Bank account opening is bouncing back after a slump during the coronavirus pandemic, and digital account opening (DAO) activity in particular is poised to benefit from the surge. Neobanks especially are becoming larger players in the greater financial services industry as they work to perfect DAO execution by stripping friction out of the process. 

But what exactly are neobanks, and how are they taking the financial services industry by storm? 

What are neobanks?

Neobanks, or digital-only banks, aren’t saddled by traditional banking technology and costly networks of physical branches. Instead, all of their banking services are conducted completely online via desktop or mobile app. There are two types of these standalone digital banks: a full-stack neobank or a front-end focused neobank. 

Digital-only bank account holders will continue to grow
Digital-only bank account holders will continue to grow.

A full-stack neobank is a standalone bank with its own banking license and can operate completely independently. Comparatively, a front-end focused neobank does not have its own banking license and must operate in partnership with either a traditional or legacy bank to provide its services to customers. 

Neobanks vs Traditional Banks

The primary difference between neobanks and traditional banks is that neobanks are entirely digital without any physical branch locations whatsoever—they’re accessed via a computer, tablet, or smartphone. To remain competitive, traditional banks may leverage the technology from neobanks so their consumers can benefit from digital offerings. 

Consumers’ growing frustration with legacy banking service providers stems from their core legacy technology and high costs. These downfalls combined with increased appetite for digital solutions, has accelerated the shift to digital-only banking. Increased consumer interest in swapping out cash and credit cards for financial service mobile apps is stimulating competition globally, which has driven neobanks to roll out extravagant features, like overdraft protection and sign-up incentives. 

Top Neobanks in the US

These are the top four US digital-only banks, by market account holders: 

  • Chime (13.1 million)
  • Current (4.0 million)
  • Aspiration (3.0 million)
  • Varo (2.7 million)

Top Neobanks in the UK

These are some of the top digital-only banks globally, by account holders:

  • Monzo (5.8 million)
  • Revolut (3.1 million)
  • Starling (1.9 million)
  • Monese (1.8 million)

Neobank industry growth

The rise of neobanks will be largely supported by the growing demand for digital banking services from younger consumers, as well as increasing trust of digital-only banks by consumers of all ages. 

The US has one of the highest numbers of digital-only bank account holders at 23.1 million. It is poised to retain this growth due to the country’s massive population and ability to boast some of the world’s oldest digital-only banks.

Overall, there will be 47.5 million digital-only bank account holders in the US by 2024, increasing at a 19.8% CAGR from 2020, and US digital-only banks’ penetration will increase by 8.9 percentage points between 2020 and 2024.