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The Rise of Neobanks and Their Impact on the Money Transfer Industry

01 Aug 2023


Technology never stops evolving!

From traditional banks to online money transfer companies to the advent of Neo banks, turns money transfers have taken over the past few decades and owe themselves to the evolving nature of technology.


Imagine where large swathes of expatriates still find it challenging to shift from traditional banks to some of the world’s best money transfer companies for their money transfers, a relatively new phenomenon has emerged.

Neo banks have been relatively new financial institutions that have crept into the remittances industry. These institutions broadly focus on digitising the financial services that traditional financial institutions like banks offer. But on the other hand, the rapid digitisation of overall global financial services has brought Neo banks to prominence, with particular emphasis on the remittance industry.


Given that Neo banks are relatively new, it is important to discuss them at length for your better understanding and to help you make an informed decision about choosing a service provider that corresponds to your remittance transfer needs.


This blog will throw light on the Neo Banks and all the associated details that are important for you to know.

 

A Brief Background and Key Statistics

An IOM UN Migration report revealed that about 281 million migrants, accounting for 3.60% of the world’s total population in 2020, lived across the world. Most of the migrants belong to developed countries and travel to developed countries for a host of reasons such as education, employment, tourism, etc.


The same report continued to state that these migrants send money online to offer financial aid back home. These remittances have increased substantially over the past few decades.

 

According to the same report, the quantum of global remittances in 2000 was $126 billion, and it just took about 20 years to reach a hefty $702 billion in 2020.

Another report by the World Economic Forum, sourcing its data from the World Bank, said that the global money migrants sent back to their respective countries swelled to $794 billion in 2022.


One of the reasons for the slow pace in the increase of remittances was the advent of Covid-19 and the invasion of Ukraine by Russia.


Let’s now understand Neo Banks with all the essential details.


What is a Neo Bank?

Neo Banks are fintech institutions that are normally referred to as Challenger Banks. These financial institutions, without any physical presence, are completely digital and offer digital financial services.

This fintech is popular in the US as Neo Banks.


The term Challenger Banks first attained recognition in the UK in the wake of the financial crisis of 2007-2009, leading to the emergence of several fintech banking startups.


These are the digital banks with no physical branches and can be called branchless digital banks. Neo Banks have an online presence alone.

Neo Banks emerged rather late, and the first such initiative can be traced back to the middle of the last decade.

 

Types of Neo Banks

Neo Banks are based on the concept of the ‘Banking as Service’ model. As of now, these can be categorised into the following three types. And the reason for these types so far is that the concept is relatively new in the strict sense of offering digital banking services. These three types are:

  • In the first type, the unlicensed fintech partner with a traditional bank and use a wrapper around the traditional banking services.
  • In the second type, a traditional bank launches its digital-only services and goes online along with offering traditional banking services.
  • In the third type, a Neo Bank has digital banking licenses. But these types of Neo Banks can operate only in countries that allow stand-alone digital entities to operate.

So far, all Neo Banks have managed to open and maintain over 30 million accounts worldwide.


Let’s now take a look at some major differences between Neo Banks and Traditional Banks.


Differences Between Traditional Banks and Neo Banks

Services

Traditional Banks

Neo Banks

Establishment

Decades-Old

Less than a decade

Banking License

Full

None, Full, Partial

Service Platform

Physical Branches

Digital Only

Customer Relationship

Long Term

Short, Virtual, Flexible

Fees

High and Complex

Low and Simple

Support

Online, In-person, Telephonic

Online, In-App, Telephonic

Bank Branches

Yes

No

Processing Speed

Slow and Lengthy

Fast and Automatic


These are some of the major differences between the services of traditional and Neo banks.


Take a look at the risks traditional banks face HERE.


Let’s now take a look at some of the advantages of Neo Banks and see how they can impact a money transfer from overseas.


Major Benefits of Neo Banks

After understanding Neo Banks holistically, let’s now see why they have become a buzzword in the financial world.

 

Low Operational Costs

Neo Banks do not have physical branches, so they do not and rather cannot charge you the way traditional banks do to meet their expenses to maintain staff, branches, equipment, etc.

 

Convenience

Owing to their digital presence, Neo Banks offers extreme convenience to approach them. You can easily use the apps or other means to approach them that depend on the type of Neo bank explained above.

 

Customer-Centric Services

Neo banks focus on the design and outlook of their platforms. Since these are completely digital, they need to create appealing and intuitive apps designed to make the users comfortable.

 

Smart and Digital Reporting

You can get to know about the detail of your transactions in a smart way digitally each time you use Neo Bank’s services. It diminishes the need to check details manually.

 

Quick Processing

With Neo Banks, you can manage to process your transactions at a faster pace, which is unfounded with traditional banks. This feature can help in transferring remittances meant to offer financial support.


ACE Money Transfer – An Even Smarter Remittance Solution

It is not only about the features explained above. One critical component of an online money transfer is the market-competitive exchange rates. Because a static rate can disbalance your finances as an expatriate, and banks, whether traditional or digital, are not particularly famous for offering live rates; in addition, it takes just 7 seconds to deliver funds to Pakistan from anywhere with ACE Money Transfer, which again is unique to the firm alone, and banks, regardless of their type, simply cannot offer.


FAQs

 

How to define Neo Banks precisely?

Ans. Neo Banks are digital-only banks providing tech-driven financial services without any physical presence.

 

What is the impact of Neo Banks on the remittance industry?

Ans. Neo Banks are helping remitters send money across borders quickly, conveniently, and cost-effectively. In addition, these enable people to access financial services regardless of their credit history, location, etc.

 

What are the key benefits of using Neo Banks?

Ans. The benefits Neo Banks offer include low service charges, ease and convenience, personalised services and transparency in their operations.

 

What are a few challenges of Neo Banks?

Ans. The challenges Neo Banks are facing are limited service availability and access, the invisibility of the institutions as they are branchless, the security of funds, etc.

 

What is the future of Neo Banks?

Ans. Neo Banks are likely to grow and expand and will have more innovative financial solutions as they become more widely available. But these will overtake online money transfer companies is unlikely because these companies are designed for remittances specifically, while Neo banks focus on offering financial services as a whole.

  • Global migrants

(Interactive World Migration Report 2022 (iom.int)

  • Global remittances in 2022

(Migrants sent home $800 billion remittances to these countries in 2022 | World Economic Forum (weforum.org)


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