Pros and Cons of Neo Banks

In the previous article, we have already discussed what neo banks are. We now know the business model of neo banks. We are also aware of the various characteristic features of neo banks.

It is important to note that a significant number of business organizations in Europe have already started migrating their banking needs to neo banks from commercial banks. This is particularly true of the small and medium enterprises who find neo banks to be much more cost-effective.

It is important to realize that migration to neo banks should be a well-considered decision. There are several pros and cons associated with neo banks. In this article, we will try to list down the pros and cons that any business needs to consider before they select neo banks as their strategic partner.

Pros of Neo Banks

The neo-banking sector is growing at a compounded annual growth rate of more than 50% because many customers see value in their offerings. The main benefits which are offered by neo banks to their corporate customers have been mentioned below:

  1. Lower Fees: Neo banks offer banking services at a considerably lower price as compared to traditional commercial banks. This is because of the fact that neo banks are able to conduct their operations at a very low cost.

    The end result is that corporate customers are able to open their current accounts without having the requirement for maintaining any minimum balance. Also, fees for everyday services such as payments, receivables, statement issuance, etc are quite low. The lower costs can be critical for small and medium enterprises. This is the reason that a lot of small and medium enterprises have migrated their bank accounts to neo-banking organizations.

  2. Convenience: Neo banks provide a lot of convenience to customers if they are willing to adapt to technological changes. The basic selling point of neo banks is that they simplify banking services and improve user experience using technology.

    Many individuals are not comfortable with technology and hence do not like neo banks. However, when it comes to corporations, they do make decisions based on likes or dislikes. Since technology is more efficient, corporations across the world are adapting to it anyways. Hence, for them, neo banking is not a big change. Instead, it increases convenience and makes their process more efficient.

  3. Higher Security: Almost all the business which is conducted by neo banks is conducted online. This means that a lot of data is transferred over the internet. Also, the neo banks have to call external systems using APIs. Hence, the data has to be transferred through various integration points.

    Since the entire neo banking ecosystem is surviving on the belief that their transactions are secure, neo banks spend a lot of money in ensuring that the data is actually secure. Also, since neo banks do not have to spend on physical branches and personnel, they have a lot of money left over to help increase the level of data security.

  4. Data-Driven Personalization: Businesses that have worked with neo banks have reported that neo banks have one of the best data analytics systems in the world.

    Neo banks are able to track patterns in the business of their customers. They are then able to suggest banking services and products which can meet the need of their clients. Basically, neo banks have successfully replaced the role of a relationship manager with technology.

  5. Integration With Cryptocurrency: Traditional banks are averse to working with cryptocurrency. However, this is not the case when it comes to neo banks. Since neo banks are not regulated by a central banking system, they are free to help their clients deal in cryptocurrency as well.

    The end result is that neo banks are able to provide more variety to their corporate clients. Since a lot of corporates have started accepting payments denominated in cryptocurrency, this can be an important feature.

Cons of Neo Banks

There are several cons associated with neo banks as well. Some of the prominent cons have been listed below:

  1. High Risk: First and foremost, dealing with neo banks comes with its own share of risks. This is because neo banks are not legally considered banks. Hence, a lot of banking regulations that are meant to keep a check on the behavior of banks do not apply to these entities. As a result, it can be said that dealing with neo banks is highly risky.

    Also, there is a lot of ambiguity about what would happen if a neo bank goes bust. If a traditional bank goes bust, the central bank steps in to control the situation. However, there is no such centralized body when it comes to neo banks.

  2. Limited Services: Another problem with neo banks is that they offer only a limited range of services. The range of services offered by traditional commercial banks is very wide.

    Since neo banks operate on a digital-only model, they have to pick and choose the services that they can provide. The end result is that all the important services are provided. The banking needs of most corporations are met 100% by neo banks. However, if a corporation requires some type of niche service, they will be disappointed by neo banks.

  3. Poor Customer Service: Lastly, the customer service provided by neo banks does not have any human touch. Most of their customer service is performed by automated chatbots. This can be problematic for corporations since they would like to have human interaction, particularly for high-value transactions.

It can be said that neo banking is poised to make a big impact in the world of commercial banking. This is because the advantages associated with neo banking clearly outweigh its disadvantages.

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Commercial Banking