While US neobanks are growing and gaining market share, they have faced challenges in regulatory compliance, profitability, and operational efficiency. Here’s what marketers need to know.
What is a neobank?
Neobanks aren’t burdened by traditional banking technology and costly physical branches. Their banking services are conducted online via desktop or mobile app. There are two types: a full-stack neobank or a front-end-focused neobank.
A full-stack neobank (like Varo) is a standalone bank with its own banking license and can operate independently. A front-end-focused neobank (like Chime) lacks a banking license and must partner with a traditional bank to provide services.
Benefits of neobanks
The top three factors for US checking account users choosing their most recent account were fees, mobile banking, and online banking capabilities, according to EMARKETER’s US Account Opening Feature Demand Report 2023. Neobanks provide digital-first services and:
- Easy access: Neobanks are fully digital, accessible to customers anytime, anywhere. Account opening can be easier and quicker as some neobanks don’t check banking histories.
- Lower fees and rates: Since neobanks don’t have to maintain physical branches, they can offer lower fees and rates. But there could be other fees requiring a certain number of transactions per month to get the best interest rates.
Examples of neobanks
These are the top four US neobanks, by market account holders, according to EMARKETER’s forecasts for 2024:
- Chime (14.4 million)
- Varo (3.9 million)
- Aspiration (3.7 million)
- Current (3.5 million)
These are the top four neobanks in the UK, by account holders, according to EMARKETER’s forecasts for 2024:
- Monzo (4.7 million)
- Revolut (4.5 million)
- Starling (2.6 million)
- Monese (1.8 million)
What to know about neobanks
In 2024, there will be 17.5 million US neobank account holders, representing 6.6% of the population. As funding dries up, neobanks will need new revenue streams and tighter risk management to attract more profitable customers. They’ll also need to increase trust and awareness among consumers.
How are neobanks different from traditional banks?
The main difference between neobanks and traditional banks is that neobanks are entirely digital without physical branches—they’re accessed via a computer, tablet, or smartphone. To remain competitive, traditional banks may leverage neobanks’ technology for digital offerings.
Consumer frustration with legacy banking and increased demand for digital solutions have accelerated the shift to digital-only banking. Increased consumer interest in swapping out cash and credit cards with financial service mobile apps is stimulating competition, driving neobanks to roll out features like overdraft protection and sign-up incentives.
What are the regulations around neobanking?
Neobanks are categorized as financial institutions instead of banks, so they don’t follow the same regulations as traditional banks. For example, neobanks don’t need a bank license under federal or state regulations. However, to ensure the Federal Deposit Insurance Corporation (FDIC) insures deposits, they usually partner with a regulated financial institution.
What does the future of neobanks look like?
The number of US neobank account holders will grow slowly over the next few years as they struggle to deliver the promised incentives, low to no fees, and innovative products.
EMARKETER predicts an increase in neobank mergers, acquisitions, and bankruptcies, but a few will emerge stronger.
As the number of neobanks dwindles, those remaining must establish a market foothold by meeting customers’ needs and earning their trust. To carve out a leadership position, neobanks should benchmark themselves against their full peer set, including incumbent banks, new entrants, and Big Tech firms.
