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Open banking and the rise of neobanks

Abílio Rodrigues
Written by

Last editedMay 20232 min read

Neobank is a relatively new concept that has been gaining traction in the last few years. The topic has been dividing experts, with some claiming that we are before the next big financial revolution, and others questioning these new types of banks and the way they operate. 

However, the fact of the matter is that younger generations are becoming increasingly more reliant on financial apps that make their lives easier and facilitate transactions on a daily basis. 

But in order to better understand this phenomenon, it is perhaps wise to start with a clarification on concepts. Both neobanks and open banking are still in somewhat early stages, so it’s important to clarify what they are and what they can offer. 

What is a neobank?

A neobank, or “new bank”, is a bank that relies exclusively on online operations, without offering any kind of physical presence. Maybe more important than this, this type of institution is also capable of providing cheaper services, with the added benefit of increased efficiency. 

At their core, neobanks leverage technology and artificial intelligence to tailor financial services to the needs of their customers. This translates into more customer satisfaction and lower operational costs. 

On the other hand, open banking integrates financial institutions and third-party providers (TPPs), allowing access to relevant banking data. This enhances financial services and products, making everyone’s lives easier by speeding up processes and improving transparency.

The adoption of open banking solutions has a profound impact on several aspects of financial relationships, namely:

  • Improved personal finance management: dashboards, smart budgeting, tips for savings;

  • Comprehensive data for SMEs: account aggregation, automated accounting, affordability checks;  

  • Smart onboarding: account verification, automatic forms, income verification, identity authentication;

What is the difference between neobank and digital bank?

Neobanks operate on the online sphere, but they should not be mistaken for digital banks. 

Digital banks are, more often than not, mere online subsidiaries of physical banking institutions. On the other hand, as we mentioned before, neobanks do not have a physical presence and operate through various digital channels. 

How do neobanks operate?

Neobanks can benefit from having a banking licence, as this allows them to accept deposits from their customers.

Often times, neobanks that don’t apply for this permit establish partnerships with traditional banks in order to provide services like deposits and withdrawals. 

Some countries have set up special regulations for this type of banking. This means that neobanks, in some countries, might be forced to have physical branches if they want to hold customers’ money. 

Neobanks: a customer-centric approach

Neobanks target mainly retail customers, but can also offer a lot of innovative products for small and medium businesses, something that traditional banks lack. 

Their mobile-first model puts customers at the top of the priority list, offering faster and safer services, usually paired with a superior customer experience that takes pride in efficiency. 

This mitigates the latent client frustration with traditional banking, removing hidden fees, non-competitive pricing policies and complicated financial processing solutions from the equation. 

Here are some of the main advantages of neobanks:

  • Fast and simple account creation;

  • User-friendly mobile interfaces;

  • Smart reporting;

  • Simplified international payments;

  • Advanced analytics thanks to Artificial Intelligence and Machine Learning;

How can open banking help neobanks thrive?

Alright, it’s time to recapitulate. We already have a firm notion about what neobanks offer, and how they are becoming mainstream because of the type of convenient financial products and services they provide. 

Open banking, a mechanism designed to provide third-parties with access to financial data through application programming interfaces (APIs), helps deliver a whole new slate of financial products and services that are well catered to what people and businesses demand in today’s world. 

From account aggregation in one place to better financial management, open banking encourages financial transformation through neobanks. Better yet, this is done in a regulated fashion, complying with the revised Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR). 

Through open banking, neobanks found a way to bring tailored solutions to a stale and unbalanced financial market, where the only beneficiaries were traditional banks. 

Neobanks and open banking go hand-in-hand, using one another to benefit customers and promote innovation in the financial market. Now, it’s up to traditional banks to up their game and embrace open banking if they don’t want to stay irreparably behind.

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