Neobank: Meaning, how it works, and is it safe?

In recent years, the neobanking market has been experiencing rapid growth. The market is anticipated to grow at a remarkable compound annual growth rate (CAGR) of 24.60% from 2024 to 2029, showcasing strong consumer adoption of these challenger banks.¹ User penetration is expected to increase from 3.89% in 2024 to 4.82% by 2028, highlighting neobanks as essential players in today's financial landscape.²

The rise of neobanks, which operate solely online without physical branches, is driven by the growing digitisation of banking. Even traditional banks in Singapore like OCBC and DBS are moving to digital platforms due to the increase in mobile and online banking.

This article will explore what neobanks are and highlight their key differences from traditional banks and digital banks. It will also examine the pros and cons of neobanks and introduce alternatives like Airwallex. 

Sign up for a free Airwallex Global Account, an all-in-one business account that helps your business operate across borders. Get local bank details in 23+ currencies, accept payments worldwide, and make global transfers to 150+ countries at market-leading FX rates. You can also create free multi-currency employee and company cards instantly to streamline your expense management.

Neobank meaning

Neobanks are fintech companies that provide online-only banking services through digital platforms like mobile apps and websites, eliminating the need for physical branches. These fintechs offer a range of financial services, such as checking and savings accounts, debit and credit cards, loans, investments, and budgeting tools.

Neobanks appeal to SMEs, small businesses, and startups with their flexibility and convenience. Unlike traditional banks, which often require a significant amount of time and effort for account opening, neobanks offer a seamless online experience where businesses can create accounts in minutes, bypassing the paperwork and hassle of conventional banking processes. We'll delve deeper into the distinctions between neobanks, digital banks, and traditional banks below.

Without the overhead of physical branches, neobanks offer lower fees and better interest rates, catering to a digitally savvy generation with a cost-effective banking experience.

Neobank vs Traditional bank

Neobanks and traditional banks differ significantly in their operations and services. Traditional banks are fully licensed and offer a wide range of financial services through branches and ATMs, providing face-to-face customer service but incurring higher operational costs, reflected in fees and interest rates. On the other hand, while neobanks function as financial institutions and may be licensed as financial providers, they typically do not hold banking licences. Neobanks operate exclusively online and leverage technology to offer services via mobile apps, reducing overhead costs and allowing for lower fees and competitive interest rates.

Neobank vs Digital bank

The terms “neobanks” and “digital banks” are often used interchangeably, but they are not the same. Both are mobile-first and digitally-centric, but digital banks are typically online branches of established, regulated banks. Neobanks, however, operate entirely online without physical branches or traditional bank affiliations. This allows neobanks to offer unique financial services and products, often innovating beyond conventional digital banks, while still adhering to regulatory standards.

Who are the best neobanks in Singapore?

While neobanks are still a relatively new concept in Singapore, they have been gaining traction in recent years. We've curated a list of the best neobanks in Singapore. While the term "neobank" is still evolving and may not perfectly define the financial service providers discussed, we believe this list includes those that best fit its definition.

Wise

Wise offers money services for both personal and business users. Businesses can create online multi-currency accounts with local account details in 18 currencies. They can accept payments via local payment rails in 9+ currencies and send money to over 70 countries. Wise also offers business debit cards at SGD 4 per card (waived for the first card), simplifying expense management by allowing businesses assign a card to each team member. With transparent pricing, Wise features $0 monthly fees and near mid-market exchange rates, though it does charge an account set-up fee and transfer fees for sending money.

On the other hand, Airwallex specialises exclusively in business services. It offers free multi-currency accounts with global payouts in 20+ currencies and free or low-cost transfers via local payment rails to 110+ countries. For a more detailed comparison between the two financial providers, refer to our article on Wise vs Airwallex.

Aspire

Aspire offers multi-currency business accounts for global start-ups and SMEs, including local account details in 5 different currencies. However, to make international FX transfers from your SGD account, businesses must first integrate their account with Wise. In contrast, Airwallex has the infrastructure to handle transfers directly, without the need for third-party integration. Aspire also offers corporate cards with zero transaction fees and competitive FX rates, helping businesses save on expenses. Additionally, their integrated expense management solution provides real-time insights into employee expenditure patterns, ensuring spending aligns with company policy.

