Webelight Solutions Blog: Insights on IT, Innovation, and Digital Trends

Rise of digital-first Neobanks: Replacing traditional banks

DEC 24, 2024

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Have you ever stopped to think about how much easier and more efficient banking could be if it were entirely digital? With just a few taps on your phone, you could manage your finances, pay bills, and even get financial advice—without ever stepping into a physical branch. This has been made possible thanks to neobanks! 

 

What are Neobanks?

 

Neobanks, which first began emerging in the UK in the late 1980s, are redefining what it means to bank in the 21st century. While the term “neobank” only gained mainstream attention around 2017, these online-only financial institutions have rapidly grown in popularity. Neobanks are digital-first, leaner, and far more agile. So, what are neobanks? These are digital-only financial services that don’t operate physical branches. They’ve proliferated because they offer cost-effective, user-friendly services such as minimal fees, faster transactions, and more convenient banking experiences. But as digital-first finance solutions for fintech companies continue to dominate, the big question remains: Are traditional banks keeping pace, or is the future of banking firmly in the hands of these nimble, innovative neobanks? And if neobanks are the next big thing, who should you turn to for AI-powered mobile app development services for fintech? Let’s find out.

 

Significance and growth of neobanks in fintech

 

Over the past decade, digital-first neobanks have developed an impressive user base, projected to reach 3799.25 billion by 2033. The value of transactions processed by neobanks skyrocketed from $0.45 trillion in 2018 to $3.21 trillion in 2022. The consumer-centric and cost-efficient model is driving this remarkable rise. Neobanks offer services like zero or minimal fees on transactions, deposits, withdrawals, and account maintenance—all without the baggage of physical branches. Add to that their faster loan approvals and competitive interest rates delivered via AI integration in mobile applications, and you have a recipe for sustained growth.

 

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Neobanks introduce a fresh, all-digital approach that challenges the status quo of traditional banking. Neobanks don't have to be dependent on physical branches and face-to-face interactions.  From account opening to mobile payments, loan management, and even trading markets like cryptocurrency, neobanks deliver everything at your fingertips.

Some neobanks operate with their banking licenses, which allows them to offer insured deposit accounts and other regulated services. However, many neobanks partner with traditional banks to use their licenses, which helps them provide similar services, such as insured deposits, without needing to go through the lengthy process of obtaining their banking charter. While neobanks have eased digital banking, the rise of CBDCs (Central Bank Digital Currencies) could impact their growth, as central banks are developing their own digital currencies. Like CBDC, neobanks must also comply with the financial regulations of their countries, such as Anti-Money Laundering (AML) practices and Know Your Customer (KYC) processes, to ensure their customers' transactions and identities are safe and legally compliant. 

 

How Do Neobanks Work?

 

If you're running a fintech business, you're probably familiar with how quickly neobanks have gained popularity in digital banking. Neobanks work with a digital interface, typically accessible via a fintech mobile application or a web platform. Customers can access their accounts, make payments, and manage finances anytime from anywhere in the world. All they need is an internet connection. There is no need for branches or physical paperwork! Neobanks count on cloud computing, which helps them scale quickly and maintain high levels of data security. Using cloud infrastructure, they can manage vast amounts of data and ensure customer information is safe and services remain uninterrupted. But how do neobanks make money with such low fees and digital-first services? Let's dive deeper into their revenue models.

Like traditional banks, neobanks generate revenue, but their model is often more streamlined and cost-efficient. Neobanks charge a fee for processing transactions, especially cross-border payments. Many neobanks offer premium accounts with added features like higher withdrawal limits or special savings tools for a monthly fee. They make money from lending by providing loans and earning interest. Some neobanks reinvest customer deposits in the interbank lending market to generate revenue.

Digital-first neobanks are especially popular among younger generations like Millennials and Gen Z, who are digital natives and prefer an all-in-one mobile banking solution. They're also favoured by tech enthusiasts, who enjoy advanced features such as integrated budgeting tools, cryptocurrency trading, and real-time spending analytics. Urban dwellers are another key demographic, as they embrace the convenience and efficiency of digital-only services. Freelancers, self-employed individuals, and cross-border workers are drawn to neobanks for tools like tax-saving sub-accounts, invoicing features, and low-cost international transfers. Price-sensitive customers seeking low fees and competitive interest rates find neobanks an attractive alternative to traditional banks.

