Both traditional and digital financial institutions have been steadily striving to align their products and services with customers’ evolving needs and expectations. Regardless of the nature of banking, the eventual aim is to embed banking into consumers’ daily lives, ensuring banking, while being invisible, becoming a critical and convenient element of everyday life.
In sync with this, digital banking has been on the rise for the past decade. Apart from a slick customer experience, digital banks provide higher interest rates and operate on a ‘low fee’ business model that tops the charts in terms of a wholesome customer experience. Under the vast digital banking umbrella, new to the banking race, Neobanks and Challenger Banks have managed to become a massive trend quite successfully in the financial industry. While personal banking is common to both, it is imperative to understand what drives the core of these entities.
Neobanks came into existence in 2017 in Europe. And since then, the overall sector has been providing promising prospects with its massive valuations and user base. As per data by Zion Market Research, the global neobank market, which is valued at $18.6 billion as of 2018, will be registering a CAGR of about 46.5% between 2019-2026, generating about $394.6 billion by 2026. The stats spell out that Neobanks are banking the formerly underbanked population that on a high-level includes Gen Z & Y and the financially exclusive population of the society, providing a wider scope of financial progress.
Typically, Challenger banks offer both personal and business accounts. Massively digitized to cater to present day customer needs, the tech-driven services attracted a multitude of customers that were conventionally underserved by the usual retail banks, with a growing lending base (read balance sheet) as their prime KPI.
While Neobanks also deal with personal accounts and services, they are more largely focused on small and medium-sized businesses (SMEs) and new age startups. They present themselves as not just banks, but as fintech organizations that cater to a more corporate vision. Think of Neobanks as a tech-startup that focuses on frictionless customer experience through Product Management and fast iterations, driven by a growing user base as its primary KPI.
As for everything fintech, there is no unanimous explanation, but below are a few aspects that tell them apart:
- Physical Presence
- Banking Licenses
- Products and Services
The first distinct aspect is their physical presence. Entirely cloud based and digital, Neobanks leverage web platforms and mobile based applications as main points of customer contact. At the core, they are synonymous to a simplified solution, predominantly for SMEs and startups. The greatest advantage is the flexibility and access to a wide range of services that include payroll, expense management and automated accounting services.
Challenger banks on the other hand, also leverage technology to structure their banking processes. However, they also maintain a brick-and-mortar physical presence, although on a very small scale. They differ from Neobanks because, they hold a banking license that allows them to offer and accommodate a plethora of traditional banking services on a digital scale.
From a customer’s standpoint, Challenger banks and Neobanks are used interchangeably because for most people, withdrawals, transfers, account viewing are the frequent touchpoints in the banking journey and can be done with either of the two.
Conversely, the difference comes to light for the less frequent interactions like:
- A loan
- A mortgage
- An overdraft
These lending services can only be offered by licensed Challenger banks whose clients typically enjoy the benefits from the national protection funds.
While the banking sector is equally consumed by the global digital transformation, it is faring well in terms of maximizing financial inclusion and internet penetration. And this is precisely why it is the right time for Fintech(s), Challenger Banks and Neobanks to make their way up the ladder, by seizing new opportunities and contributing to the digitally evolving banking space.
However, with technology advancing at a rapid pace, it is imperative for Challenger banks and Neobanks to consistently step up their game to stay relevant and frictionless. While, existing ones leverage contemporary infrastructure, newer ones are constantly born out of banking innovations that thrive on newer technology. All in all, this rapid increase in the number of newer Neobanks and Challenger banks is here to stay and the best way to navigate through this new era of banking is through collaboration with similarly focused resources to build an ecosystem for new-age Neobanks and Challenger Banks. Also, with COVID-19 set to usher in unprecedented transformations in the eye of comprehensive digital banking, Challenger banks and Neobanks will have to play a pivotal role within the banking industry.
In a nutshell, while Neobanks and Challenger banks are essentially two distinctive business models; at some point in their growth journeys, they converge, as Neobanks attain their banking licenses.
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