Read more about the comparison between Aspire vs Airwallex in our linked article.

Youbiz

Designed for travellers and globetrotters in Singapore, YouTrip offers multi-currency mobile wallets and contactless Mastercards in over 150 currencies with zero fees and competitive exchange rates. Their business-focused offshoot YouBiz offers SME corporate cards with unlimited 1% cashback and 0% FX fees, as well as corporate multi-currency accounts available in up to 9 currencies.

Revolut

Headquartered in the UK, Revolut provides a comprehensive suite of digital banking solutions for both personal and business use in over 35 international markets. At the moment, only Revolut Personal is available in Singapore. Their offerings include international money transfers, payment acceptance, currency exchange, company debit cards, and automated expense management. Revolut recently introduced their Flexible Accounts in Singapore, offering customers up to 5.21% in annual percentage yield.

Learn about the comparison between Revolut and Airwallex in our linked article.

Globally, neobanks are also becoming more popular due to their user-friendly interfaces, innovative features, and competitive pricing. Here are some key fintech players in the market categorised by their business account and cards capabilities:

Sources: Wise, Aspire, Youbiz, Revolut Business, Starling Bank, Chime, Bunq, Varo as of 1 July 2024

Neobank alternative: How Airwallex business account helps businesses save money

Airwallex positions itself as a financial platform that simplifies international payments for global businesses of all sizes. The Airwallex business account offers features like batch transfers, expense management, and Xero integration for simplified bookkeeping and financial operations. You can also issue free unlimited Borderless Cards, a corporate debit card powered by Visa that earns 1% unlimited cashback on all business expenses and accept payments from 180+ countries with their payment gateway.

Read on to learn more about how you can utilise neobank alternatives like Airwallex for international transactions to save on fees and gain better control over your finances.

How do challenger banks like neobanks work?

Neobanks offer an array of financial services designed to enhance financial management and operational efficiency for businesses. Here are some innovative features offered by these fintechs:

• Business accounts: Neobanks offer business accounts tailored to support the seamless handling of vendor payments, payrolls, and other business transactions, often at minimal costs. Some even offer multi-currency accounts catering to businesses that handle frequent global transactions, as well as additional payment acceptance methods such as payment gateway, POS, and payment links for eCommerce businesses. Moreover, advanced features such as integration with accounting software and automated reconciliation significantly reduce the admin burden on businesses.

• Corporate cards: Neobanks offer businesses the convenience of easily issuing corporate cards for employees, significantly reducing their out-of-pocket expenses. Virtual cards are also widely available, adding an extra layer of convenience and security for online transactions. Businesses can set flexible spending limits on each card and instantly freeze or cancel them, ensuring robust protection against fraud and unauthorised transactions. Some neobanks also offer cashback rewards on eligible card spending to help businesses save more.

• Expense management tools: Neobanks provide robust tools for creating company budgets, monitoring cash flow, forecasting expenses, and setting financial goals. Moreover, their integration with accounting software like Xero and QuickBooks allows businesses to gain a comprehensive view and greater control over their finances.

• Loans: Some neobanks offer small business loans as an alternative to traditional bank loans with faster approval processes and more competitive interest rates. This can be especially beneficial for startups and SMEs seeking funding without the hassle of lengthy paperwork and collateral requirements.

How do neobanks make money?

Depending on the type of services the neobank offers, its revenue model may vary. For instance, some neobanks charge monthly fees on their business accounts. In other instances, businesses making international money transfers through a neobank might incur a small FX mark-up on currency conversions. If the neobank provides payment gateway services, they may also charge a fee on every payment processed through their platform.

For neobanks that offer corporate cards, they typically earn their revenue through collecting an "interchange fee", also colloquially known as a swipe fee. When you make a purchase using your card, payment networks like Visa and Mastercard collect this interchange fee from the merchant. A portion of this fee is then paid out to the issuing bank. 

