Neobanks are a new generation of financial institutions that offer banking intermediation services in a completely digital way. Also called Digital Bank, Virtual Bank, Online Bank or Internet-Only Bank, they arise in the so-called digital transformation in the United Kingdom and Germany, countries with a more deregulated financial system that allows this type of initiative, they have been spreading rapidly in Europe and today they are making their way more and more strongly in Latin America.
These Neobanks have been able to quickly expand thanks to their low structure costs and their ability to grow with the help of technology. They provide updated and accurate information in real-time, attend via “online” and are among the main stakeholders in the development of artificial intelligence. They are completely oriented to that niche market that does not want to go to branches or stand in lines but prefers to carry out their operations through an App on their mobile phone, being faster, direct and simple. Not only young people or “Millennials” but increasingly people of all ages, although in the valuation of older people, the traditional bank is still preferred to give them a greater sense of security and trust.
Although at first glance they may be confused, especially for a casual observer, with “Fintech” companies they have their important differences. According to the eCommerce Observatory “Neobanks are banking entities that use the “fintech” philosophy (financial technology). But “fintech” companies are not banking entities, they are only intermediaries between the bank and customers.” And in addition, many of these digital entities have a banking license to operate or are associated with a traditional bank.
The Neobanks focus on offering a better and closer experience to users, through digital and non-face-to-face channels, with an emphasis on the transparency of operations and the reduction of commissions. With this, a more adjusted loyalty is created, and data and feedback are obtained that allow services to be improved by adapting them to the needs of users. Unlike traditional banks, these Neobanks have the advantage of not having a complex technological legacy, with data that is difficult to exploit because they are organized in silos and with the cost savings of not having a physical distribution network.
Among the distinctive features of the Neobanks, we find:
- All operations and transactions are done “online” and the opening of products is completely digital without the need for paperwork.
- Low or no maintenance costs. Users are practically free from the payment of commissions.
- The absence of physical branches allows them to pass on cost efficiency to the customer in the form of lower fees and interest rates.
- Easy or intuitive applications that operate through mobile phones and constitute the hook for digital natives.
- Real-time financial information for users.
- They offer different types of services: account opening, debit and credit cards, international transfers and currency exchange, combined with different financial management tools (help with savings plans, expense and income management through alerts and messages, etc.).
- The intensive use of technology helps them to operate in an agile and dynamic way to identify segments of the population not served or underserved by traditional banking, which allows them positive impacts on financial inclusion.
Latin America has not been oblivious to the rise of these Neobanks, among other things the COVID-19 pandemic left us with a significant increase in banking digitalization. Traditional banks have strengthened their digital services to the point that they operate as a mixed entity, with a large number of operations that can be carried out remotely through non-face-to-face digital channels (some even, for example, with delivery services for credit and debit card) although some operations still have to be carried out at the bank’s headquarters.
And we see an interesting increase in fully digital Neobanks in the region. Even according to a research done by WhiteSight in 2020, already then, 4 of the top 20 Neobanks in the world were of Latin American origin, the Brazilians NuBank, C6Bank, Neon and the Argentine Uala. In fact, due to its listing on the stock exchange and the scope of its operations, the Brazilian NuBank is considered the largest bank in Latin America, with a presence in Brazil, Colombia and Mexico, a technology office in Berlin and a “Tech Hub” in Argentina; which reveals that the commitment to Neobanks and their operations focused on fully digital attention is gaining more and more firm ground.
Likewise, entities that are betting on the Neobank model have been emerging in different countries, many with success stories that are making this option more and more attractive. Such as the Mexicans Albo, Broxel and Cuenca, the Peruvian Maximo, the Colombians RappiPay and Daviplata or the Panamanian Creska, as well as increasing and varied entities in countries such as Chile and Ecuador. Neobanks are here to stay because innovation in products and services is the key to addressing a market as complex and diverse as Latin America.
Latin America is a real challenge. The well-known economic fluctuations of some countries or their complex legislation have a lot to do with it. However, the nerve center of the issue is related to the disparity of the population and the difficulty of citizens to be included in the financial system. For traditional banks, this is a problem when thinking about the products and services to offer. And it is precisely there that Neobanks appear as an accessible alternative to the entire unbanked population sector. An important detail that prompts to consider the option of a Neobank occurs in those countries that restrict or block the free flow of foreign currency. In many of these countries, the best opportunity for economic stability is offered by freelance work for services to foreign clients, and precisely these professionals find in a Neobank an alternative to collect their fees without obstacles or restrictions, which offers a good, specialized niche market.
However, not everyone in Latin America is in favor of using this type of application. Since the lack of physical structure is one of the main characteristics of Neobanks, there is a large segment of the population that does not want or cannot adapt to this system. Especially adults who resist accessing technology or find it too complicated, in addition to feeling a certain distrust for an entity without a physical headquarters to which to move to solve any inconvenience. Digitalization is not uniform in Latin America, nor is it even uniform within the same country. In some cases, the possibilities of technological access vary from one city to another. Therefore, there is an important challenge for the growth of Neobanks compared to Traditional Banking.
Despite everything, in this diverse and complex region, interesting opportunities arise that should be taken advantage of to the fullest. The very complexity of the region, which varies from one country to another in many ways, offers fertile ground for the adoption of innovative products and services that allow the evolution and progress of the financial system. The Neobanks are still making their way, more and more, and it doesn’t look like they’re going to leave for quite some time.