Neobanking: Pros, Cons, and How To Use Them Efficiently For Your Business

As the world transforms rapidly, especially after COVID-19, traditional institutions change faster too. Let’s take a look at the recent stats:

In 2020, the number of e-commerce transactions made with digital or mobile wallets reached roughly 45 percent and by 2024 this number is expected to be over 50 percent. What does it have to do with neobanks or EMIs?

They are called “challengers” for a reason and they are to take a share from traditional banks indeed. The venture capital in this segment is counted by billions proves this statement. What is the nature of neobanks, what’s their place in fintech, and how businesses may need them – let’s find out in a minute.

What is a neobank?

Neobank is a term for banks that exist only in digital form, as an app, web app, or other software solution, and doesn’t have any physical branches. It can work in several jurisdictions and is usually not limited to a single country or region. Sometimes “neobank” is used as an umbrella term for all apps with financial functional, like money transfers, but that’s not correct. Since not all financial apps have bank licenses or partnerships with physical banks, technically they can’t be considered as neobanks. Some neobanks to consider for businesses: N26, Revolut (has EMI and bank license), Starling Bank.

What is EMI?

Electronic money institutions (EMIs) are certified to open e-wallets to their customers and have the right to issue electronic money. Although it looks very much like mobile banking or neobanks, it is not. EMIs can also potentially engage in payment services, cash withdrawal and deposit services, payment executions services, remittance services, direct debit or credit transfers, account information services, and payment initiation services.

This list of “complementary” services into which the EMI can potentially engage strongly depends on the type of authorization as certain activities may be restricted. For instance, their main difference from banks is that they can't lend or invest clients’ money, and the sums of money over 100 000 EUR stored with them are not insured.

If neobanks and EMI’s don’t have a banking license, they partner with physical banks. This allows for offering full banking services to their clients: checking, creating savings accounts, loans, and issuing credit cards.

But their requirements for opening an account are usually less strict. Their main source of revenue comes from interest rates and ATMs out-of-networks. Some EMI’s to consider for businesses are Genome, Fire, Bunq, Monzo.

Let’s pretend you make nice clothes and want to open an online boutique to sell them from your workshop. You take photos of all your items, set prices, write descriptions, and buy a domain for your website. Yet, you need a payment processing provider and an account to collect the payments and pay for website maintenance, marketing, etc.

And here's where neobank and EMI come: you can open a merchant account and manage all these procedures online, usually faster than with a regular bank. It doesn’t mean that you don’t need to provide any documents or go through a verification process, but in a neobank, this process will be significantly faster.

All the documents can be provided online and verified in 48-72 hours, while at a regular bank this procedure takes longer. As a result, you launch your business much faster and pay more attention not to paperwork, but to actual work - providing your customers with your high-quality things. Now that you get the general idea of neobanks, let’s proceed to some details.

Pros and cons of neobanks and EMIs

Neobanks seem like a good alternative to traditional banks and electronic wallets. Via them, customers can easily perform most of their daily financial operations. But does it mean that all they are as good for one people as for the others? Let’s take a look at their upsides and downsides.

Advantages

• Agility. Being entirely digital products, neobanks follow the recent trends and often adopt innovations. Also, in case a problem with the solution arises, this allows the developers for fixing them quickly.
• Fast registration. One of the most valued advantages of digital banks is that you can open your account in up to 3 days and submit all necessary documents online.
• Multicurrency accounts. Traditional banks usually provide separate accounts for different currencies, while neobanks allow for creating multi-currency accounts.
• Fees and rates. As neobank owners spend less money on their maintenance, this results in lower fees for their clients and higher interest rates. Also, they do their best to make the terms of usage as transparent as possible.
• Finance education. Besides finance operations, these apps frequently offer their users finance management features like saving programs, budgeting, and finance management.

Disadvantages

• Limited free services. The majority of neobanks offer free services, but this is a basic list and you might need more for your business. In this case, you can have them in a paid plan. However, even if you need just one service from their extra plan, you still pay for all of them.
• Cash withdrawal fees. Among the top problems arising with neobanks is that they don’t always have their ATMs. So they partner with banks that provide cash withdrawal but if you use ATM out of the network, this leads to higher fees.
• Lack of operations with cash. Depending on a neobank, you can get various financial services, from loans to insurance services. However, the truth is that without an external partner, they can’t cover services like cash deposits, available at regular banks. So, if cash operations are crucial to you, be extra attentive if a chosen neobank is partnered with a bank or an ATM network provider.
• No physical presence. Of course, you can solve most of the issues by contacting a neobank representative online, but for some customers, this can be a trouble.

Taking all these into account, a question arises: Is neobank a good choice for a business? Let’s find this out in the next paragraph.

Neobanking and Business: What’s the catch?

With all pros and cons discussed in the previous chapter, you might think that neobanks are created mostly for individuals. Yet they are good for small and mid-sized businesses. The best thing about them is that a business owner can set all processes and manage all company finances without much problem and papers. In this case, a neobank serves as a platform for finance management that comprises all dashboards, allows for paying for logistics, supply, and ancillary bills.

So, choosing a neobank for your business, start with these basic things.

• Explore the functionality. One neobank is unlike another – this offers you generous fees for money transfers and a referral program, that has a cool dashboard with analytics and a multicurrency account. It can be really hard to choose the one for you, so take your time to know each one available in your region better.
• Check the fees. Since fees lie at the core of their business model, it’s worth considering how much your potential neobank charges for work. This will help you plan your budget better.
• Mind the interest rates. Entrusting personal finances to a financial institution, all people want to make sure that they will get as much from this as possible. Make sure that your money will multiply.