Neobanks are changing the way we bank faster than ever, and more than 20% of UK adults have already switched to these digital-first alternatives. Traditional banks struggle to keep pace while neobanks continue to grow stronger across Europe. France projects a 29.57% increase in neobank customers between 2024 and 2028. These numbers tell a compelling story – 64% of traditional banks acknowledge their difficulty in attracting new customers because they’re slow to adopt new technology.
Many people ask about neobanks’ safety compared to 50-year old institutions. The contrast between neobanks and traditional banks reveals why millions of customers are making the switch. New customers can open a neobank account in just 10-15 minutes, while legacy banks take weeks or even months. The meaning of neobanks in today’s digital world and their revenue model deserves attention, especially since they charge lower fees than traditional banks. The Covid-19 pandemic has definitely sped up this banking transformation. Yet this change was inevitable since traditional banks spend 60-80% of their budget to maintain outdated systems instead of creating new solutions.
What Are Neobanks and How Do They Differ?
Financial technology companies have started a new era of banking with neobanks – fully digital financial institutions that work without physical branches. These banks deliver all their services through mobile apps and online platforms. They provide simplified experiences without the extra costs of physical locations.
Neobanks vs Traditional Banks: Core Differences
Neobanks work differently from legacy institutions in several ways:
- Business Model: Neobanks work only online without physical branches, so they save money that traditional banks spend on overhead costs.
- Technology Infrastructure: Traditional banks struggle with old systems (sometimes still using COBOL). Neobanks build their services with modern technology stacks.
- Fee Structure: Lower running costs help neobanks offer services with low or no fees and better interest rates on deposits.
- Customer Experience: Neobanks focus on easy-to-use mobile interfaces and quick service delivery. Account opening and transactions happen faster.
Neobanks vs Digital Banks: Not the Same
People often mix up these terms, but they mean different things. Digital banks are usually online branches or updated versions of old banks that have banking charters. On the other hand, neobanks are independent fintech companies that usually don’t have banking licenses. Digital banks offer more services like mortgages and investments. Neobanks stick to basic banking features.
Neobanks Meaning and Licensing Explained
“Neobank” means “new banks” that challenge old banking methods. Most neobanks aren’t actually banks from a legal standpoint. They team up with licensed, FDIC-insured banks to provide banking services. This partnership lets neobanks offer FDIC-insured accounts without getting their own banking charters. Getting a charter takes up to 15 months and needs lots of money. Some neobanks like Varo Bank got their own national charter in 2020 after a long application process.
Why Customers Are Switching in 2025
The rise of neobanks in 2025 makes perfect sense. Customers are leaving traditional banks in droves because these new digital banks offer clear, measurable benefits that positively affect their everyday banking.
Faster Onboarding: 10 Minutes vs 10 Days
Traditional banks can’t seem to shake their slow account opening process—almost half still want you to visit a branch to set up an account. Neobanks have completely changed this with their digital onboarding system. Numbers tell the story: Niyo gets you started in just 100 seconds. Traditional banks take days, often getting stuck with verification delays and document problems. This advantage becomes even more valuable as people of all ages embrace digital banking.
Lower Fees: No Monthly Charges vs Maintenance Fees
Money talks when it comes to choosing neobanks. Regular banks hit you with $10-15 monthly fees, $3-5 ATM charges, and steep $35-40 overdraft penalties. Neobanks simply don’t charge these fees. You get free accounts, no-cost domestic transfers, and minimal charges on foreign exchange. They can do this because their operations cost 60-70% less than old-school banks.
Mobile-First Experience: App-Only vs Branch Visits
Neobanks put mobile first, and it shows—they average 1,400 daily active users while traditional banks see just 577 daily branch visits. Their accessible interfaces draw tech-savvy customers who want to handle their money from their phones. Young people love this approach: 60% of millennials, 57% of Gen Z, and 52% of Gen X use mobile banking apps as their main banking tool.
Spending Insights and Budgeting Tools
Neobanks go beyond simple banking features. They give you:
- Immediate spending breakdowns (dining, travel, bills)
- Budget alerts you can customize
- Smart savings rules that move money based on your preferences
- Tools to track and cancel unwanted subscriptions
These features help people understand their money better, which builds confidence, especially for banking newcomers.
Challenges Faced by Traditional Banks
Traditional banks are struggling to keep up with agile neobanks in today’s digital world. Their biggest problem stems from old systems and processes that make it hard to adapt to change.
Legacy Systems: COBOL and Monolith Architecture
Old technology remains the foundation of many traditional banks. These banks have built up a lot of technical debt over the years through quick fixes. This has created complex IT systems that don’t work well together. The situation gets worse because many core banking platforms still depend on COBOL—a programming language from the 1950s that fewer developers know how to use. These older systems weren’t built to handle our fast-paced, customer-focused world. Simple updates need extensive changes, which costs more time and money. Research shows that banks often forget to include technical debt cleanup in their original transformation budgets. This is a big deal as it means they can’t build the platforms needed for the future.
Slow Innovation Cycles and Compliance Bottlenecks
The gap between traditional banks and neobanks keeps getting bigger. Traditional banks need four to six months to roll out new products. Neobanks launch new features every two to four weeks. Large banks are nowhere near as productive as digital companies, working at 40% less efficiency. One Fortune 500 investment bank spent over 200,000 hours yearly just to prepare and approve change tickets—that’s like having 100+ full-time engineers working for a year. Bank compliance costs have jumped by more than 60% in the last eight years. Yet 42% of banks still use manual processes “often” for compliance work.
Customer Experience Gaps in Digital Services
Traditional banks find it hard to understand what different customers need and adjust their services. About 70% of digital transformations cost more than planned because leaders don’t see how complex these changes can be. Banks continue to work in separate departments that don’t communicate well. This leads to mixed priorities and poor execution. Customers feel the impact of this structure directly, while neobanks offer easy-to-use alternatives that work better.
