The difference between a neobank and a challenger bank?

By Joanna England
Neobanks and challenger banks are big business and the next 'big thing', but what is the difference between the two...

Neobanks and challenger banks are big business and the next 'big thing', but what is the difference between the two?

As relatively new entities to the banking sector, neo and challenger banks have grown massively over the past decade. Indeed, the Compound Annual Growth Rate (CAGR) of both these banking sectors currently stands at 46%. And this phenomenal rate looks set to top US$356m by 2025. The success of neo and challenger banks have seen is undeniable. They both seem to offer similar services to their growing customer base too. But there are considerable differences between these new banking options and the features they provide. Read on to find out more. 

Digital banking

The first big difference between neo and challenger banks is their physical presence. Neobanks are entirely digital, cloud-based concerns that reach out to their customers from web platforms and mobile applications. First launched in 2010, the idea is that neobanks offer a simplified solution for SMEs and startup companies.

Current, leading neo banks include Monzo and Atom Bank, which were the first of their kind to launch. Others now taking the market by storm are Volt, Chime, Starling, N26 and Moven. 

What neo banks offer

The greatest asset that neobanks offer SME’s and startups, is flexibility and access to a wide range of services. Neobanks provide a platform that not only has a current account, but also offers additional features such as payroll, expense management and automated accounting services. 

Neobanks also provide a range of add-ons that offer solutions to the corporate financial challenges SMEs commonly struggle with. Along with this, they allow APIs to help integrate business workflows with banking requirements. 

However, neobanks do not hold a banking license. Instead, in order to operate, they rely on a partner bank. This means they cannot offer more traditional banking services.

What are challenger banks?

Challenger banks also leverage technology to streamline the banking process. However, they also maintain a brick and mortar physical presence in addition to being fintech operations. Their presence is also generally much smaller than anything seen in the mainstream banking sectors.

Today, there are an estimated 100 challenger banks in operation globally. 

These differ to neobanks because they each hold a banking license and therefore can offer customers a range of traditional banking services as well as digital features. These traditional services can also be accessed and utilised on a more accommodating basis than mainstream banks. 

Current, industry-leading challenger banks are Revolut, Allica, Tandem, Amicus, Monese, Metro and MyBank. 

The future of neo and challenger banks

While it’s up to each client to discern which type of bank works best for them, one thing is clear: neo and challenger banks are here to stay, and they will soon become a formidable sector in the business banking industry. The reasons for this apply to both neo and challenger services, which offer favourable government regulations, quick and convenient account opening, 24-hour banking support and customer-friendly interfaces. 

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