Everything is going digital. It’s just a fact, and despite my belief that we will see a future where Bitcoin and blockchain take over the entire financial world, a recent trend has started to emerge that might actually help ease people into this new idea of digitized finance. I am referring to neobanks. These entities have emerged as a disruptive force, challenging the status quo of traditional financial institutions and an innovative approach to the problem of cost-saving and streamlining the user experience. Let’s take a closer look at the pros, cons, and potential impact that these so-called neobanks can have on the future of finance, and how it might reshape the entire banking industry.
Embracing Change and Innovation:
Neobanks, also commonly called digital banks or challenger banks, have their base of operations set up online. This is perhaps one of their greatest assets, as it saves an incredible amount of money that would otherwise be spent on ATMs, physical bank locations with all the infrastructure that comes with having a bank branch, and clerks to work in those branches. Let’s take Wise for example. They were founded back in 2011, and mainly set themselves up as a Forex exchange and money transfer agency. Over the years they embraced the changing technology and financial landscape, and today are pretty much a full-fledged bank, where you can keep your money in many different currencies, apply for a Visa card, and do almost everything else that you would be able to do via any regular bank. Why is this noteworthy? Well, they only have around 5,000 employees and are seeing a staggering amount of growth each and every year. Let’s compare this to Bank of America, a well-known institution that has been around for more than 100 years, has over 133,000 people working for them, yet is one of many old-school institutions now starting to lose a younger generation of tech-savvy clients.
One of the key factors driving the success of neobanks is their unwavering commitment to embracing innovation. Unlike their traditional counterparts, neobanks understand the importance of adapting to the needs of customers, and the current need is digitization. No one has the time or energy to go and open a bank account downtown where you have to spend 2 miserable hours in line hoping that you will get served before the clerk goes on lunch. So, when you can open an account in 5 minutes, verify it with a pic of your ID and a selfie, and sit on your couch watching Netflix while doing it, who the hell would choose option A?
As we have seen with the example of Bank of America vs Wise, it is clear which bank will have the highest running costs. Bank Of America needs to pay the salaries of 133,000+ employees and maintain 4,000+ locations, as well as service their 16,000 ATMs. On the Wise side, they need to pay salaries, and fair enough, they are much smaller at this point, but the fact that they don’t need to spend any money on locations, extra staff, and ATMs, means that the savings can be directly passed on to their customers. This is also true for the likes of other top digital banks such as Nubank, Chime, Revolut, and many others that are taking to the online world as their main business platform. None of these will ever have to spend on anything other than software development, some employees, and server usage.
You might be thinking that this could leave the neobanks in a precarious position if the big banks start closing and ATMs start to vanish, but by the time this happens, we will probably be well into an era where every transaction will be done digitally. Today, even dodgy dealings have made their way to the digital world, and for almost every legal transaction there is a digital payment option available.
Outdated Systems and High Management Costs:
Traditional banking systems are lagging way behind when it comes to upgrading the way they do business. Most of them are built on decades-old infrastructure, which comes with high operational costs. Add to that the maintenance and security concerns that face physical branches, along with the management of large employee teams, all significantly add to their expenses. Neobanks generally operate on cloud-based platforms, leveraging the power of artificial intelligence and automation to streamline processes and reduce costs, and whenever a new idea arises that might make them run even better, they won’t hesitate to try it out.
Friedrich Schiller once said that “simplicity is the result of maturity”, but when we look at the old-school banking sector, they seem to be trying to prove the opposite. Even in this modern age, it can take up to 7 working days to do a simple bank transfer, which should tell you that things are not running very smoothly.
The rise of neobanks marks a new era in the financial industry, and will hopefully help to pave the way for digital finance and crypto adoption. These cutting-edge institutions are challenging traditional banks on many fronts with super agile operations, commitments to innovation, and cost-effective approaches, and neobanks are extremely well-positioned to reshape the banking landscape for the better. While it is still a bit early to prophesy the complete extinction of traditional banks, it is evident that they face an uphill battle to adapt to the changing needs of consumers, with many of them seeing mass migrations out of their sphere. There might still be some chance for the old dogs to learn new tricks, but unless they start by harnessing cutting-edge technology, these new digital banks will take over; at least until we all switch over to Bitcoin.