The difference between a neobank and a challenger bank?
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.
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.
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.