The difference between traditional banks and neobanks hits me like a brick each time I realise it. Waking up early to print out your ID documents and rush to your bank used to be the account-opening protocol until a few years ago. Since then, banking has seen multiple revolutions and here we are today - in the day and age of neobanks.
While ‘neobanks’ sounds like something out of The Matrix series, their impact on the financial sector in the last few years has been undeniable. First- let’s break down what they mean. The word Neo is derived from the Greek word that translates to “new”. A neobank is a new-age financial institution that functions similarly to a traditional bank. Like traditional banks, they offer savings accounts, current accounts, loans, money transfers, and several other financial services. But before you assume neobanks are just another type of bank, here’s what you need to know:
While they share a ton of similarities, it is important to understand the differences between neobanks and traditional banks.
Unlike traditional banks, neobanks usually have no physical locations. They operate entirely online. This allows them to save on the costs of operating and running physical locations. Users typically access their features through mobile applications.
Traditional banks have both a physical as well as a digital presence. Traditional banks may have mobile applications as well. However, the interface of the neobank applications tends to be a lot more user-friendly than their counterparts. Want to open a neobank account? Read about it here.
While they’re called banks, neobanks are actually financial institutions. The difference between them and traditional banks is that traditional banks must have banking licences. Neobanks are not recognised by the RBI, unlike traditional banks. This also means they have much fewer regulations than traditional banks, which allow them to keep their costs low.
In some cases, neobanks may have a partial, full range, or specialised banking licence. A banking licence allows them to offer a wider range of services.
As neobanks have no physical locations, the money they save allows them to operate with way lesser costs than traditional banks. As a result, they have no opening fees, low maintenance costs, no minimum balance requirements, no hidden fees, and higher saving account interest rates.
Neobanks also tend to be more transparent with their fees upfront. Traditional banks tend to have a lot of hidden charges that consumers may not comprehend at first without reading the fine print.
It is easier to sign up for and open an account in a neobank than in a traditional bank. Neobanks do not generally have an extensive credit history check. It also tends to be easier to borrow money in the form of a loan through a neobank as compared to a traditional bank.
Perhaps the biggest difference between neobanks and traditional banks is that, while neobanks have their perks, they are still in a nascent stage. As a result, they offer fewer services than traditional banks. Traditional banks offer a wide array of services, including providing physical debit cards, credit cards, and chequebooks.
Neobanks have certainly exploded in popularity recently. However, a big hurdle they face is digital literacy. The older generations are not well versed with new technology, making it harder for them to use digital banking services. Traditional banks have a wider reach owing to their physical locations. They are still the go-to for people that are not tech-savvy.
Neobanks are looking to revolutionise how the world looks at banking and financial services, while traditional banks rely on strong age-old fundamentals to maintain relationships with their customers over time. Neobanks are currently going through a rollercoaster in India and have everyone edged on their seats to see what the future of neobanks in India is. While traditional banking services have their merits, neobanking is moving younger consumers toward a more convenient banking experience. It all boils down to your preferences.
While Fi isn't a neobank, and is a money managment and personal finance simplification app partnered with a traditional bank, it can help you access super helpful ways of saving, investing, and getting better with your money. Here's how you can open an account on Fi.
Which bank is better for you depends on what your personal needs and requirements are. Neobanks have low fees, and they are easy to sign up with. They are more appealing to tech-savvy people. They have higher interest rates than traditional banks too. On the flip side, the difference between neobanks and traditional banks is that the latter are time-tested and are easier for some people to trust, given their physical locations.
Traditional banking services include:
Neobanks do not have banking licences. However, some neobanks may have a partial, full range, or specialised banking licence. These licences make it easier for them to offer more services and issue credit and debit cards.