Neobanks has recently become a buzzword in the fintech world. This is courtesy to more organisations springing up to provide convenient financial services as technological improvements pervade the financial sector. Since it’s been in the news and the media, the term “neobank” has acquired traction. But do we understand what’s going on?
Neobanks in Singapore, also known as Challenger Banks, are a new breed of non-bank fintech (financial technology) businesses, are bucking the trend with digital-first and, in some cases, digital-only banking platforms that offer smooth online experiences and low- or no-fee services.
Every day, a new competitor enters the market with the primary goal of further simplifying financial services. However, is the neobank customer experience genuinely exceptional as it seems to be?
This article takes a closer look at the Neobanks’ impact on business banking and, more crucially, whether you should open a business account with one.
What are Neobanks?
A neobank is a form of a digital bank that operates without a physical presence. You don’t need to be physically present in a given location to use a neobank.
It is a broad group of financial services firms trying to reach today’s tech-savvy clients by offering them what they need. Neo banks are fintech companies that offer digital and mobile-first financial services such as payments, money transfers, money loans and more.
To start a digital bank, the Singapore banking groups, as well as non-banking players, need to get the required licenses from the Monetary Authority of Singapore (MAS). In addition, there are up to two digital full bank (DFB) licences and three digital wholesale bank (DWB) licences. Neobanks can also collaborate with bank partners to provide licensed services.
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A gap has formed between what traditional banks supply and what clients desire as the financial landscape turns towards client experience and satisfaction. As a result, Neobanks are attempting to meet this demand.
A majority of traditional banks are hampered by outdated infrastructure. As a result, they fall short when it comes to providing financial services to SMEs, such as payment gateways, invoicing software and diverse perspective on cash management.
It’s only logical that banks and financial services will merge as a result of this gap, as well as the proliferation of mobile technologies.
What Advantages Do Neobanks Have?
Painless and Straightforward Account Creation
Neobanks use algorithms and cloud-based tools to deliver quick and accurate financial services via a mobile app. With just a click of a button, you can bypass many of the formalities required to open an account with a traditional bank.
A Simple and Easy to Use Interface
Customers with less financial understanding may be confused by the range of information provided by traditional banking organisations. Neobanks, on the other hand, break down economic activities into smaller, more digestible bits, making financial services such as loans and peer-to-peer transactions more accessible.
Low Operational Costs
Because they don’t have physical branches, neobanks have a considerable cost advantage in terms of operations. Clients benefit from these cost savings in the form of lower application fees, account fees, and program fees.
A typical bank, for example, will usually require a minimum deposit and monthly amount to open a business account. This might be a significant expense for a small business trying to get off the ground.
Quick and Easy International Payments
Setting up a business account with a neobank is usually free because neobanks have lower administrative costs than banks. Furthermore, neobanks usually provide lower foreign exchange rates and transfer fees, which is great for SMEs and startups looking to expand globally.
Tailor-Made Services
Neobanks provide a more tailored approach. While traditional banks offer a broad range of financial services and products to a wide audience, such as credit cards, insurance, and loans, neobanks focus on a specific specialisation.
This includes developing solutions for payroll, expenditure management, and automated accounting services for freelancers. In addition, neobanks commonly offer add-on assistance as a tool to improve company finances and address issues that SMEs have.
Easy Adjustment to Customer Needs
Integrating APIs into a neobank’s platform is one of the numerous ways neobanks help expedite business procedures. Because Neobanks are entirely online, they can easily analyse client behaviour and pain points utilising data-driven methods. This enables neobanks to make quick changes to their user interface for more user-friendly platforms.
What Disadvantages Do Neobanks Have?
No Physical Location
Neobanks are ‘virtual’ banks, which means they operate almost exclusively through apps; therefore, they don’t have physical locations.
While this allows neobanks and digital banks to save money and offer consumers lower rates, they also can’t provide the same level of in-person service as traditional banks.
That is why a neobank is not the bank for you if you want to conduct your banking over the counter or chat with a live person about opening a new account or taking out a loan.
No Branded ATMs
While many neobanks lack (or are unlikely to have) branded ATMs, this does not rule out the possibility of withdrawing cash using your phone or a neobank debit card.
In actuality, several online banking companies in Singapore already have mechanisms in place that allow users to withdraw money from qualifying ATMs.
Constrained Service Capability
As a service provider, neobanks’ capabilities may be constrained. Currently, the major products available are bank accounts and savings accounts. This means that a neobank may not be the best option for you if you prefer to do all of your banking in one location, such as having a bank account, credit card, and home loan with the same institution.
