What Is A Neobank?

In many ways, banking has spent the last decade getting progressively less bank-like. You don’t necessarily need a branch, a bank manager or even a piece of paper to open an account anymore. Now, you can sign up from your phone, get a notification seconds after spending money and move your finances around from an app while sitting on the sofa. It’s almost too easy.

Enter the neobank. The name is pretty self-explanatory, but there’s a catch: a neobank isn’t necessarily a bank in the most traditional sense. Some neobanks are fully licensed banks, while others actually rely on established banks behind the scenes to provide the regulated infrastructure that their customers never see.

So, if a neobank can be fully licensed but it doesn’t necessarily have to be, then what exactly is it that makes a neobank a neobank? Further to that how does the technology behind it work and why have these digital-first financial companies become such a big part of modern banking?

What Is A Neobank?

A neobank is a financial technology company that provides banking services primarily, or entirely, through digital platforms like mobile apps and websites. Unlike traditional banks that we’re used to, neobanks generally don’t operate physical branches; rather, they build the customer experience around technology.

The idea really took off in the 2010s, when smartphones became central to how people managed their money and fintech startups began challenging traditional banking models.

Rather than making customers visit a branch, fill out paperwork and wait for things to happen (a process we all love, I know), neobanks tend to focus on quick digital onboarding, app-based banking and features that are designed around how people actually use money today. The point is that neobanks are practical and efficient. That might mean instant notifications when you spend money, built-in budgeting tools, easy international transfers or the ability to open an account from your phone.

Companies like Revolut, Monzo, Starling and N26 are examples of well-known digital banking businesses, although their regulatory structures differ depending on where they operate.

So, Are Neobanks Actually Banks?

The term “neobank” describes a business model and customer experience rather than necessarily a specific type of banking licence. After all, in many cases, a neobank isn’t actually a fully licensed bank at all. Instead, it can partner with an established bank that provides the underlying financial infrastructure. Then, the neobank builds the technology and customer-facing experience on top of it.

You can think of it as the difference between what you see and what’s happening behind the scenes. That is, you see the app, you open an account, you can check your balance, you can make a payment or you can move money. But behind the app, there’s a regulated banking partner who may be holding deposits, processing transactions or handling certain regulatory requirements.

But that isn’t always the case. In fact, some digital-first businesses have obtained banking licences themselves. For instance, in the UK, Monzo and Starling now operate as fully licensed banks.

So “neobank” doesn’t automatically mean “not a bank”. It’s probably better described as a broad term for digital-first banking businesses.

How Neobanks Make Money

Not having branches can remove a significant chunk of the traditional banking cost base, which is part of what allows neobanks to operate differently to the banks we’re most familiar with.

Many make money through a combination of sources, including interchange fees that are generated when customers use cards, interest earned through lending or other financial products, subscription plans and various fees. The exact model depends heavily on the company and the services it offers.

So the technology used by neobanks is only one part of the business model. A slick app might get customers through the door, but a neobank still needs to make money, manage risk and operate within financial regulations. After all, the main point is still that the bank provides financial services.

Why Are Neobanks Popular?

Convenience is an obvious part of the appeal. Going to the bank is something we all know can be tedious and time-consuming, so being able to eliminate that component of banking is a massive potential win. With a neobank, opening an account can be faster, banking can happen from virtually anywhere and many neobanks offer low or no monthly fees. Their digital-first infrastructure can also make it easier to experiment with new features and financial products.

But another important factor is that in recent years, expectations have changed. People are accustomed to apps that update instantly, personalise experiences and let them complete tasks in a few taps, and so old-school banking is increasingly expected to work the same way. Neobanks are essentially bringing those expectations into financial services which can make things difficult for traditional banks.

What Are the Downsides of Neobanks?

The lack of physical branches can also be a weakness, even though it’s also a major strength. If something goes seriously wrong with your account, some customers may still prefer having somewhere they can physically go and a human they can actually talk to.

There can also be questions around the range of products available, the financial stability of newer companies and how customer funds are protected, particularly when a neobank relies on a banking partner.

And then there’s regulation that needs to be considered. Banking isn’t exactly an industry where you can move fast and worry about the rules later. Neobanks have to deal with requirements around additional bits of technology like customer verification, financial crime, data security and consumer protection. The exact rules depend on the country and the company’s regulatory structure, but no matter where the company is based, there will be regulatory rules to be aware of.

So, What Is a Neobank Really?

A neobank is essentially a digital-first financial services business that delivers banking through technology rather than branches, and that is the main difference between a neobank and a traditional bank. However, the important thing is not to assume that every neobank works in exactly the same way, because they don’t.

Some are fully licensed banks, while others rely on licensed banking partners to adhere to regulatory requirements. Some offer little more than everyday spending and payments, while others are expanding into lending, investing, insurance and other financial services, more like a traditional bank.

Neobanks are changing what people expect a bank to be and, increasingly, how much of their financial life can fit inside an app.