Neobanks: should we worry about traditional banks?

Instead of using traditional banks for financial transactions and investments, consumers seem to increasingly resort to neobanks.

So, what exactly is a neobank? I would define it as any service that holds your money. Many neobanks exist in the space between traditional banking and check cashing or payday loans, although that’s not quite how their marketing describes them. They started to become popular over ten years ago, even though they weren’t called neobanks at the time. It all started when retailers and non-financial institutions started to branch out into financial services. One example that stands out is Wal-Mart’s partnership with Green Dot and offering light banking services to their customers and employees. Likewise, some neobanks are now joining forces behind the scenes with traditional banking institutions.

More attractive to a younger generation

Neobanks are popular among young consumers because the old model of traditional banking does not make sense to the post-millennial generation. For example, they don’t often, or at least not yet, feel the need to have multiple accounts in the same way that people in their thirties or older may have a checking account, a savings account, and a market account. monetary or even possibly, a stock a trading account. This can change over time as the generation most often targeted by neobank marketing begins to build their savings and long-term financial plans.

In terms of marketing, these neobanks often focus on a younger population. They seem friendlier and more “human” than, say, a Wells Fargo or a Bank of America, which tend to skew their messages more. To attract customers, some neobanks may also try to add a social messaging veneer, be it environmental or social justice.

Why “at risk” may not be a problem

Neobanks are often viewed as a “riskier” investment approach than traditional banking. For example, one of the risks associated with neobanks is that the assets are not insured through a program like the FDIC. However, this was not a major problem during the 2008 financial crisis, so new customers of banks today may not be worried. This is certainly not the case with stock and crypto trading apps, which are riskier and tied to the market rather than the financial creditworthiness of the bank itself.

Some neobanks, like Robin Hood, bring together regulated and unregulated financial services in one place. Consumers should always read the fine print and determine which investments best fit their risk profile – crypto being at least regulated and riskiest, and cash in an FDIC insured account being highly regulated and stable.

That said, these apps make it very easy for individual investors to get their feet in the water to invest in intangibles. It is now much easier for a Robinhood user, for example, to buy a fraction of a stock or try to invest in cryptocurrencies. This is a huge democratization of investment opportunities, and it is also something that traditional banks cannot offer.

For young adults who cannot or will not be able to buy a home, they may also find these potentially riskier investments more attractive and may have more capital to experiment with.

Overlapping customer segments

The idea that these neobanks serve the “underbanked” – and therefore do not overlap their clientele with traditional banks – may be overstated. True, it’s certainly more convenient than going to a bank branch to open an account and fill out a form (or fill out one online), but traditional banks usually don’t require much more information than they do. , say, Cash App or Venmo. Neobanks should always comply with US laws, including identity verification, anti-money laundering, and knowing your clients’ rules.

They also often offer lower or lower fees and sometimes higher interest rates on their checking and savings accounts due to their lower overheads, which can be attractive to a wider consumer segment. Fortunately, this has forced some traditional banks to become competitive with their fees as well, so it has been a win-win situation for consumers overall.

Customer service can be the Achilles heel

Perhaps a surprising area where traditional banks can still get ahead of neobanks? Customer service. Granted, there are plenty of horror stories for both of them. But with a conventional bank, there is often a physical branch that a customer can visit if they have a problem. With neobanks, you might not even be able to call someone when you have a problem. Before customers sign up, they need to see what their customer support options are – and see what the App Store customer reviews are saying.

In conclusion, it is fair to say that the neobanks are here to stay. They are a great option for consumers and have particularly revolutionized investing. As these neobanks evolve and their customer base ages and begins to accumulate more wealth, traditional banks should be concerned. The cost of switching banks isn’t overwhelmingly high, but it’s also not a matter of a few clicks. And if customers are used to, say, free stock trading, they probably won’t suddenly be comfortable paying them without solid, clearly articulated benefits.

Author: Chris Morton, President and Chief Operating Officer of Cognito.

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