Are Neobanks Safe and Sustainable?
People evaluating neobanks against traditional banks worry about security. You need to learn about regulatory frameworks and cybersecurity practices that protect your money before switching.
Regulatory Oversight: FSCS, PSD2, and EMI Licenses
Most neobanks operate under e-money institution (EMI) licenses, unlike traditional banks with full banking charters. This makes a big difference in how customer funds receive protection. The European Banking Authority keeps a central register for payment and electronic money institutions authorized within the EU. The UK’s Financial Conduct Authority and other national authorities ensure compliance with security requirements. Neobanks usually partner with licensed banks, so customer funds must have protection through segregated accounts with credit institutions, insurance coverage, or similar guarantees.
Cybersecurity Measures: 2FA, Encryption, and Passkeys
Neobanks use resilient security protocols that protect customer data and transactions:
- End-to-end encryption keeps sensitive information safe during transmission, making it unreadable to unauthorized individuals
- Multi-factor authentication adds extra security through One-Time Passwords or biometric verification (fingerprint/facial recognition)
- AI-powered fraud detection systems monitor transactions with up-to-the-minute data analysis to spot potential fraud before money is lost
Many neobanks now use passkeys—a secure, passwordless authentication method. This FIDO2 and WebAuthn standard-based approach replaces traditional passwords with biometric authentication.
How Do Neobanks Make Money Without Fees?
Making money remains the biggest problem for many neobanks. Yes, it is harder without proper banking charters since they cannot use fractional credit as a revenue source. We relied on interchange fees from merchants when customers use their neobank-issued debit cards. Cash-back incentives have become more generous due to competition, which reduces their interchange margins. The industry still faces questions about whether this business model can last.
Comparison Table
| Feature | Neobanks | Traditional Banks |
|---|---|---|
| Business Model | Digital-only without physical branches | Physical branches with online services |
| Account Opening Time | 10-15 minutes (some take just 100 seconds) | Several weeks to months with mandatory branch visits |
| Monthly Fees | Zero monthly charges | $10-15 monthly upkeep fees |
| ATM/Overdraft Fees | Little to none | $3-5 for ATM use, $35-40 for overdrafts |
| Technology Infrastructure | Modern tech systems | Older systems (still running on COBOL) |
| Budget Allocation | Focuses on digital breakthroughs | Spends 60-80% to maintain old systems |
| Customer Engagement | 1,400 users active daily | 577 branch visits per day |
| Feature Deployment | Updates every 2-4 weeks | Takes 4-6 months to launch new products |
| Banking License | Teams up with licensed banks | Owns banking charters |
| Security Features | End-to-end encryption, 2FA, AI fraud detection, passkeys | Not specifically mentioned |
| Primary Revenue Source | Card transaction fees | Standard banking services and loans |
| Mobile Features | Real-time spending categorization, budget alerts, automatic savings rules | Basic mobile features |
Conclusion
The banking world of 2025 shows a growing difference between neobanks and traditional banks. Traditional banks don’t deal very well with their outdated systems. They spend 60-80% of their budgets to keep legacy infrastructure running while falling behind on state-of-the-art solutions. Neobanks excel through tech flexibility, accessible design, and streamlined services.
Numbers paint a clear picture. You can open a neobank account in 10 minutes compared to weeks at traditional banks. There are no monthly fees of $10-15 or overdraft charges of $35-40. Their mobile-first strategy gets more and thus encourages more engagement—1,400 daily active users compared to 577 daily branch visits at traditional banks.
Safety concerns still exist, but neobanks tackle these issues with reliable security measures. They use end-to-end encryption, multi-factor authentication, and AI-powered fraud detection. They also partner with licensed banks to ensure customer’s funds get proper protection under regulatory frameworks.
Sustainability remains a challenge. Neobanks must grow beyond depending on interchange fees to build long-term profits while keeping their edge in customer experience.
This banking transformation goes beyond just technology. Neobanks reflect changing customer expectations about financial services. People just need more transparency, lower costs, and continuous connection. Traditional banks’ future market share depends on their readiness to welcome fundamental change rather than small improvements.
Choosing between neobanks and traditional banks comes down to your priorities and needs. Tech-savvy customers who want minimal fees, powerful mobile tools, and quick service find neobanks more appealing. People who value face-to-face relationships and detailed financial services might still prefer traditional banks despite their drawbacks.
One thing is clear – competition between these banking models will without doubt help consumers through better services, lower costs, and more state-of-the-art solutions across the financial sector.
FAQs
Neobanks are digital-only financial institutions that operate without physical branches, offering services exclusively through mobile apps and online platforms. They typically have faster onboarding processes, lower fees, and more advanced mobile features compared to traditional banks.
Yes, neobanks implement robust security measures such as end-to-end encryption, multi-factor authentication, and AI-powered fraud detection. Most neobanks partner with licensed banks to ensure customer funds are protected under regulatory frameworks like FSCS or similar guarantees.
Neobanks typically offer faster account opening (often within minutes), lower or no monthly fees, free domestic transfers, and advanced budgeting tools. They also provide a more user-friendly mobile experience with features like real-time spending categorization and customizable alerts.
Neobanks primarily generate revenue through interchange fees received from merchants when customers use their neobank-issued debit cards. Some are also exploring additional revenue streams to ensure long-term sustainability.
While neobanks are gaining popularity, traditional banks are unlikely to become obsolete. Many are adapting by improving their digital services. The choice between neobanks and traditional banks depends on individual preferences, with some customers still valuing face-to-face relationships and comprehensive financial services offered by traditional institutions.