 

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Traditional banking vs. neo-banking

 

 

People often find distinguishing between digital banks and neobanks difficult because they share many similarities. Both provide various banking services, such as withdrawals, deposits, loans, transfers, and other standard banking transactions. However, neobanks operate independently, one of the most valuable advantages of neobanking over traditional banking. Digital banks typically function as online branches of more extensive, established banks. Let’s look deeper into what truly sets traditional banking vs. neo-banking apart.

 

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Technological innovations in Neobanks

 

1) Blockchain and cryptocurrency

Blockchain innovation in neobanks opens doors to financial inclusion by removing traditional identification hurdles. Blockchain helps in reducing fees and delays by facilitating cross-border transactions. Blockchain-powered neobanks use smart contracts to automate processes like loan approvals and fund transfers. Decentralizing banking services improves security by removing the need for a central authority. The tokenization of assets like real estate and commodities makes them easier to trade.

2) Artificial intelligence and machine learning

AI-powered chatbots and virtual assistants in neobanks handle queries and transactions in real time and provide 24/7 customer support. On top of that, AI and ML are being used to offer highly personalized financial services by analyzing transaction histories and spending patterns to create tailored savings plans and investment recommendations. Fraud detection has also been enhanced, as AI detects unusual patterns and flags potential fraud in real time while improving accuracy. 

3) Digital wallets and payment technology

Neobanks have redefined digital banking by offering user-friendly services like real-time transaction notifications, budgeting tools, and competitive savings rates. They easily integrate with digital wallets, which store payment methods and passwords for easy access. These innovations are enhancing security with features like biometric authentication and tokenization, which protect against fraud.  Wallets like Apple Pay and Google Wallet leverage NFC (Near Field Communication) technologies for contactless payments.

4) Open banking and API integration

Open banking allows third-party providers to access customer account data—only with explicit consent. API integration plays a key role by facilitating secure, real-time data exchange between banks and fintech firms, enhancing customer experiences through more personalized and accessible services. Neobanks, which rely on a digital-first approach, use open banking to widen their offerings. The customers benefit from a more interconnected financial ecosystem, with improved convenience, better pricing, and greater control over their finances. 

5) Robo-advisors for investments  

Robo-advisors in neobanks have made investment services more accessible, cost-effective, and personalized. These automated platforms design vestment strategies based on an individual's risk tolerance and financial goals. By utilizing algorithms to manage portfolios, robo-advisors provide services similar to traditional financial advisors but at a fraction of the cost, making them particularly attractive to smaller investors or beginners. They also offer continuous portfolio rebalancing, tax optimization, and risk assessment services.  

 

Beneficial Neobank Features that Beat Traditional Banks

 

1) Digital Loans

Digital-first neobanks offers fully digital loan application processes, making it easier for users to apply for loans online. They depend on traditional credit scores and utilize digital data analysis to assess a customer’s financial health. They look at factors like spending habits and receipts to determine loan eligibility, one of the best advantages of neobanking over traditional banking.  This is especially beneficial for the unbanked and underbanked populations, who often don’t have access to traditional banking services.

2) Digital Know Your Customer (KYC)

Neobanks offer digital KYC solutions that allow users to verify their identities remotely. They cross-check user details with global databases, including Politically Exposed Persons (PEP) lists, sanctions, and cybercriminal records. They assess the legitimacy of an account holder quickly and reduce their onboarding time. The compliance team can contact users for additional details if there are verification issues.

3) Biometric authentication

Forgetting passwords is a common problem, with studies showing that 80% of people need to remember their passwords at least once every three months. Neobanks addresses this by offering biometric login options such as fingerprint or facial recognition. This makes logging in and performing sensitive transactions seamless in the secure mobile banking app for fintech. In addition to log-in, biometrics are used for transaction confirmations and document signings. They add another layer of security while enhancing the user experience

4) Smart Budgeting 

The budgeting tools of neo banks help users manage their finances effortlessly. They provide real-time spending tracking across categories like dining, travel, and bills, offering detailed insights into where money is spent. The apps also allow users to set customized budgets for various spending categories, with alerts notifying them when they're close to exceeding their limits. Users can set predefined rules for transferring funds into savings accounts or “pockets”. Neobanks offer subscription management, helping users track and cancel unwanted recurring charges. 

5) Gamified elements

Users can easily track and categorize their expenses by introducing gamified elements in neo-banks, such as customizable icons for receipts. For example, a “car” icon can be used for transportation-related costs, making it easy to sort through transactions visually. Another effective gamification strategy is creating digital characters or mascots, like Kakao Bank’s cute bear, which helped boost brand recognition in South Korea. The gamification approach makes banking more enjoyable and also drives user engagement. 

