3 Major Differences in Customer Onboarding for Neobanks vs. Challenger Banks


While neobanks and challenger banks share several similarities and are often grouped together and considered one and the same, there is one big difference. Neobanks do not have a banking license, and instead partner with traditional banks and other lenders to provide their services. Challenger banks, a term more often used in the UK, do hold a banking license and maintain a brick-and-mortar presence — albeit much smaller than that of a larger traditional bank — in addition to their digital operations.

The term “challenger bank” arose when Metro Bank received its banking license in 2010, as it was the first bank to be issued a license by the UK government in 100 years — challenging incumbent banks Barclays, HSBC, Lloyds and NatWest.

In recent years, neobanks and challenger banks have increased in number and size, becoming more and more popular. This is especially true among younger banking customers seeking fast, easy financial services without the need to be tied to a physical location. According to Statista, 24% of consumers indicated convenience as a reason for using a digital-only bank.

3 Differences in Customer Onboarding for Neobanks vs. Challenger Banks

Again, While neobanks and challenger banks are often considered the same, since their services are digital-first and delivered primarily via mobile apps, there are differences that might arise during customer onboarding. Let’s have a look at these three:

1. Neobanks Might Defer to Their Partner Firms for Customer Onboarding


Because neobanks do not have a banking charter, they need to rely on their partner banks, lenders, investment funds and other financial services companies when it comes to the creation and opening of accounts.

When a new customer creates an account with the neobank, there will be a basic onboarding process. This will include taking photos of government-issued IDs, as well as a selfie, using a smartphone camera.

However, when the customer wishes to take advantage of non-core services offered by that neobank, such as cryptocurrency trading, an additional layer of onboarding will most likely be required. That is because the partner firm will have requirements which the new customer must adhere to.

2. Challenger Banks Might Require That Certain Services Be Initiated in Person


Challenger banks do maintain a small physical presence, and in some instances might require new customers, when possible, to open an account in person at a physical location rather than completely through the mobile app. This would never occur with a neobank.

However, as with neobanks, customers can onboard using their smartphone camera to verify photo IDs and their actual identity. Additionally, challenger banks may have alliances with other financial services providers, and as with neobanks, customers will need to undergo separate or additional onboarding to partake of those services.

3. Differences in Product Offerings Might Dictate Different Expectations During the Onboarding Process


Customers interested in neobank offerings, such as payments and debit cards, might expect the onboarding process to be fast. After all, these customers aren’t immediately interested in applying for loans, credit cards, or mortgages, so they might anticipate onboarding to be nothing more than filling out a few blank fields and taking a few ID photos and selfies in order to get going.

Challenger banks, in addition to payments and debit cards offered by neobanks, are similar to traditional banks and are regulated as such, and so their product offerings are much more extensive. Challenger bank products and features include loans, overdraft protection, and deposit protection/insurance, and so a customer onboarding with a challenger bank will be comfortable with—and perhaps even expect—a longer, more involved onboarding process that includes credit checks, answering additional questions, and supplying information that the onboarding process of a neobank would not include.

Different Business Models, Different Customers
Due to their digital-only offerings, neobanks often categorize themselves as fintechs. As they are also startups in nature, their venture investors seek growth at all costs. Marketing and conversion are paramount, and the biggest goal of neobank/fintech/startups, in general, is to get new users to sign up.

As such, neobanks might be signing up less-than-ideal customers just for the sake of it — not that these customers are fraudsters, but that these customers might not be interested in higher-revenue generating banking products at first, such as mortgages.

On the other hand, challenger banks are interested in growing their balance sheet. While they are also interested in lead generation and account creation, the same as neobanks, they are more interested in moving the customer through a cycle of various banking and loan products to generate revenue. The onboarding and account creation process for challenger banks will take a look at the customer’s prior loan histories with other financial institutions, identifying those customers as having the potential to generate revenue for the challenger bank.

These different sets of customer expectations impact expectations during onboarding, and neobanks and challenger banks should take note and adjust their onboarding processes accordingly.

Why Should You Care?

A slick Instagram ad or a funny TikTok video shouldn’t be the only reason for a consumer to open an account with a new financial institution that they’ve never heard of. Consumers should take some time to understand more about the company’s offerings before diving in. A too-good-to-be-true rate might simply be that: too good and not available to most individuals who open accounts. This scrutiny helps neobanks and challenger banks as well. Greater transparency of offerings helps them attract, onboard, and retain the right customers.

An onboarding tool, such as Insnt Accept, should cater to both types of banks. In addition to vetting customers and removing potential fraud, the onboarding process should also be able to identify and tag certain customers that might be likely candidates for higher-revenue banking or lending products.

What Is Instnt?

Instnt is the only third-party customer acceptance service for banks that provides performance guarantees for each good customer a bank accepts. Because Instnt assumes liability for fraud, banks can experience top-line growth without the risk of turning away good customers. For more information on Instnt’s innovative solution for digital-first financial services providers, start your free demo today.


About the Author

Instnt's fraud loss insurance platform offers comprehensive protection for businesses for the entire customer lifecycle, from account initiation, and onboarding to subsequent logins, transaction processing, and the broadened accessibility of additional products and services.