5 Challenges and Opportunities for Neobanks


These days, being tech-savvy is the rule rather than the exception. Neobanks, which are financial-technology firms that provide banking services exclusively through digital platforms, have been around for less than a decade. Cutting-edge fintech innovations have allowed them to go head-to-head with traditional brick-and-mortar banks and their online linkups.

Easily accessible via a mobile app or online, neobanks give their customers the luxury of managing their money on their smartphone, tablet, or computer. By eliminating the costs of maintaining physical branches, they can also offer lower fees and expand financial services to underbanked and underserved segments.

These digital-only banks are also subject to banking regulations and procedures. However, for a relatively new financial-services platform, overcoming certain challenges and capitalizing on opportunities can be a complicated balancing act.

How Do Neobanks Work?

As the sole point of interaction with the digital bank, a neobank’s mobile and online banking platform gives customers flexibility and convenience. Opening an account is a seamless experience that can be done anytime, anywhere, and without taking time off work to get to the bank. The process is fast, free, and usually as easy as registering for an email or online shopping account.

The process typically involves:

  • Downloading the mobile app or opening an online account.
  • Automated Know Your Customer (KYC) checks.
  • Additional identity verification via facial recognition, with either a real-time selfie or a video call with an authorized representative.

An account can be approved and be up and running within minutes. In addition, the neobank’s main online platform can support open-banking money dashboards and applications; execute and track payments, transfers, expenses, and loans in real-time; and manage other customer needs.

5 Challenges and Opportunities for Neobanks

The most widely recognized neobank brand in the US, Chime, added an estimated 12 million customers by February 2021, up from eight million the previous year. Customers are opening neobank accounts in droves, owing to the immense convenience, real-time processing, lower or waived fees, higher interest rates, less-strict customer onboarding processes, and lower hesitation among younger customers to manage their finances via their phones.

While the number of neobanks in the US and around the world continues to grow to cater to an equally growing volume of customers and respond to the demands of the digital era, the trend has not been without bumps. There is definitely a significant growth potential, just as there remain considerable obstacles to long-term business sustainability.

1. Customer Acquisition

Even with the number of neobank customers in the US already in the millions and estimated to go up to 50 million by 2025, US consumers have still been relatively slow to adopt digital services compared to UK consumers. In fact, a Forbes report revealed that 10 years after neobanks were first launched in the US, only 3 percent of millennials, 1.5 percent of Gen Xers and 0.8 percent of baby boomers had opened a primary checking account at a digital bank.

The majority of US Americans still prefer traditional banks, particularly the security of having a physical business location they can visit and real people they can reach out to when they have issues or concerns. Additionally, it isn’t easy to dislodge a longtime customer from their relationship with a traditional financial institution and convince them to move their financial assets. Many US consumers with neobank accounts use them only as ancillary accounts.

2. Synthetic or Stolen Identities

Digital banks have become a bigger target for fraudsters. The less strict customer onboarding process can facilitate fraudulent behavior, especially when tech-savvy and unscrupulous individuals can easily fabricate synthetic identities or use stolen ones to open multiple accounts. Utilizing predictive analytics and anomaly detection can work hand-in-hand to prevent identity theft before it happens.

3. Customer Onboarding and Regulations

A personalized onboarding process is, perhaps, even more important within a highly automated system. To achieve this, a person’s IP address may be used to indicate their general location, when and where they log in, adapt autocomplete functions, and provide personalized greetings. Experiences like this can make a neobank brand stand out from the competition.

The KYC process can also be a frustrating experience for applicants when the system is not robust enough to handle poor-quality images or other document image problems. Compliance with KYC regulations is a requirement and should be done correctly and efficiently to give clients the seamless experience they expect from a digital platform. The system should also provide easy access, such as assistance via a chatbot, in case clients experience difficulties during onboarding.

4. Online Fraud

Moving money online via a digital bank still seems like a riskier option for many consumers, especially with the continuing surge of online scams, fraud, account takeovers, phishing, and mobile Trojans.

Perhaps even more than traditional banks, neobanks must have an integrated and robustly maintained antifraud and digital security systems, which include secured front-end systems, back-end security, and compliance and reporting. Neobanks must gain their customers’ trust and guarantee that there are effective and adequate systems in place to protect their accounts from all types of fraud.

Online fraud continuously evolves alongside technological developments, becoming more and more sophisticated over time. To protect clients against fraud, investing in the right tools and resources should be a priority. That’s what Instnt is for. We can help you safely onboard customers to fight against online fraud and decrease financial losses.

Ensuring account security is about complying with regulatory requirements and maintaining a good reputation and perception among consumers — which is critical to long-term business growth.

5. Security and Integrity of the Mobile Channel

For mobile app-based banking, a lot is riding on the mobile channel and the mobile app itself. Customers use the mobile app for many important activities and transactions, including opening an account, accessing their money, making payments and transfers, and shopping. The app has to have robust security and deliver a flawless experience each time.

Since the security of the mobile devices themselves is beyond the control of the app developer, neobanks must take extra measures to continuously monitor and protect their channels and their customers’ data and transactions. Mobile app shielding implemented by third-party solution providers can effectively protect the mobile app inside and out, even when there is a breach of the device’s security.

The Future of Neobanks

The banking industry has been undergoing extensive changes over the years as digital continues to dominate our lives on a global scale. Neobanks are quickly becoming the new face of digital banking as consumers turn to the online space to engage, work, and run errands - including banking. Neobanks are consequently experiencing challenges and opportunities as they look ahead. Luckily, Instnt can help your neobanks onboard and retain customers with fraud protection technology. See how it works today.


About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.