6) Fraud Detection

Neobanks provide real-time alerts to protect customers from unauthorized transactions. Customers receive an instant push notification to confirm or flag the transaction as fraudulent when a large or unusual purchase is attempted. These digital-first finance solutions for fintech companies also use location-based tracking to assess whether a purchase is consistent with a user's usual transaction behaviour. If a user doesn’t respond or multiple fraudulent attempts are detected, the bank can temporarily lock the card to prevent further unauthorized transactions. 

 

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Challenges faced by Neobanks 

 

1) Security Issues and Cyber Threats

Given that neobanks operate digitally,   they are particularly susceptible to cyber threats. The list of cybercrimes, like malware attacks, phishing scams, and even insider threats, is a constant concern for neobanks. The reliance on cloud infrastructures and digital channels makes them prime targets for hackers looking to exploit weaknesses in security systems. 

2) Brand Recognition and Loyalty

Neobanks face hurdles like low brand awareness—many customers still don’t know they exist. Building customer loyalty is another uphill battle, especially as more digital banking platforms enter the market. Over-reliance on partners also brings risks, like conflicts of interest and losing control over customer experiences. 

3) Overcoming Regulatory obligations

Neobanks must comply with the same complex rules as traditional banks, which can drain resources and slow operations. They also face licensing hurdles and rely on partnerships with conventional banks. While these collaborations help, they further deepen the reliance on third parties.

4) Profitability and Scalability Issues

Most neobanks are still in the growth phase. They tend to operate with leaner structures and lower fees.  This can be great for attracting customers, but it also makes it hard to generate revenue and sustain profitability in the long run. Scaling the business while keeping operational costs low is a delicate balancing act. Neobanks need to secure substantial funding just to break even.

5) Intense Competition

Competition in the neobank space is heating up. Neobanks must constantly innovate to keep customers engaged and attract new ones. Their value propositions—like low fees, ease of use, and faster transactions—are being mimicked by big competitors. To make matters worse, many customers remain loyal to their traditional banks, making customer acquisition a tough battle.

 

Strategies for Neobanks to Overcome These Challenges

 

1) Creating Solid Customer Relationships and Engagement 

You always have to be available and responsive to your customers, whether it’s through in-app chat or a customer hotline. Making sure your customers feel heard is non-negotiable. Being upfront about fees builds confidence and minimizes the risk of negative reviews or complaints. Don’t hide small print—explain everything in simple terms.

2) Improving Customer Acquisition and Retention Tactics

You’ve got to go beyond just attracting customers—you need to retain them. Customer acquisition tactics emphasizing personalization and incentives can make a big difference in a market flooded with choices. Offering rewards for signing up (cashback, referral bonuses, or discounted fees) can incentivize new customers to make the leap.

3) Building Strong Compliance and Risk Management Systems 

The fintech industry is heavily scrutinized, with regulations changing frequently. To ensure your neobank stays on track, it’s vital to build a substantial compliance and risk management framework by aligning your neobank with relevant regulations (like GDPR, PSD2, etc.) and constantly reviewing associated risks.

4) Discovering Innovative Revenue Channels and Partnerships

Revenue generation can be a tricky area for neobanks since they often rely on non-traditional models. They can overcome this by exploring innovative revenue channels and seeking strategic partnerships. Partnering with fintech firms, fintech infrastructure providers, or even non-fintech companies can offer you new ways to enhance your service offering. Now you know how do neobanks make money with such innovative strategies. 

5) Investing in Enhanced Cybersecurity and Data Protection

You need to educate your employees on security protocols and the latest threats. Staff who understand the importance of cybersecurity will act as the first line of defense. Be ready for when (not if) an attack happens. Have a solid incident response plan to minimize damage, communicate clearly with customers, and resolve the situation swiftly.  

 

3 Best Neobanks in 2025

 

1) Nubank 

Founded in 2013, Nubank has quickly become the largest neobank in Latin America and one of the most valuable fintech companies globally, with a market capitalization exceeding $45 billion as of 2022. The digital-first bank operates without physical branches and offers a comprehensive suite of financial products, savings accounts, personal loans, credit cards, insurance, and business banking services.  Nubank has expanded rapidly across South America, serving over 70 million customers in Brazil, Argentina, Colombia, and Mexico. Its innovative business model focuses on solving customer pain points such as high interest rates and limited access to banking. One of Nubank’s notable achievements is its digital credit card launch, which has no annual fees and has surpassed 10 million users by 2019. 