Overall, neobanks may charge a small fee for the different services they provide including business accounts, FX mark-ups on international transfers, payment gateway services fees, and interchange fees from corporate cards. Over time, these small cuts from numerous transactions add up to a significant revenue stream.

Why choose a neobank?

Neobanks provide lower fees and greater convenience compared to traditional banks, but they also have their drawbacks. It's essential to understand their pros and cons before making the switch.

Pros of using a neobank

• Lower fees: Neobanks generally offer lower fees compared to traditional banks. They often eliminate common charges such as monthly account fees and minimum balance requirements, making them a cost-effective option for many SMEs and startups.

• Higher rates: Many neobanks offer higher interest rates on interest-bearing accounts. This is possible because they don’t operate any physical location and may have lower overhead costs compared to traditional banks.

• Accessibility and convenience: Smartphone penetration in Singapore reached 93.7% in 2023. This number is projected to reach 99.4% by 2026.³ In today's digital age, neobanks, which operate without physical branches, offer 24/7 access to banking services. With your smartphone, you can effortlessly perform everyday tasks such as transferring money or receiving customer payments via mobile or online banking from anywhere, at any time.

Cons of using a neobank

• Limited physical presence: The absence of brick-and-mortar branches can be a drawback for customers who prefer face-to-face interactions or require in-person services, such as cash deposits.

• No bank charter: Neobanks, unlike traditional banks, do not possess a banking charter. Instead, these fintech companies typically collaborate with a partner bank to insure their products. Before registering with a neobank, ensure it is SDIC-insured through its partner bank to safeguard your funds.

Are neobanks safe to use?

When considering the safety of neobanks, it is crucial to understand the security measures they employ to protect your business's funds and sensitive information.

• Advanced encryption: Neobanks often leverage advanced encryption technologies to safeguard data transmitted between users and their servers. Encryption serves as a barrier against unauthorised access, ensuring that business and financial information remains confidential and secure.

• Fraud monitoring: Robust fraud monitoring systems are implemented to detect and prevent fraudulent activities. Neobanks utilise real-time analytics to identify unusual transactions or patterns that may indicate fraud. These systems enable prompt responses to potential threats, minimising the risk of unauthorised access or transactions.

• Data privacy: Neobanks employ comprehensive data privacy measures to prevent breaches and unauthorised use of company information. Businesses can also control their privacy settings and permissions, granting them greater autonomy over how their data is shared and utilised.

• Deposit insurance & consumer protections: As mentioned earlier, neobanks in Singapore partner with licensed banks insured by the Singapore Deposit Insurance Corporation (SDIC) to keep their customer's funds in a bank account, providing an additional layer of protection for business finances.

While no financial institution is entirely immune to risks, neobanks employ robust security measures to protect customer's funds and data. Elsewhere, Airwallex also prioritises the safeguarding of both user's funds and sensitive business information through various security measures. The fintech provider partners with leading global financial institutions to hold their customer's funds, and strictly complies with international security standards including PCI DSS, SOC1, and SOC2. In Singapore,  Airwallex (Singapore) Pte. Ltd. is licensed as a Major Payment Institution and is regulated by the Monetary Authority of Singapore under the licence number PS20200541.

Why you should consider a financial technology service provider like Airwallex

If you make frequent global transfers to pay your overseas suppliers or employees, you may be familiar with the high fees that come with traditional SWIFT transfers. These fees can quickly add up and eat into your profit margins.

This is where Airwallex comes in. With the Airwallex business account, businesses can access benefits such as:

• $0 international transaction fees: Airwallex's connection with local payment networks ensures that international money transfers across their extensive network of over 110 countries are free from transaction fees and hidden charges.

• Competitive exchange rates: To help businesses save on hefty foreign exchange fees, Airwallex offers market-leading exchange rates for 23+ currencies with just a tiny markup.

• Faster transfers: Utilising local payouts, 70% of businesses using Airwallex can make same-day payments to their overseas suppliers.

• Multi-currency account: With Airwallex Global Account, businesses can hold balances in 20+ currencies. This eliminates the need for constant currency conversion and reduces foreign exchange risks.

