The demand for digital financial services offered by challenger banks continues to grow worldwide, although not at the same pace. According to the report published by SEON, Neobanking Index: The State of Neobanks in 2022, 46% of the adult population of Brazil already has an operating account with a neobank, as does 26% of the population of India, compared with 8% of the adult population of the United States. Likewise, in the Philippines, usage is expected to increase by 154% next year, in Mexico by 141% and by 71% in Germany.
Despite this uneven pace of growth, the rise of neobanks is a global phenomenon, a result of the pandemic that drove the demand for much simpler and more agile financial services, such as being able to open an account without the need for proof of income or other information that was previously required by a traditional bank.
“The ease of opening an account is key to the growth of these neobanks, as well as the current demand from users for more accessibility and personalization. Traditional banks are closing branches and not all of them have an agile and clear digital strategy that allows their customers to open an account in five minutes, or carry out their daily operations with complete autonomy,” explains Juliana Ortiz, Customer Success Manager at Latinia.
Beyond digital banking
The fact that they have been conceived within a digital native framework gives these banks very specific functionalities, which allow them to offer a user experience that clearly differentiates them from traditional banking. There are numerous advantages directly linked to their operational capabilities such as lower fees and commissions for their customers, more accessibility and 24/7 customer service. They are also highly valued by people who travel, as they eliminate foreign exchange fees.
On the other hand, experts point out social benefits that are clearly transforming the global financial industry, which are impacting certain communities and sectors of the population, as highlighted in the article 5 ways challenger banks add value beyond digital banking published by American Banker:
- Greater accessibility for users from more vulnerable groups and those who have greater difficulties in accessing banking services.
- Creating communities for your clients, helping them forge connections with people in their industry, among founders, investors and mentors with virtual and in-person events.
- Improving its customer service both digitally and in person, training its branch staff so that customers feel that they are served in exactly the same way as in a traditional bank.
- Functionalities specifically created for different customer segments, such as parents being able to monitor their children’s banking activities with emergency alerts, accident detection or location behavior, among other functions.
Challenger banks are not exempt from fraud
The growth of challenger banks is positive for today’s consumer demands, but it should not be forgotten that they also face some challenges for the future, such as cybersecurity. “Most neobank apps implement multi-factor authentication and encryption alongside other security measures to protect your information. Under the hood, risk management and banking fraud prevention software work around the clock to protect operations and customers,” according to the SEON report.
The main risks faced by this type of banks are:
- New account fraud by criminals posing as legitimate consumers, using stolen, synthetic or false identities.
- Identity theft using methods such as phishing and vishing to impersonate genuine users.
- Organized groups of fraudsters often have access to more resources than individual hackers.
- Stolen information, as neobanks are common targets for account takeover fraud due to ease of access and lack of real-world infrastructure.
- Prevention of money laundering because neobanks often process transactions quickly through digital means, making them somewhat more susceptible to financial crime.
“Fraud within neobanks can be difficult to detect, both for the institution and its customers. In this sense, technological tools such as those developed by Latinia specifically for the financial sector are important for detecting critical events and accompanying users in each transaction, guaranteeing their security and improving the customer experience,” concludes Juliana Ortiz.