Neobanks have grown immensely as a result of the COVID-19 pandemic and the increased demand for digital financial services. 8% of US adults and millions more people all over the world now use a challenger bank.

Adoption continues to grow as well, in the US its up 2% from last year. By 2027, 15% of US adults could hold a digital-only bank account – according to research by Seon.

The convenience of opening a bank account from your home, the availability of 24-hour support, and the opportunity to obtain credit without jumping through the traditional hoops appeal to many.

Of course, these come with new types of risk. However, there are equally innovative solutions to the new challenges, including alternative credit scoring methods and sophisticated risk management and fraud prevention software.

The below is a state of the industry research piece on neobanking.

Which Are the Most Successful Neobanks?

Wise comes in first place on the list as the neobank which has raised the most capital from investors, currently at $13 billion. Formerly Transferwise, the company was launched in 2011 and offers an inexpensive way to send money internationally.

Wise is now used by over 13 million people in more than 170 countries to send money across borders quickly, easily and without hidden fees.

2. Robinhood / Origin: United States / Capital raised: $6.2 billion

Launched in 2015, Robinhood is an online commission-free brokerage platform, allowing users to trade stock, ETFs and cryptocurrencies with no extra costs. It is included it in our rankings because it is FinTech-related and often grouped together with the other contenders.

The reserach found that Robinhood has raised $6.2 million in capital since its foundation, putting it in second place on the list.

3. NuBank / Origin: Brazil / Capital raised: $3.9 billion 

A Brazilian neobank, NuBank, comes in third place, having raised $3.9 million.

Latin America’s largest FinTech bank was originally set up in 2013 with the goal of offering affordable credit cards to Brazilians – and now has over 48 million users.

Which Countries Have Adopted Neobanks the Most?

1. Brazil: 43% of the population

According to a survey by Finder, around 43% of Brazilians have a neobank account, putting them in first place as the country that uses digital banking the most.

According to current population estimates, that equates to around 91,719,000 people. The digitization of the economy has been accelerated by the pandemic and, as a result, popular neobanks have seen their client base grow exponentially.

Brazil is home to Latin America’s biggest neobank, NuBank, which has over 48 million users.

2. India: 26% of the population

In second place, the study found that 26% of Indians use a digital-only bank. Looking at India’s current population, around 356,553,704 could be neobank account holders.

Innovating the banking sector in India, neobanks offer their customers convenience, 24-hour support and often reduced costs.

Importantly, they can also help serve the unbanked and underbanked, if they employ alternative credit scoring and similar innovations.

3. Ireland: 22% of the population

Ireland is one of the countries using neobanking the most, with around 22% of Irish people using a digital-only bank.

According to current population estimates, around 1,127,178 residents currently use neobanking. Finder predicts this could increase to 34% by 2027.

Where Are Neobanks Being Adopted Faster?

1. Philippines: 154% increase from 2022

In the Philippines, around 13% of the population currently use neobanks, but Finder predicts that by 2027 that figure will be around 33%, representing around 33,323,874 people.

This is the biggest increase out of all countries surveyed.

2. Mexico: 141% increase from 2022

By 2027, 41% of Mexican residents will use neobanking.

That figure represents around 51,665,750 people and a 141% increase from the 17% of people that currently hold a digital-only bank account.

3. Portugal: 129% increase from 2022

Around 14% of the Portuguese population currently uses a neobank, and an estimated 32% will use neobanking services by 2027.

This indicates a 129% increase in neobanking usage in the next five years.

What Is the Legal Status of Neobanks?

Although neobanks might seem worlds apart from traditional banks in terms of how they operate and provide financial services, they must follow the same laws and regulations that apply to traditional banking.

A banking license is a legal certificate that must be obtained by financial organisations that wish to provide banking services. Licenses are normally issued by local regulators, which differ by country. Applying for a banking license can be a lengthy and costly procedure.

In practice, some FinTechs partner with legacy banks to comply with legislation when providing services. Other neobanks have their own capital to secure their investors’ deposits and are able to acquire their own banking licenses.

Neobanks are certainly an attractive option for those who prefer to do everything online, travel often, handle multiple currencies, or want to avoid fees.

They often have lower fees than traditional banks, with most applying no hidden fees for users and sometimes offer higher interest rates compared to traditional banks.

They are also more likely to use alternative data when onboarding new customers. This can help onboard more people who struggle to access regular banking facilities or those with poor credit.

Of course, this is hugely important as nearly 1.7 billion people are unbanked or underbanked around the world. In fact, more than 60% of the population of the top five countries, which include Morocco and Mexico, is unbanked.

Through most neobanks, you can access 24/7 support. Neobanks also eliminate the need to wait in line, freeing up customer time.

Onboarding is equally fast and in fact much faster than with traditional banks. You can be up and running very quickly, once you have gone through identity verification checks and filled in a few more details.

Most neobank apps implement multi-factor authentication and encryption alongside other security measures to protect your information. Under the hood, risk management and banking fraud prevention software work around the clock to protect operations and customers.

Shortcomings of Neobanks

Although the advantages of neobanks set them apart from the crowd, there are some shortcomings which the sector is looking to improve upon to be able to attract even more customers.

With neobanks, often there are no face-to-face options are available for support, which could make them difficult to access for certain demographics.

Some lack the additional services offered by traditional banks, such as loans, overdraft facilities, etc. However, there is great variety, and indeed institutions that have almost everything covered despite being digital-only banks.

Naturally, neobanks have less history and can find it challenging to gain consumer confidence compared to traditional banks.

Also, they may not be fully chartered or licensed in all cases. Instead, these digital-only companies sometimes partner with a traditional bank to insure their products or to enable certain services.

Types of Fraud that Threaten Neobanks

Fraud rates in neobanking can be nearly double that of traditional credit card companies – averaging a fraud rate of 0.3% compared to 0.15%.

It is useful for both neobanks as well as their customers to be aware of the different types of fraud associated with this type of banking – as well as general good practices to mitigate against them.

• Account opening fraud: Fraudsters often try to open new accounts by impersonating legitimate consumers, using stolen, synthetic or fake identities.
• Identity theft: Scammers can commit identity theft by using methods like phishing and vishing to impersonate genuine users.
• Fraud rings: Fraud rings are organized groups of fraudsters that usually have access to more resources than individual hackers. They often launch attacks of different types on neobanks.
• Account takeover (ATO) fraud: Brute force or stolen information is used to access an existing, legitimate bank account. Neobanks are common targets of account takeover fraud due to the ease of access and lack of real-world infrastructure.
• Money laundering: Neobanks usually process transactions quickly through digital means, which makes them somewhat more susceptible to financial crime. Neobanks should have strict AML controls to protect from this. Without these, they run the risk of hefty fines or even complete removal of licensing.