Challengers and Neobanks: The Rise of Finance Alternatives

Neobank vs. challenger bank. With the emergence of Neobanks and Challenger banks, the concept of using traditional banks for business purposes is gradually taking a backseat. The novel Neobanks and challenger banks are digital, innovative, and smart competitors of the traditional banking industry.

These new banking systems have already taken over many banking operations in many parts of the world. Payments and transfers using traditional banking are now considered old school and people avoid visiting the bank as much as they can. So, what are the trends of today taking over the world in the financial industry? Let’s discuss the advantages and disadvantages of Neobanks and digital challenger banks before exploring the trends!

What is a Neobank?

Sometimes “Neobanks” and “challenger” banks are terms used alternatively for the same bank: a Neobank. But they are two completely different FinTech firms. Neobanks are 100% digital banks, meaning they have no physical presence. They can also be referred to as, “internet-only banks or virtual banks.”

These Neobanks do not have any bank branches that you could visit. They operate on a low-cost structure that requires no brick-and-mortar presence. They provide all of their services through their mobile banking application. There is no service center because of their innovative application, all questions from their customers are answered online.

What is a Challenger Bank?

Challenger banks on the other hand are the ones that might have some physical presence but they opt to solely manage their banking operations through modern financial means. They are the ones challenging the traditional banking industry upfront.

Even though these banks are now heavily working online, they are considered real banks and require a banking license from the government as they have some kind of physical presence or none, although if they have, it is as minimal as 1 or 2 brick-and-mortar banks that do not offer many services.

Some of the most famous challenger banks in the European district that have challenged traditional banks and their operations are Revolut, Starling Bank, and Monzo.

Read more: 20 Features Your Online Banking & Mobile App Should Have

Neobanks vs Digital Challenger Banks

When we compare the Neobanks and digital challenger banks, there are some major differences. Neobanks are financial startups that focus on acquiring many new customers and delivering proficient user experience.

They usually offer services like money transfer, payment options, and landing. Other than these, they also offer other banking services.

On the other hand, a digital challenger bank is basically a traditional bank without a physical presence. They continue all their banking operations online and provide services through their online banking application.

Sometimes, Neobanks do not offer some services like providing loans or offering deposit protection. Whereas, challenger banks are complete banks that offer all banking facilities, and do not have any limitations.

Pros and Cons of Challenger Banks

Pros

Some of the advantages that challenger banks offer you are:

• The challenger banks allow you effortless setup and quick usage. The applications are streamlined to provide high-quality convenience and maximum benefits to their users.
• The fees that challenger banks request are exponentially lesser than those of traditional banking institutions and other organizations.
• Signing up for a challenger bank is simple, in most cases, you can easily sign up, get approved, and start your business with the bank within fifteen to twenty minutes.
• Challenger banks have bank licenses, therefore, they can effortlessly offer their users all kinds of financial services like enabling the use of credit cards and giving out loans.  

Cons

When there are pros, there are bound to be some cons, so, some disadvantages we’ve observed about challenger banks are:

• As compared to traditional banks, you might not have the same level of security.
• Most challenger banks still run a credit check before allowing in potential users
• There is no physical presence for you to visit a banker for your queries.

Compared to the disadvantages, the challenger banks provide more benefits and are a great choice for you to store all your earnings at!

Pros and Cons of Neobanks

Pros

The online banking system of Neobanks also have quite a lot of benefits. Some of them are:

• For potential customers, Neobanks don’t look for credit scores and have fewer rules when signing up. This also allows them to bring you the most affordable financial solutions.
• all Neobank operations are effortlessly completed through your smartphone app.
• Neobanks utilize customer data to predict all future account activity. This aids users in planning their business activities and setting up budgets.
• Neobanks have a great advantage over many other banks. They allow the trading and buying of cryptocurrencies. The modern Neobanks double as cryptocurrency exchange platforms.

Cons

However, some cons that we have observed in Neobanks are:

• Neobanks require tech-savvy people to operate them, if you’re not techy, you will have a hard time navigating through the app.
• If there is a financial security deficit, there aren’t many protective measures in place or legal remedies that would help you get out of those negative situations.
• No physical presence of the Neobanks are present, including links within the ATM network. This makes depositing cash quite difficult.

However, the benefits of Neobanks outweigh their cons, making them quite popular day by day and Neobanks are opening all over the world today, making all banking operations effortless.

The Rise of Challenger Banks and Neobanking

Since the advent of digital financial solutions, we have observed a consistent rise of Neobanks and challenger banks in the market. With each year, more and more FinTech organizations are emerging with various innovative ways of offering banking services to new customers.

As of the year 2020, it was observed that more than 300 Neobanks were established. It was predicted that the Neobanks and challenger banks are set to grow about 5% from the year 2019 to 2026. So, looking at the market today, they are sure to make their mark for a long time.

The UK and the US Market Overview

If we compare the US and UK markets, it is safe to say that the UK is ahead of the US in adopting the neobanking system. It is observed that about 15% of the UK’s population has an app-based bank account and more than half of the users use it as their main source of payment and making transactions.

The European market is also way ahead, the people have adopted the neobanking system and accepted the changes that the challenger banks have made. As a result, they enjoy the effortless banking that the new system offers them. The US market may be a little behind, but it also has a large number of users that’s increasing by the day.

