways to handle volatility and better serve their own customers and clients online. There are several reasons why they could achieve this in the years ahead:

  • Neobanks can be more cost effective to bank with. They don’t rely on legacy infrastructure and as many physical resources as traditional banks. Neobanks claim they can pass these savings onto their business customers. 
  • Business-to-business payments may be made quicker and it’s possible to move money across accounts with easy-to-use mobile apps and software dashboards. 
  • Automated reporting tools and accounting software integrations can help businesses access data to shape insights about their financial performance. They can also set up budget tracking to help businesses plan spending and curtail costs. 
  • Neobanks have partnered with other fintechs to quicken historically slow banking processes, such as account opening, identfying checks, and originating loans.

“Neobanks are part of a larger tectonic shift in the way banking is done,” said Alex Armitage, CEO and founder of Nectarine Credit. “Open-banking is providing opportunity for neobanks and other fintechs to provide better, faster and more transparent financial services.”

Quicker credit decisions 

Working with neobanks has made deciding credit applications much smoother for Nectarine Credit, a credit application management platform.

“When a buyer of goods wanted 30-day credit terms from a supplier, there used to be a cumbersome process of emailing and even faxing documents back and forth,” said Armitage. 

“The process took weeks and sometimes months, and often resulted in a dead end with the banks. Nectarine Credit has automated the entire process. We’re integrated with more than 10,000 banks. Our bank account verification, bank balance checks and cash flow reports take a few seconds.” 

Quicker loan approvals

Jessica Chase, a loan and finance expert at Premier Title Loans, recently switched from traditional banking to a neobank for a number of reasons.

“I made a move from corporate banking to neobanks as it offered my venture lower fees and higher interest rates,” said Chase. “When we sought a loan for our small business, we were offered low fees and high-interest rate options on our deposits." This meant the company could earn more on its deposits and save on its regular transactions.

Chase said the move greatly benefitted the business’s financial team, too.

“Neobanks granted us loans with reduced processing time. There was no need for paperwork, and online verification was all that was required to apply for a business loan,” she added.

Neobank limitations

Despite the growing presence of neobanks in the business banking market, the industry faces a difficult decade ahead. Downward pressure on profit, economic headwinds and digital transformation have given banks an opportunity to ‘catch up’ with digital innovators like neobanks and challenger banks. 

As McKinsey research notes, business banking was already undergoing rapid digital transformation before the pandemic.

“Banks and their digital challengers [are] creating new customer interfaces, streamlining customer journeys, and modernizing middle and back offices,” said experts at the global management consultancy.

Growing competition

Neobanks must also fend off new competitors too, with banking services now being offered by businesses outside financial services, such as Amazon and Apple. And despite their ascendancy in the past decade, neobanks are still unable to offer some of the services and assurances that traditional banks can provide. 

“Neobanks usually offer watered-down products and services compared to those offered by big banks,” said Ricardo Pina, founder of finance site, The Modest Wallet. Pina believes business neobanks are best suited for small businesses that don’t need all the bells and whistles and are looking for an affordable banking solution. 

“Few, if any, neobanks today can offer the one-to-one relationship banking businesses are accustomed to,” said Kathleen Yeh, Head of North American Compliance for Technisys. “Additionally, many neobanks are new — established in the late 2000s — and simply do not have the legacy, nor the more complex product solutions, that a traditional bank can offer.”

Regulatory future

Regulations provide another problem for neobanks that hold a bank charter — making them challenger banks. Their oversight does not fall under a prudential regulator. Instead, oversight is driven by the financial products and services offered by the neobank and can be provided through state licensing requirements or, even at the federal level, through the Consumer Financial Protection Bureau (CFPB). 

Yeh said some neobanks may partner with a chartered bank for the purposes of getting deposit insurance through the Federal Deposit Insurance Corporation (FDIC). The FDIC examines and supervises financial institutions for consumer protection, makes large and complex financial institutions resolvable, and manages receiverships.

While such partnerships may mean neobanks are scrutinized as a third-party service provider of the partner bank, there are still no consistent regulatory standards specific to neobanks.

“While the general expectation is that neobanks will design products while using technology to benefit business customers, there may be loopholes in protections afforded to business customers of traditional banks that may not be considered for business customers of neobanks,” said Yeh.

As the rise of neobanks continues, regulators are unlikely to let those loopholes stay open for long.

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Luke O'Neill

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