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How does neobanking work?

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Simple, accessible and transparent - three qualities that describe neobanks. Over the years, the customer experience with banks has completely evolved.

With speed and security being two key aspects of the new digital consumer, neobanking has emerged as a new way to break away from traditional banks and their long transaction waits.

But what exactly is "neobanking", and why is it such a big deal? In this article, we will tell you all about it.

First things first: what is a neobank?

Neobanks, also known as digital banks or virtual banks, are new generation financial institutions that provide banking intermediation services in an entirely digital environment. The FinTech philosophy embedded in their DNA encourages the use of technology to implement financial services and operations.

They mainly stand out for being simple, accessible, customer-centric, and transparent—by offering updated and accurate information in real time and online customer service—as well as saving on structural costs by having reduced staff, automated functions, and no branches or physical ATMs.


How exactly does a neobank work?

The first point to make is that neobanking should not be confused with digital banking. They are both banking services that operate through mobile phones and other devices, and they both use technology solutions to reduce fixed overhead costs. But that's where the similarities end. There is a clear distinction between how neobanks are organized and what they provide: a simpler, more intuitive, and enjoyable user experience.

In terms of business models, neobanks can take one of three approaches:

  • Non-licensed fintechs that work with traditional banks to provide a mobile/web interface and wrapper around their partner banks' products.
  • Traditional financial institutions with their own digital initiatives.
  • Licensed neobanks that operate independently without being affiliated with a traditional bank. This is usually done with digital banking licences in countries where it is legal. They are also called challenger banks, which would be neobanks that hold a banking licence.

The difference between neobanks and challenger banks is that neobanks do not necessarily have a banking licence, but usually operate with e-money licences. Challenger banks, on the other hand, do have a banking licence.

However, for practical purposes, both types are usually referred to as neobanks.

Features of neobanks

Neobanks are driven by market trends: more connected customers and banking solutions, technological tools, and artificial intelligence development. These are the characteristics that best define them:

  • Fully digital user experience: Aims to simplify the customer's life by providing a global app for tracking expenses and income. In this case, branches are relegated to the background.
  • No fees: In general, these types of services do not charge opening fees for debit cards or bank transfers.
  • Online transactions: There are no formalities needed to be carried out in person; there are no branches; and you don't have to be trained in order to make a deposit or transfer. Everything can be done on your phone through an app created to make any type of transaction.
  • Payment of services: When doing your regular payments, and especially with your house services (electricity, water, telephone, gas, insurance, streaming, etc.), in many cases these applications can find better deals, stop unwanted expenses, or even reward you with discounts and cash.

What do neobanks include?



Bank account

  • No barrier to entry (no fees, no direct debit)
  • 100% online opening in just a few minutes


  • Mastercard or Visa
  • Mobile payments


  • 24/7 control of finances
  • All the functionalities of a traditional branch or bank


Neobanking vs traditional banking

Given these characteristics, the differences between neobanks and traditional banks are clear.


Traditional bank



  • Telephone
  • Branches
  • Online

Everything works through the app


Decades since its creation

Recently launched, adapted to the new digital environment

Permanence commitment

Depends on the bank


Customer service

Several channels, more personalized (face to face in branches)

Online, sometimes less personalized but more agile


All profiles of people

More oriented to tech adopters and younger generations


Neobanks should also not be confused with the online version of traditional banks. In terms of the main differences, neobanks do not have branches, unlike traditional banks that also operate online.


How do Neobanks operate?

From a customer's perspective, a Neobank is nothing more than an app similar to any other, with the characteristic that they focus on managing money and, with some neobanks, on making informed decisions about it. But how do neobanks operate, you may ask? 

Since neobank customers are mostly young, they are familiar with technology, so they can quickly and easily set up all the functions of these Apps. Without being forced to sign a piece of paper or interact with other services (such as traditional banks), neobanks offer the same level of security as any other existing financial modality. 

To make a difference between how traditional banks and digital banks operate, some advanced neobanks may provide fully personalised services for their users, as they make use of Big Data and forecasting technology to design a much more appealing journey for the user. 

Neobanks do not limit themselves to operating in a single sector but often seek to generate increasingly detailed customer segments with more precise information to feed them. 


Bottom Line

The average consumer seeks tailored and holistic financial management solutions. Millennials and Gen Zs are more financially literate than ever before. Neobanks capitalize on their strengths by leveraging technology to create engaging features and some advanced ones even monitor users' cash flow and financial behavior and recommend appropriate instruments. Neobanks can provide low-interest credit, high-interest savings, and seamless, low-cost services.

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