Breadcrumb

Neo Banking: Beginner’s Guide

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedMay 20222 min read

Put simply, a neobank is a type of direct bank (branch-less bank) which only operates in the online sphere and does not have any physical premises. Many cite it as the future of banking, set to overtake traditional brick-and-mortar style banks.

In this post, we’ll define in detail what a neobank is, how it operates and how it differs from open banking.

What is neobanking?

With “Neo” meaning “new” in Latin, neobanks are essentially a novel re-imagination of traditional banks.

Neobanks operate exclusively in the digital world and have no physical or tangible presence. They communicate with customers via mobile apps and online platforms exclusively, and therefore do not offer physical, one-on-one consultations or meetings. Examples of neobanks include Webank and Yolt.

There are two types of digital neobanks: full-stack neobanks and front-end focused neobanks.

Full-stack neobanks operate as standalone banks with their own banking licence. This means they can operate 100% independently. Front-end focused neobanks, meanwhile, don’t possess banking licences and therefore operate in partnership with other financial institutions in order to carry out certain banking operations.

Neobanks vs challenger banks

Challenger banks emerged in the UK following the 2007–2009 financial crisis. They were created by fintech companies in the hopes of offering an alternative and more customer-powering alternative to existing banks.

Challenger banks do operate for a large part online, however not exclusively. This marks a major difference between challenger banks and neobanks, with the latter existing online only.

The other key difference is that challenger banks can offer full-fledged banking services and are fully licensed banks in and of themselves. Neobanks, on the other hand, are not always licensed (as with front-end focused neobanks) and instead partner with financial institutions in order to be able to offer bank-licensed services.

What is Open Banking?

Open Banking, sometimes known as “open bank data”, is a system that gives third-party service providers (TPPs) access to financial data through the use of application programming interfaces (APIs). It is essentially whereby customers give permission for TPPs to access their financial data and issue payments and transactions.

Open banking vs Neobanks

Aside from both being very modern and online-centred banking concepts, open banking and neobanks do not really share many similarities.

Neobanks aim to provide all the banking services a user may require. This involves opening and closing accounts, retrieving transactions, balance data and making payments. Open banking, on the other hand, is only involved in one aspect of the banking lifecycle: retrieving transaction and balance data from a customer account.

In other words, neobanks present as an all-encompassing bank service. Open banking, however, does not present as a bank, but a financial service which connects with banks. Indeed, users typically interact chiefly with their own bank channels, and will only occasionally opt to access their bank data via open banking APIs.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.