What is a Neo Bank and how are they disrupting traditional banking models?

One of the big conversations currently taking place in the financial industry is about Neo and Challenger Banks. Both are on the rise, but don’t expect them to surpass financial institutions anytime soon. Right now, the established players enjoy the best of both worlds, with most having augmented their full-service models with digital banking.

What is a Neo bank?

Neo-banking emerged about 5 years ago, namely in the UK through FinTech players such as Monzo and Atom Bank.

Simply put, a Neo Bank is a new type of digital bank that exists without any branches. Neo Banks are reinventing the practices and processes associated with traditional banking.

Neo Banks are starting to evolve in Australia, with not only the introduction of equity crowdfunding, but legislation being put forward that reduces restrictions on an organisation.

How does a Neo Bank work?

For example, Apps that facilitate the administration of accounts and credit cards are typical Neo Banks. They rely on customers having an account with an underlying Bank and corresponding bank license, bu offer a user-friendly interface. The extent to which customers are aware of the underlying bank relationship day to day may vary.

Put simply, a ‘Neo Bank’ is a bank sitting on a 100% digital and mobile platform (ie: no physical branches), but more than that, its systems are 100% new too. This means it is not simply a digital front end to a traditional (and mostly cumbersome from a technological perspective) bank.

Currently, the digital front ends that have been added to traditional banks represent just a digital manifestation of the traditional banking experience.

Market statistics for Neo and Challenger Banks

The Neo and Challenger Bank Market is set for huge potential growth worldwide.

A new research study included in the ‘Neo and Challenger Bank Report on Global and United States Market, Status and Forecast, by Players, Types and Applications’, provides an in-depth assessment of Neo and Challenger Banks. The report includes key market trends, upcoming technologies, industry drivers, challenges, regulatory policies, key players company profiles and strategies. The research study provides forecasts for Neo and Challenger Bank investments till 2022.

Interaction with Australian Government and Regulators

Australia has its first licensed digital challenger bank, following a decision by a key Australian Government regulator to establish a new pathway to allow these banks to be established. With new regulation making it easier for smaller companies and startups to become banks — the time is now right for new challengers to the traditional model. There is significant opportunity for new banking entrants to capitalise on market share, particularly as the regulator wants to see more consumer choice and therefore more competition for the incumbents.

The global market is driven by factors such as government regulation, the convenience offered to consumers, and low-interest rates as compared to traditional banks. However, acquisition of customers and profitability are major challenges faced by these banks. An increase in penetration of smartphone and internet in emerging economies are expected to offer lucrative opportunities for market growth.

ASIC licensed the first seven intermediaries under the government’s new Crowd-Sourced Funding regime, allowing eligible companies to raise capital by making offers of ordinary shares to investors via the online platform of one of the intermediaries.