While traditional banks have existed in physical form for hundreds of years, neobanks have emerged

significantly in the last decade on digital platforms. Neobanking is defined as a type of banking
where the entity carrying out the transactions does not have any branches and is solely digital, and
completely online.

Those last three words could make one think that neobanks and digital banks are interchangeable
terms, but it is not so. Such financial service providers differ from digital banks in the sense that the
latter is merely an extension of traditional banks. Digital Banks offer the same number of versatile
services as traditional banks whereas neobanks often do not possess banking licenses and rely on
traditional banks to provide their monetary services.

Neobanks are more affordable as the fees they charge are minimal. This is because they can afford
to spend more on software systems as they do not require physical infrastructure. They do not have
to employ bank staff and neither do they have to maintain physical bank branches, unlike traditional
banks. Much quicker and more accessible than traditional banks, they can enjoy perks like operating
virtually all the time and requiring just a software application for access.

Neobanks rely heavily on software and try to employ the most sophisticated artificial intelligence
systems to collect and analyze data to increase their selling accuracy. Additionally, because of the
lesser operating costs, they can afford to offer higher interest rates to customers, further increasing
their attractiveness. The convenience they provide further bolsters their appeal as tasks like making
payments or sending cheques are effortless.

The way traditional banks make huge profits are by charging interest on loans handed out, and the
way neobanks profit is by charging fees on the usage of their cards and interchange fees. The profit
margins are almost always higher for neobanks as their expenses are much lower. An added benefit
is that the higher profit margins give neobanks the option to charge their customers lesser,
increasing their appeal among the masses.

To put things into perspective and prevent the information given from becoming tedious, a brief
head-on comparison between neobanks and traditional banks is given below.

While traditional banks have not changed much and have long-term in-person interactions,
neobanks are completely virtual and do not have any in-person interactions. The fees charged also
act as a criterion for differentiation. While neobanks charge their users a pleasing minimal amount,
traditional banks often have high service charges. Neobanks also boast transparency and simplicity,
whereas traditional banks utilize opaque and complex banking systems. This is why an additional
benefit neobanks possess is instant and clear confirmation of any transaction done, while traditional
banks have long and cumbersome confirmation processes, often involving different branches.
Traditional banks make a large chunk of their profit by charging interest, whereas neobanks make
the largest fraction of their profit by charging fees when their credit or debit cards are used to make
a purchase.

Those were the advantages, but like everything else, neobanks are not ideal. They also have a few
flaws.

The most prominent is the lack of a bank charter. It means that they are not insured against sudden
crashes and the money kept there is not safeguarded against such occurrences. There exists a very
real risk of losing your money kept there in case the bank crashes. To prevent this, we can ensure
that the neobank is under insurance by government agencies. An example is the Federal Deposit
Insurance Corporation, FDIC, which belongs to the government of the United States of America and
ensures the money deposited in neobanks by the general public is returned in case the bank crashes.

Another shortcoming is that because neobanks rely on traditional banks, they cannot offer services
as versatile as theirs. There will always be some services exclusive to traditional or digital banks that
neobanks cannot offer, if they do, they will cease to be neobanks and will become digital banks.
Moreover, while traditional banks can offer in-person customer care and support, neobanks by their
very nature cannot do so, as they lack offices and bank staff.

The bottom line and the first thing to be taken care of is that while neobanks are convenient and
affordable, one must ensure that the money they deposit in neobanks is secured against crashes.
Neobanks have diversified banking and have killed the monopoly of traditional banks by offering
new and easy-to-access services which used to be previously inaccessible to some. Much-needed
and ever-adapting, neobanks are a boon to an industry that desperately needed evolution.