Digital-only banks, or neo-banks, are not dependent on outdated, legacy financial infrastructure. These virtual banks are more efficient than traditional banking institutions because they operate without the costly networks of physical branches.
Neobanks have been working towards transforming the retail banking sector in major financial markets throughout the world.
According to Crunchbase data, OakNorth ($1 billion) and N26 ($670 million) have received the most funding out of all other major US and European neobanks.
Other top European and American digital banks include Atom bank, Revolut, Monzo, Chime, Starling Bank, Varo Money, and Aspiration. These digital-only financial services providers have benefited from an innovation-friendly regulatory environment and have picked up significant momentum in Europe during the past three years.
Several European digital banks are already entering the US market leveraging the experience generated by operating in continental Europe and the UK.
Although many of the relatively older digital banks are based in the US, which includes Simple (launched in 2009) and Moven (established in 2011), the American digital bank ecosystem has not made as many advancements as Europe’s digital-only banks. This is largely due to a convoluted regulatory regime.
In the UK, one of the most robust Fintech markets, regulations are relatively streamlined. Digital banks have been encouraged to compete with traditional brick and mortar banks.
The US, by comparison, possesses a stultifying regulatory approach that makes it exceptionally difficult to receive a federal bank charter. Few digital banks possess a federal banking charter. Lobbying by traditional financial services firms have also slowed the development of digital banks.
Agile Fintechs have learned to adapt and today most US-based digital banks partner with a chartered bank to provide bank-like services.
Consumers, particularly the younger generation, have become increasingly frustrated with traditional banking services providers. Millennials are also more eager, or inclined, to consider using digital solutions, which may lead to more people using digital banks in the future.
There are many reports that have been prepared (including Business Insider’s Evolution of the US Neobank market) to address questions related to how digital banks and other modern Fintech firms are planning to establish their operations in the world’s financial markets.