What are neobanks and how do they work?

Financial technologies are actively transforming the banking sector, and one of the most noticeable trends in recent years has been neobanks. These are digital-only banks that operate without physical branches, offering customers convenient financial services through mobile applications and web platforms. Fast registration, minimal fees, and modern financial management tools make them an attractive alternative to traditional banks. But how exactly do neobanks work? How do they differ from payment systems? What are the advantages and risks of using them? Let’s break it down.

What Are Neobanks?

Neobanks are financial institutions that operate exclusively online without physical branches. They offer a wide range of banking services via mobile apps and web platforms, ensuring quick access to financial transactions without visiting a physical office. Simply put, a neobank is an online bank or a digital bank.

The key difference between neobanks and traditional banks is their flexibility and technological innovation. They utilize automated processes, artificial intelligence, and cloud technologies, significantly reducing operational costs. As a result, they can offer more competitive conditions—such as lower or no fees, fast registration, and a user-friendly interface for account management.

Neobanks can be categorized into two main types:

1. Fully Digital Banks – These have a banking license and can independently provide financial services, including deposits and loans.
2. Fintech Companies – These operate in partnership with traditional banks, using their infrastructure to process payments and offer financial services.

A payment system is a financial platform designed to process payments and transfers. It is not a bank and usually does not hold a banking license. However, it may obtain financial licenses such as EMI or PI, allowing it to operate in specific jurisdictions with electronic money transactions. The primary role of payment systems is to enable fast and convenient online money transfers between users or companies.

At first glance, neobanks and payment systems may seem similar, as both allow for digital transactions, transfers, and financial management. However, they have fundamental differences that affect their functions, legal status, and user capabilities.

Key Differences Between Neobanks and Payment Systems

License and Legal Status

• Neobanks may hold a banking license or operate through partner banks, allowing them to offer banking services.
• Payment systems usually do not have a banking license but obtain a special license for money transfers and payment processing. This is typically an EMI license, which allows them to issue electronic money, open wallets for clients, and store funds without the need to deposit them in a traditional bank.

Financial Products

• Neobanks can provide bank accounts, debit cards, loans, deposits, and other financial services, similar to traditional banks.
• Payment systems mainly specialize in money transfers and payment processing.

Usage Purpose

• Neobanks are suitable for those who need a full-fledged bank account, allowing them to make card payments, receive salaries, and access credit services.
• Payment systems are more focused on online transactions, international money transfers, and payment acceptance for businesses.

Integration with Businesses

• Neobanks target individual customers, small businesses, and freelancers, offering convenient mobile services for financial management.
• Payment systems like Stripe or PayPal are more business-oriented, enabling companies to integrate online payments and automate financial flows.

Although the terms neobank and payment system theoretically refer to different concepts, the modern financial market is evolving in a way that the boundaries between them are becoming increasingly blurred. Some companies combine the functions of both, offering users the ability to open accounts while also providing cost-effective international transfers. Prominent examples of such hybrid services include Revolut and Wise. Revolut initially started as a fintech company focused on low-cost international transfers and currency exchange. Over time, the service expanded and obtained a banking license, enabling it to offer traditional banking services alongside payment system functionalities. Wise (formerly TransferWise) began as a money transfer service with minimal fees. However, it gradually expanded its capabilities and now functions not only as a payment system but also partially as a neobank.

As a result, many modern payment systems can now be classified as neobanks. These platforms merge the best of both worlds—the flexibility of payment systems and the capabilities of digital banks—making them highly attractive for users seeking simplicity and efficiency in financial management without unnecessary bureaucracy.

Advantages and Risks of Using Neobanks

Neobanks are rapidly gaining popularity due to their convenient and innovative financial solutions. However, like any financial tool, they come with both advantages and risks, which are crucial to consider when choosing such a platform for personal or business finances.

Advantages of Using Neobanks

1) Convenience and Accessibility

One of the main advantages of neobanks is their fully digital nature. All transactions can be completed through a mobile app or online platform, eliminating the need to visit physical branches. Users can open accounts, make payments, receive cards, and even apply for loans without leaving their homes.

2) Fast Transaction Processing

Neobanks typically offer rapid transaction processing, especially for transfers between users of the same platform. In many cases, international payments are also processed much faster than in traditional banks, as digital services using modern technologies to optimize financial flows.

However, in practice, transaction speeds may vary. Sometimes, transfers from a traditional bank may be faster than those from a payment system due to increasing regulatory scrutiny of financial transactions in fintech companies. Thus, the speed of operations depends not only on the platform itself but also on regulatory requirements and the level of checks applied to a particular transfer.

3) Lower Fees and Transparency

Neobanks often charge lower fees than traditional banks. Due to automated processes and the absence of physical branches, these companies reduce operational costs, allowing them to offer lower service fees. Most of these platforms are also transparent in their pricing policies, clearly displaying the cost of specific transactions on their websites

4) International Transactions and Multi-Currency Accounts

Many neobanks allow users to open accounts in multiple currencies and seamlessly make international transfers, which is especially beneficial for frequent travelers or businesses operating globally

5) Financial Planning and Analytics

Neobanks often provide spending analysis tools, budgeting features, and financial planning solutions. These features help users manage their finances more effectively and avoid unnecessary expenses.

Risks of Using Neobanks

1) Limited Legal Support and Guarantees

Since neobanks typically lack physical branches and operate as digital platforms, their legal support and guarantees may be more limited compared to traditional banks. This can become a problem if disputes arise or if legal action is needed.

2) Limited Functionality Compared to Traditional Banks

Not all neobanks offer a full range of banking services, such as comprehensive credit products or advanced investment tools. Some neobanks cannot fully replace a traditional bank, especially for those who require specialized banking services.

3) Cybersecurity Risks

Since neobanks operate entirely online, they may be more vulnerable to cybercrime and fraud. While most platforms invest in security measures such as two-factor authentication, there is still a risk of data breaches or unauthorized account access.

4) Licensing and Regulatory Instability

Neobanks are often registered in different jurisdictions, meaning users should be cautious about stability and legal changes in the country where their neobank is based. Regulatory changes could lead to service restrictions or even deposit losses in certain cases.

Neobanks offer many advantages and are an excellent choice for startups and entrepreneurs seeking flexible and modern financial tools. They are transforming traditional financial management, allowing users to make payments, open accounts, and access services without visiting physical branches. However, like any financial service, neobanks come with risks that require careful evaluation before choosing a platform. Fraudsters may also create fake platforms, posing as neobanks or payment services.

Therefore, before deciding which neobank or payment system to choose for personal or business purposes, it is essential to carefully assess your needs and the capabilities of each platform. It is recommended to consult qualified specialists for advice on selecting the most suitable service, taking into account specific requirements and legal aspects.

Bcorp has extensive experience in selecting financial solutions, including neobanks and payment systems, for entrepreneurs and individuals. We will help you find the optimal option that meets your requirements and ensures the security and efficiency of your financial transactions. Contact us for consultations and assistance in choosing the best financial tools for your business or personal needs, and be confident in the safety of your funds.