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Created on 15.12.2021

Neo-banks: The bank in your pocket

Digitalization is opening up new possibilities. Ordering food online, booking holidays easily via app and making payments anywhere and anytime – these days we do practically everything with our smartphones. Neo-banks are a perfect fit for the needs of the young, digital generation. In Part 2 of the fintech series, find out how neo-banks – also known as online or smartphone banks – work and why even traditional banks are now increasingly founding their own neo-banks and offering similar digital solutions.

Everywhere she goes, Nadja is always online. The 25-year-old has grown up with digital technologies so doing everything on her smartphone goes without saying – even banking. That’s why she has an account with a neo-bank. It’s not just because the account and bank cards are free of charge. It’s also because she can open the account easily and quickly via the app, make payments at any time in the app and keep a constant eye on her account.

Nadja can’t imagine fitting her banking needs into bank opening times. She’d much rather have her questions answered by a chat-bot on her mobile than go and find a bank branch. As a commuter, she also uses her smartphone to find out about market trends affecting her securities or even to buy new equities – transparently, easily and cost-effectively.

What’s a neo-bank?

A neo-bank is a purely digital bank that uses modern technology to bring banking products and services onto the market very quickly. Its services are primarily available via smartphone app. There are no bank branches and cash withdrawals are usually subject to a fee. So neo-banks are also known as smartphone banks, online banks or internet banks. In English-speaking markets, the term “challenger bank” is also used because their purely digital business models present a challenge to traditional banks. Neo-banks are typical fintech companies. More about this in Part 1 of the series.

Digital banking boom

Neo-banks are booming. This was shown by the Swiss Payment Monitor 2021, a study by the Zurich University of Applied Sciences and the University of St. Gallen , which surveyed 1000 people about their payment behaviour. A quarter said that they had used a banking solution from a neo-bank at least once. One year previously, it had been just 10%.

Awareness is also increasing. According to the study, two-thirds of survey respondents know at least one neo-bank. For every fourth user of a neo-bank, it is their primary payment method or main bank account. Neo-bank services are particularly appreciated by young people of Generations Y and Z, who have grown up with digital media so are particularly comfortable with neo-banking.

Neo-banks are user-friendly and cost-effective

Neo-banks are coming up trumps with highly user-friendly and cost-effective banking solutions. A basic package of an account or a card is usually offered free of charge. Customer needs are focussed on when developing the range of services. This includes making neo-banking services available around the clock and regardless of location.

Services are usually cheaper than those of traditional banks because neo-banks don’t operate any branches and make savings on customer service. For example, questions are answered by chat-bots rather than human customer advisors. Neo-banks also make savings on included services, i.e. usually only a certain number of cash withdrawals are free of charge. Making frequent trips to the cash machine, needing a credit card or more than the standard package will mean you fork out extra. But the good thing is that customers only pay for the services they actually use.

Neo-banks aren’t replacing traditional banks

Despite the advantages of neo-banks, traditional banks haven’t outlived their usefulness just yet. For one thing, the product range from neo-banks doesn’t completely cover that of traditional banks: 3a retirement planning products or retirement funds, loans or mortgages are only sometimes available. Another thing is that there’s no advice on site for neo-bank customers; personal assistance with more complex banking transactions, like investing money or taking out a mortgage just isn’t available. With foreign online banks, there’s also the question of security – how is data protection managed? Is depositor protection in place if the bank goes bankrupt?

However, the success of neo-banks has given the traditional banks a wake-up call. They’ve realised that customers want quick, digital services wherever they are. The established banks are jumping on the bandwagon, grabbing a slice of the action and starting to offer similar digital solutions. To name a few examples, PostFinance and Swissquote are launching the digital finance app Yuh, Lenzburger Hypothekarbank is working with fintech startup Neon, Credit Suisse has made a start on its “CSX” app and Bank Cler has been on the market for a while now with its app “Zak”.

The winners here are the customers of the traditional banks. They are benefiting from the technological advances initiated by the neo-banks as well as from the security of an established financial institution. But the trend is far from over. New Swiss and foreign neo-banks will emerge and others will disappear. Ultimately, the customers will decide which will stay and which will go.

Yuh App

Pay, save and invest with a single app – the finance app Yuh. Yuh was jointly developed by PostFinance and Swissquote. Customers use the app to manage their finances digitally and completely independently. The basic services like account management and debit card are free of charge. 

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