Neobanks vs Traditional Banks
It’s crucial to distinguish between neobanks and our age-old banks. Indeed, several of them are on the verge of becoming financial technology companies.
The biggest difference between neo and a traditional bank is how they get Singapore Deposit Insurance Corporation (SDIC) insurance and who their parent company is.
Many traditional banks also provide internet banking services, such as digital-only bank accounts or a separate online-only bank division. This type of internet bank will almost definitely be covered by the Singapore Deposit Insurance Corporation (SDIC).
Neobanks, on the other hand, obtain Singapore Deposit Insurance Corporation (SDIC) insurance for their customers by forming a partnership with a traditional bank that is a participant in the program.
The end effect for the consumer is the same: your money is guaranteed up to S$250,000 if the bank or neobank goes bankrupt.
Traditional banks are well-known for having a secure and well-regulated financial system. Because of their dependability, they are an excellent choice for financial services.
However, due to changes in the landscape, they may struggle to cope with their rigid processes and rapidly evolving consumer needs.
The same operating systems that are in use today have little room for innovation.
Neobanks vary from typical banks in this regard. The lean business model of a neobank allows it to serve its target customers better, decreasing fees and enhancing incentives.
Neobanks provide fast payment solutions to meet the financial needs of emerging enterprises and individuals.
Neobanks in Singapore
Despite the hype around neobanks, they are still relatively new in Singapore, which has a plethora of banking rules. As a result, many fintech businesses seeking to incorporate or secure a license in Singapore may encounter certain challenges.
Full-banking licenses aren’t required for neobanks. Instead, they might form a partnership with a license holder bank or use alternative license types to offer bank-like products via an app. These are distinct from full-banking licenses held by challenger banks like Revolut.
The existence of neo banking licensing issued by MAS in Singapore has enticed larger IT companies to enter the digital bank space. However, the stronghold of traditional banks might make it a little more challenging for these digital banks to sustain and make a mark in the country.
Some of the notable neobanks in Singapore include:
- Digibank
- Frank
- Revolut
- Aspire
- CurrencyFair
- Neat
- Transferwise
- YouTrip
Should You Make the Switch?
Neobanks appeals to an increasing number of customers who want digital financial services. It’s handy to perform routine operations online, such as depositing checks or making peer-to-peer payments, without incurring a slew of fees. In addition, account setup and processing are frequently faster with neobanks since they are more flexible and have fewer regulatory hurdles to overcome.
On the other hand, neobanks aren’t for everyone. They tend to provide fewer services than traditional financial organisations. Customers frequently receive little credit from them. Rather than giving mortgages or other loans, they focus on the basics, such as checking and savings accounts. They don’t open physical branches very often, so users won’t be able to seek support regarding their accounts in person.
Factors to Consider
Customers considering switching from a traditional bank to a digital-first one should examine the following factors:
- The available financial products such as bank accounts, money transfer platforms, and so on, and how they match your demands
- The availability and prevalence of ATMs
- Any fees or charges that may be applicable, especially for overdrafts
- The interest-bearing account rates that are offered
- Features such as financial education and budgeting are included with the platform.
Prospective Customers of neobank should also analyse their comfort level with technology platforms. Ask yourself – Are you willing to install a new app and grant it access to your financial information? Are you comfortable talking to a chatbot about your banking needs? Do you prefer online-only customer care or in-person assistance? Well, you must answer all these questions before considering switching.
With all of the hand-wringing about the status of Singapore’s neobank sector, there’s another key factor to consider: what happens if a neobank fails? What about neobanks that aren’t affiliated with huge financial institutions?
This is why you should make sure any neobank with which you open an account is federally insured. Check to see if the neobank you’re contemplating is insured by the Singapore Deposit Insurance Corporation (SDIC) or protected by the Deposit Insurance Scheme (DIS) or comparable regulating agencies for overseas citizens. This ensures that the money you deposit into mobile apps or online accounts is secure.
If you are still unsure if this would be the right option for your SME, don’t hesitate to contact us to discuss all your options. Our experienced accounting professionals will provide you with the best solution based on your business needs.
Conclusion
Neobanks are an excellent option if you belong to a niche that conventional banks currently ignore.
If you value other aspects like UI/UX, low fees, and potential ethical considerations, the answer is less evident because you must weigh if they are worth the higher risk.
Furthermore, if you intend to open a long-term banking account, you should be aware of neobanks’ uncertain future.
However, there’s no harm in opening a digital bank account. Try out different digital banking platforms and neobanks to see if they’re right for you, as the choice is highly dependent on your preferences.