• Corporate card: Businesses can create free multi-currency Visa cards for their employees to use for business expenses, providing greater control and real-time visibility over spending while enjoying unlimited 1% cashback.

• Payment gateway: Airwallex accepts payments in 180+ countries and 160+ local payment methods, such as Alipay and WeChat Pay, making it easier for businesses to expand their customer base globally.

• Embedded finance: Airwallex offers embedded finance solutions for businesses, allowing them to integrate financial services into their own platforms and applications. This helps businesses provide a more seamless experience for their customers without requiring them to leave their platform.

• Integrations with accounting software: Airwallex integrates seamlessly with popular accounting software like Xero, QuickBooks, and NetSuite. This further simplifies the accounting process and reduces manual data entry errors.

How to open an Airwallex account

Opening an Airwallex account is a straightforward process designed to be quick and convenient for businesses. Follow these steps to get started in just 5 minutes:

1. Sign up: Visit Airwallex's website to create a new account.

2. Submit business documents: Prepare and upload necessary documents such as business registration certificates, identification of business owners, and proof of address.

3. Account verification and approval: Airwallex will perform identity verification checks to confirm the authenticity of the provided information. After successfully completing the verification process, your account will be reviewed and approved. This usually takes just a few days.

Once approved, you will receive a confirmation email with instructions on how to access your Airwallex account. Login using your credentials to start managing your business transactions right away.

Conclusion

Neobanks offer a digital-first solution for SMEs and startups to streamline global payments. They typically provide lower fees and greater convenience compared to traditional banks, making them a cost-effective choice for many businesses. At the same time, traditional banks may provide products that fintechs typically do not, such as treasury and investment banking. Therefore, depending on your specific financial needs, you may find value in using both neobanks and traditional banks to fully meet your business requirements. Carefully consider what services your business needs before choosing your banking solution.

For businesses seeking a comprehensive fintech solution, Airwallex is an excellent alternative. This all-in-one financial provider not only employs advanced security measures to safeguard your funds but also offers cost-saving advantages with $0 transaction fees and market-leading FX rates. Sign up for a free Airwallex account today to enhance your business banking experience with convenience, affordability, and security at the forefront.

Frequently asked questions

1. Who regulates neobanks?

Most neobanks in Singapore are not fully licensed banks. Instead, they function as fintech companies that collaborate with licensed banks insured by the SDIC.

2. Why are traditional banks better than neobanks?

Traditional banks typically offer a wider range of financial services and have established reputations in the industry. They also often have physical branches, making it easier to access services in-person. However, traditional banks may have higher fees and less user-friendly digital interfaces compared to neobanks. Ultimately, the best option for your business will depend on your individual needs and priorities. Businesses might benefit from leveraging both options: traditional banks for their physical services and neobanks for their wide range of digital products.

3. How big is the neobank market?

The global neobank market is experiencing rapid growth in recent years, with the number of users projected to reach 386 million by 2028.² As more businesses turn to digital solutions for their financial needs, it is likely that the neobank market will continue to see significant growth and innovation. In 2024, the neobanking market is estimated to have facilitated over US$4550 billion in transactions worldwide and is expected to grow at a compound annual growth rate (CAGR) of 24.6% from 2024 to 2029.¹

4. Are neobanks available worldwide?

Yes, neobanks are available in many countries around the world. Some prominent examples include Aspire and YouTrip in Singapore, Revolut and Starling Bank in the UK, and Chime and Varo in the US.

4. Can I get a loan from a neobank?

Some neobanks offer lending options for both personal and business needs. As these banks operate entirely online, they often have faster and more streamlined loan application processes compared to traditional banks.

***Note: This publication does not constitute legal, tax, or professional advice from Airwallex nor substitute seeking such advice, and makes no express or implied representations/warranties/guarantees regarding content accuracy, completeness, or currency.

Sources and references

^1. https://www.mordorintelligence.com/industry-reports/global-neobanking-market

^2. https://www.statista.com/outlook/dmo/fintech/neobanking/worldwidehttps://wise.com/sg/pricing/business

^3. https://www.statista.com/statistics/625441/smartphone-user-penetration-in-singapore