2) Revolut 

Revolut, a British fintech company founded in 2015, has created an all-in-one mobile banking solution that caters to the modern, tech-savvy consumer. Created initially to reduce high currency exchange fees for travellers, it now serves millions of users with a wide range of financial services.  For users seeking premium benefits, Revolut offers upgraded plans like Premium and Metal accounts, with perks like higher withdrawal limits, travel insurance, concierge services, and cashback. Beyond traditional banking, Revolut also allows users to invest in stocks and cryptocurrencies and even purchase insurance—all within the same secure mobile banking app for fintech, solidifying its position as one of the best neobanks in 2025. For businesses, Revolut offers tailored services such as employee payment cards, expense tracking, and efficient international payments.

3) Chime 

Chime is a fully digital neobank founded in 2013 to provide economic peace of mind by offering accessible, no-fee banking services. It’s partnered with regional banks to offer customizable financial tools, such as checking and savings accounts, debit cards, and even a new secured credit card, all managed seamlessly via a user-friendly FinTech mobile application. One of its standout features is early direct deposits (up to two days early), fee-free overdrafts up to $200, and the ability to round up purchases to save spare change automatically. Chime also offers an automatic savings plan, where 10% of every direct deposit goes into a savings account, and transactions can be made via ApplePay, GooglePay, and SamsungPay. With no hidden fees, no foreign transaction fees, and access to over 60,000 free ATMs, Chime is positioning itself as a flexible, customer-first banking option. 

 

Why Neobanks Will Lead the Future of Banking?

 

The future of neobanks in the fintech industry is undeniably exciting. Even though traditional banks still dominate the market, customers are increasingly drawn to these “online-only” banking solutions. With the rise in internet penetration and smartphone adoption, neobanks are becoming attractive to younger generations who are already comfortable with digital-first services.  This demographic is increasingly open to managing their finances entirely online. However, the real potential for growth of neobanks in fintech lies in unbanked and underbanked populations. In regions where traditional banking infrastructure is limited or non-existent, digital-first neobanks could offer services like accounts and loans, to people who have never had access to them before.

The future of neobanks in the fintech industry promises even more advanced AI integration in mobile applications. AI will become more sophisticated in risk analysis, while blockchain could enhance security and transparency. Biometrics will likely become the norm for securing customer accounts and payments. 

Neobanks are also exploring creative ways to generate revenue. A popular strategy is charging for value-added services, such as overdraft protection, ATM withdrawals, or foreign currency transactions. Some neobanks even charge fees for certain transactions, like wire transfers. However, it’s not all about fees. Many neo-banks attract customers by offering high-interest savings accounts and investment options like mutual funds and ETFs.

Listen to Anne Boden, the CEO of Starling Bank, talk about what the future holds for neobanks.

 

 

Stay ahead with Futuristic & Innovative Fintech Solutions

 

As we've seen, neo-banks are taking over the banking sector with their innovative, customer-first approach. But even with all their potential, neobanks aren’t without their hurdles. From regulatory challenges faced by neobanks to the ever-present threat of cybersecurity breaches, these digital banks have a lot of hurdles to overcome. That being said, neobanks have a clear advantage in today’s digital-first world. As consumers gravitate toward mobile and online banking, the demand for flexible AI-integrated fintech solutions will only increase. 

Webelight Solutions Pvt. Ltd., our AI/ML solutions and mobile app development company, provides AI-powered mobile app development services for FinTech. Our AI-integrated mobile applications boost engagement, increase customer retention, streamline workflow with faster transactions and real-time analytics, and automate loan processing. Whether you want to enhance your fraud detection system, optimize user interactions with innovative budgeting features, or integrate cutting-edge biometric security, we have the expertise to bring your vision to life! Let’s partner and create an innovative mobile experience that redefines banking for your customers.

 

Embrace the future of banking with AI-integrated fintech solutions that enhance security, speed up transactions, and deliver personalized customer experiences- Contact us now!

 

FAQ's

Neobanks are digital-only financial institutions that offer banking services without the need for physical branches. Unlike traditional banks, which operate both online and offline, neobanks focus exclusively on online banking, providing services such as payments, loans, and account management via apps or websites. This approach makes them more agile, cost-effective, and convenient for users.