“Neobanks”: what are they and what do they offer?

03/12/2020

“Neobank” is a term that has recently become widespread and increasingly used in the press. It is not a legal term and does not appear in any regulation. You might think a neobank is a newly created bank, seeing as it is formed by the prefix “neo”, meaning new, and the word bank. But this is not the case. In addition to analysing which services they offer and how, we need to compare them with traditional banks since, though at first sight they may seem they are the same, they are not. Let us try and dispel any doubts.

First, what are they? The colloquial term “neobank” refers to emerging finance companies that are characterised by their intensive use of technology (fintech). Although they offer the same core banking services as traditional banks, such as payment accounts, cards and loans, “neobanks” do this exclusively online, mainly through a mobile app. Their lower costs allow them to charge their customers less.[1]Abre en ventana nueva However, the absence of physical branches may be a drawback for some customers who prefer to deal with the bank in person.

Are these firms banks?

Not necessarily. Some fintech firms are not banks. Before purchasing financial services, it is advisable to check what type of licence each firm operates under, as this determines the type of services they can provide. It is like a driving licence: you may have a licence for cars, but not be allowed to drive trucks or trailers. That is why it is important to know what authorisations each entity has. Also, you should find out if they offer what you need.

Strictly speaking, only those that have a credit institution licence are banks (i.e. banks, savings banks and credit cooperatives). This means that they are subject to the same regulation as traditional banks and that the amounts deposited in them are protected by a deposit fuarantee scheme , one that is either Spanish or from another EU country. Additionally, they are the only entities that can take deposits from the general public, an activity exclusively limited to credit institutions. 

Under what arrangements do non-banks operate?

They are normally associated with an electrónic money institution (ELMI) that is already established in Spain or abroad, or else choose to apply for the ELMI licence themselves. In some cases they operate as payment institutuions or they provide only account aggregation and payment initiation services. Bear in mind that it is important to know who the legal person behind a brand is; in the event of any problem, you will have to turn to them. ELMIs, unlike credit institutions, are not affiliated to a deposit guarantee scheme. However, as security, they must deposit their customers’ money in special accounts in banks or invest these funds in safe assets such as fixed-term deposits.