The rise of “neobanking”: why you might want to consider online-only banks

Category: News & United Kingdom

Since governments and monarchies minted the first currencies, people have required a safe place to store their wealth. Traditionally, money was stored in temples and churches, though goldsmiths in the UK started safeguarding the wealth of others during the reign of Henry VIII after he dissolved the English monasteries.

The advent of modern banking didn’t properly gain traction until the 18th century, when Scottish economist, Adam Smith, introduced the “invisible hand” theory, encouraging a self-regulating economy and limiting the state’s involvement in banking.

Subsequently, numerous bank branches opened across the UK, giving people a local place to safely store their wealth and access a range of financial services.

However, as society becomes increasingly reliant on the internet, dependency on physical banks has declined, and many branches have closed. In fact, Which? states that almost half of the UK’s bank branches have shut down since 2015.

As a result, many online-only banks, commonly referred to as “challenger banks” or “neobanks”, have become increasingly popular. As time goes on, many people may never see the inside of a physical bank.

Continue reading to discover precisely what “neobanking” is, and whether you might consider using such a service in the near future.

“Digital-first” banking has become more popular in recent years

While the idea of online-only banking may seem like a relatively new concept, it can actually be traced back to the 2008 financial crisis. Following this period of financial instability, innovative digital banks capitalised on the complexity and costs of traditional banking, promoting lower costs and greater transparency.

At the time, these online-only banks were relatively unknown and struggled to gain widespread recognition and trust.

Though, as technology has continued to advance and smartphones have become more common, “digital-first” banking has gained momentum, with more and more neobanks appearing on the market. In the UK, Revolut, Monzo, and Starling Bank are three of the best-known examples.

More recently, at the height of the Covid-19 pandemic, governments imposed social distancing measures to halt the spread of the virus. This benefited neobanks, as people searched for new and safer ways to manage their money digitally.

Perhaps the most apparent difference between traditional and neobanks is that the latter typically has no physical presence.

Traditional banks usually have a network of physical locations, allowing customers to store and access their money locally. In contrast, neobanks operate solely online through websites or mobile apps, with no bricks-and-mortar locations.

This lack of physical locations means that the cost structure of neobanks differs from their traditional counterparts. Since conventional banks pay property costs and typically hire more employees, consumers generally absorb these costs in the form of higher fees and lower interest rates.

Neobanks are available 24/7 and generally have lower fees

One of the benefits of neobanking is that they are always online. This around-the-clock availability means you can manage your money no matter the time or place, and you don’t need to worry about restrictive operating hours, or your local branch closing altogether.

Similarly, neobanks focus on offering customers a streamlined, user-friendly experience. This means their platforms tend to leverage technology to provide modern interfaces that are easy to understand, and they often offer financial and budgeting insights to help you make informed decisions.

This digital capability can also be beneficial if you want to transfer money internationally – perhaps from your UK to Australian account.

Additionally, since neobanks don’t pay property costs and have less physical infrastructure to maintain, they can often offer higher interest rates on savings accounts and have lower fees, giving you the chance to maximise your savings.

On the topic of fees, one of the main reasons neobanks rose to popularity was due to a perceived belief that conventional banks weren’t being transparent with costs, often imposing hidden fees that consumers struggled to understand. Meanwhile, neobanks aim to avoid these hidden costs and be as open as possible.

Elderly people may struggle with neobanking

While the lack of physical branches often means lower fees and higher interest rates, this could be a downside for those who prefer face-to-face interactions and appreciate the opportunity to visit a local branch to discuss more complex matters.

This is especially true for older people as they may not be as tech-savvy. In fact, Age UK reveals that 75% of over-65s with a bank account wish to undertake at least one banking task at a branch, while 39% of older people with a UK bank account don’t manage their money online at all.

If neobanking becomes even more prevalent and branch closures continue, these older customers may feel excluded and could struggle to manage their finances.

Also, while neobanks offer essential day-to-day services, such as savings accounts and debit cards, their offerings may be limited in other areas compared to conventional banks. For instance, they may not offer services such as cash deposits, extensive loan options, or specialised financial products.

How to decide which form of banking would best suit you

It’s important to note that choosing between a traditional and a neobank isn’t simply a binary decision, as both present their own benefits and downsides. As such, the right choice for you will depend on your personal circumstances.

For example, if you would prefer to make the most of lower fees and higher upfront interest rates on savings accounts, you may want to choose a neobank. Though, this means you’ll need to give up face-to-face service, which could be an issue if you prefer to discuss complicated financial matters in person.

Ultimately, it’s worth assessing your banking preferences and overall financial goals so you can make an informed decision. You may even want to consider a hybrid approach, utilising the services of both traditional and neobanks to create a solution that aligns with your financial objectives.

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Please note

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.