Read more: What do the Banking-as-a-Service Trends mean for Digital Financial

10 Tech Trends That Are Driving Development of Challenger Banks and Neobanks

The difference in service providence between traditional banks with challenger banks and Neobanks is what’s forcing them to the top of the market. They follow some trends that are not available in traditional banks that attract new users are:

1.     Open Banking

Open banking API is a mandatory financial institution integration that enables them to get access to clients’ data and improve many software solutions. It also accelerates all kinds of banking solutions like real-time payments, improving cross-selling opportunities, and enhancing transparency for all account holders. When banks have the Open Banking concept, it allows:

• Analytical approaches to finances, like dashboards, tips for saving, and smart budgeting
• SME finances, like automated accounting, account aggregation, and affordability checks.
• Smart onboarding of accounts and integration of income verification, auto-fill forms, identity verification, and much more

2.     Blockchain

Blockchain is a trusted and non-trusted entity for many users. some people believe that it’s going to change the world’s financial industry and conquer many technological threats. However, the other half of the world’s population has little faith in this advanced technology and its practical applications.

Neobanks and challenger bank organizations have adopted this technology wholeheartedly and are enjoying the benefits that it’s bringing, which include:

• Trade facilitation
• Syndicated loan services
• Customer identification
• P2P transfers
• Management of threats and fraud

Blockchain technology is one of the major developments of FinTech that is enabling challenger banks and Neobanks to conduct all their banking operations online safely.

3.     Microservices Architecture and Cloud Adoptions

Many FinTech organizations including several banks have already adopted cloud technology and are harvesting its benefits in abundance. If you’re still unaware of the advantages it provides to challenger banks and Neobanks, then you’re missing out. Some of the best benefits of the cloud include:

• It allows the effortless on-demand scalability of the whole system or specific parts of the system.
• By establishing a cloud in the system, the Neobanks can effortlessly add as many security systems as they want and effectively comply with the standards of the industry.
• When the microservices architecture is properly set up, it allows stable services, and users get improved performance that allows them to act faster on the application.
• Cloud adoption accompanied by microservices architecture enables the organization to respond according to the market’s requirements in the system and provide better services to their users.

4.     Banking Super-Apps

According to today’s demands, the consumers of today do not look for a simple banking app, they are here to conduct all their financial operations. From paying bills to buying properties, they need an application that caters to all their financial requirements and offers them a highly integrated banking experience.

They are looking for a super app. So, Neobanks and challenger banks are loading these requirements into their applications and catering to their users by adding these services to their baseline integration. This allows for the creation of a collate banking app that is not limited to banking services but also allows services like mobile payments, real estate payments, and much more!

5.     Customer-Centricity and Hyper-Personalization

 When it comes to technological services, the more customer-centric and hyper-personalize your services are, the more they have a chance of making it big in the market. In order to make your services according to your customers, it is important to add value using customized solutions.

Here, data analytics is the most useful element. When you look into the data provided by analytics, you are more aware of your customer’s needs and requirements. Neobanks and challenger banks work in the same way, they provide what the customer is looking for and drive more traffic this way.

6.     Data-Driven Predictive Banking Customer Journey

With data collected through analytics, you can also make predictions about the future of your customers’ demands. You can’t just look for data in the present. If you want to succeed, it is imperative to look into the future demands and requirements of your users.

Therefore, the Neobanks are using this trend to go big amongst their clients by introducing services that the client would want in the coming future, making them famous in their market.

7.     Mobile Apps

According to Statista, over 90% of the population uses mobile banking as of 2022. Also, at least 6 out of 10 people prefer the use of mobile apps instead of a website to manage their finances. Neobanks and challenger banks are offering all their services online through mobile banks, meaning that their well-developed banking application provides users with attributes that include:

• Effortless access to their funds
• Customized analytics and advice
• Enhanced security methods like face ID and biometric
• Real-time notifications

As the banking industry is developing, more and more users are switching to mobile banking facilities. 

8.     Growing Appeal to Niche Markets

Challenger banks and Neobanks are targeting their niche customers. This is making them even more successful in the banking industry. They are addressing their client’s specific needs and are targeting the particular client bases that they know require their services.

This is giving them the advantage of building market share by providing unique services to those particular customers.

9.     Advanced Analytics

The Neobanks and challenger banks are using advanced data analytics to benefit both themselves, as well as their consumers. With this advanced analytics, they are able to:

• Gather data about their consumer’s preferences
• Establish different risk management algorithms
• Introduce strong threat and fraud prevention systems

There are even more benefits for their customers here, this system aids them in:

• Staying on top of their debts and bills
• Review their financial situation easily
• Set recurring payments
• Evaluate their transactions
• Get customized financial solutions and improve their baking literacy

This way, the clients improve their spending habits and make smart choices with the help of the Neobank applications.

10. Machine Learning and Artificial Intelligence

With the introduction of machine learning and artificial intelligence, the challenger banks and Neobanks managed to largely improve their service methods and boost their overall processes. The use of these technologies has allowed banks to:

• Control and optimize processes
• Enhance threat prevention
• Customize services and offers
• Make predictions and allow credit scores
• Improve customer service

Additionally, with the use of AI and machine learning, the banks have met all the industry standards and effectively established many new and improved banking solutions!

How Can We Help You?

Digital banking operations can look daunting, especially when you’re looking to digitalize your operations for the first time. Sometimes, this sudden change can disrupt the core banking operations. However, if you build a secure and successful banking application with the help of experts you will never have to experience any disruption in your banking functions.

At, FinHost, we can build the best core banking software for you. Whether you’re looking for a digital core banking software or a white-label mobile digital wallet, we can do it all for you!

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Looking for innovative mobile banking solutions? Contact us today, discuss your requirement and get the perfect mobile banking application for your Neobank or challenger bank!