In recent years, the concept of FinTech has become increasingly popular. This term encompasses a range of modern technologies designed to compete with traditional financial services. FinTechs utilize cutting-edge IT technologies to deliver financial services to their clients via the internet. Virtual banks, also known as neobanks, fully align with the FinTech definition, with their number growing each year. Neobanks are characterized by operating exclusively online, meaning they lack brick-and-mortar branches or physical locations, and access to banking services is possible via computer or smartphone thanks to blockchain and artificial intelligence. The number of virtual banks worldwide is close to 400. In Europe, the United Kingdom is a pioneer in this regard, with over 35 such institutions already operating there.
Neobanks can take various forms. Some operate solely as payment processors, free from banking law restrictions and therefore are not considered banks in the strict sense. Others operate under a license from a traditional bank, which, upon taking on a neobank, becomes a guarantor of its compliance with all regulatory requirements imposed on banks by national law.
Market research shows that the primary users of virtual banks are young people, who are familiar with virtual money transactions and therefore aren't afraid to entrust their funds to an institution operating exclusively online. Given that young people are the primary users of neobanks, the greatest demand is for simple banking products, such as account management and the ability to exchange currencies at favorable rates. Neobanks, in order to meet their customers' needs, primarily offer simple banking products, which is why they may not currently be considered real competition by traditional banks.
So why is running a neobank profitable?
The digitization of services means that neobanks' operating costs are lower than those of traditional banks. Compared to the latter, digital banks have an advantage due to lower infrastructure costs, which is obvious given the lack of physical branches. This also requires employing fewer employees, which in turn improves the customer-to-employee ratio. Furthermore, since branch visits are no longer required, neobanks acquire new customers faster and more easily, as all formalities are completed online.
More and more digital banks are adopting a subscription model. The subscription concept replaces all fees traditional banks charge on a daily basis—whether in the form of account maintenance fees, international transfers, or ATM withdrawals—with a single, fixed monthly fee. Beyond the subscription fee, customers do not incur any additional costs for transactions performed through the bank. For the first time in banking history, we are thus witnessing a membership (subscription) model, replacing the traditional model based on maximizing profits from each customer by charging small fees for banking transactions.
Despite all these advantages, neobanks are not as popular as their creators expected. This stems from public distrust of the digitization of money and cashless transactions. However, contrary to appearances, neobanks may now be having a moment of their own due to the deepening economic crisis and rampant inflation caused by the COVID-19 pandemic.
Most potential customers may be somewhat hesitant about a bank that doesn't have physical branches and whose functions are accessible only via computer or smartphone. Therefore, it's worth knowing that every bank operating in the European Union, or a virtual bank operating under a traditional bank license, is covered by a deposit guarantee of up to €100,000 and is subject to supervision and oversight by the European Central Bank.
This alert is for informational purposes only and does not constitute legal advice.
author:
