Neobanks as Killing Factor of Traditional Banking System

Running head: NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING
SYSTEM
NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
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1NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
Table of Contents
Chapter 3: Literature review......................................................................................................3
3.1 Introduction:.....................................................................................................................3
3.2 Concept of Neobank:........................................................................................................3
3.3: Financial technology in the banking industry:................................................................4
3.4 Comparing traditional bank model with the Neo bank model:........................................5
3.5 Comparing the traditional online banking services with that of Neobanks:....................7
3.5 Summary of the points:..................................................................................................10
Chapter 4: Collection of Primary Research.............................................................................11
4.1 Methodology..................................................................................................................12
4.2 Research Design.............................................................................................................13
4.2.1 Type of research..........................................................................................................15
4.2.2 Design of the research instrument...............................................................................16
4.3 Research execution.........................................................................................................17
4.4 Analysis of data..............................................................................................................18
4.4.1 Profile of respondents.................................................................................................18
4.4.2 Analysis of responses..................................................................................................22
Chapter 5. Analysis and Conclusion........................................................................................33
5.1 Hypothesis Testing.........................................................................................................33
5.2 Intermediate Conclusion................................................................................................84
6. Conclusion............................................................................................................................87

2NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
6.1 Summary of Findings.....................................................................................................87
6.2 Overall Conclusion.........................................................................................................89
6.3 Recommendations..........................................................................................................90
6.4 Lessons Learned.............................................................................................................91
6.5 Ethical Implications.......................................................................................................92
References and Bibliography...................................................................................................95

3NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
Chapter 3: Literature review
3.1 Introduction:
This section of the research paper provides a detailed description on the theoretical
background on the concept of Neobank and how the traditional banking system is being
dominated by the trending digital banking system. It also outlines how the business model of
retail banking are challenged by the trending Neobanks. In the last decade, Neobanks have
emerged that are posing challenge to the business model of traditional banking. The
relationship of the customer with then bank is being changed due to the digital revolution
taking place in the 21st century. In the banking sector with a digitized and modernized model,
Neobanks are seeking a foothold which is creating a shift from the customer relationship
model. In many developed countries, the banking sector witnessed a turning point in the
aftermath of the global financial crisis of 2008. The vulnerabilities in the traditional system
of banking system was highlighted by the crisis and resulted in the loss of trusts due to the
public scandals and government bailouts. The last subsection demonstrate the comparison
between the Neobanks with that of traditional online banking system (Moysan & Rudnicki,
2019).
3.2 Concept of Neobank:
A new appearance of the financial world has been built by the FinTech Revolution
after the global financial crisis of 2008 and most the benefits of such revolution has been
reaped by the customers. Despite the fact that the FinTech is in its initial stage, they are
gaining popularity in the financial market as they make use of technology to provide the
financial solutions. Neobank is one such solution that solely offers digital products and
charges lower fees. Such banking system performs most of the transactions using the
applications on the mobile devices and tends to keep the expenses at lower level. In the

4NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
financial year 2018, the total worth of global market of Neobank stood at USD 18.6 billion
and it is expected that the growth would accelerate at the compounded rate of around 46.5%
and this would generate around USD 394.6 billion by year 2026 (Zaleska & Kondraciuk,
2019). The lower cost model for end customers is substantially driving the growth potential
of Neobanks. Customers under this banking system are charged with either very low or no
monthly fees on the services, withdrawal, deposits and maintenance of minimum balance.
Some of the catalysts for the Neobanks success are the adoption of this banking services by
small and medium and micro enterprises, millennial and due to the embracing of newer
technologies and by those having sporadic earnings and income. The interest of corporates,
venture capitalist and investors has been piqued due to the successful business model and
higher rate of adoption of Neobanks (Collins, 2018). The acceptance of digital payment is
growing in both the organizations and multinational companies and this has caused majority
of the global market revenue of the Neobanks to be accounted by the business sector.
Neobank are the fully digital direct bank and are owned independently. The two most
established Neobanks is Monzo in Germany and United Kingdom.
3.3: Financial technology in the banking industry:
Significant changes is being experienced by the banking sector due to various factors
such as shift in the expectations of the customers, digitization and regulatory changes. With
the rise of new platform of payments and Neobank, banking is not about just directly paying
the debit and paying off the credit cards at the month end. The manner in which people
receive and make payments are transformed with the Neobanks representing the new age of
banking revolution. Neobanks and challenger banks are the two major groups of FinTech
banks. Neobanks are the mobile or internet banking focuses on the niche market and offers
individual customer with the customized services. On other hand, Challenger bank are same
as the traditional banks that do not rely on other banks and have its own infrastructure. Both

5NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
the types of bank can possess business to business and business to customers and in the
business to customers, products and services are offered directly to the customers, whereas in
the business to business, services are sold to the business such as small and medium
enterprises. It has been said that Neobanks provides financial services to their customers by
partnering with one or the other banking institutions and do not have their own bank license
(Ashta, 2018).
Fintech companies are established for bringing improvement in the financial services
offered by the traditional financial institutes. The difference between the online traditional
banking system and the Neobanks exist in terms of the innovation that is involved in the
development of the user centric services. The digital footprint of traditional banks is very
limited and they have not felt the needs to adjust and examine their business models.
Although, considerable technology related debt has been accumulated by such banks but they
are weakly adaptive to the needs of customers, expensive to support and the legacy making
the banks to commit to pursue initiatives that are not digital. Neobanks are highly successful
transformational banks and innovated in the form of digital banks. Almost all the major
domains of business incorporates the Fintech with such companies focusing on innovating in
the fields such as investment, insurance, bit coin, real estate and security industries (Arslanian
& Fischer, 2019).
3.4 Comparing traditional bank model with the Neo bank model:
The core services offered by the Neobanks are same as the traditional banking system,
with the notable differences exhibited in their business models. Neobanks are the financial
technological organizations that have their own systems developed using provider of the
cloud based operating system instead of relying and purchasing on the existing system of
information technology. On other hand, the traditional banking system relies on the legacy
system that are costly in terms of maintenance and they are slow to implement some changes.

6NEOBANKS AS KILLING FACTOR OF TRADITIONAL BANKING SYSTEM
Neobanks have developed the core banking system that has the feature of micro services
network that are integrated together and operate separately (Haber et al., 2018). There are
four innovative areas that acre created by Neobanks which comprised of money and feature
management tools, customer experience, transparency, low cost structure and agility. The
business model of the existing traditional banks are supplementary to the business model of
Neobanks instead of being competitive and replacing the traditional banks becomes a
question. In one of the articles titled” Neo-banking features is one of the line of development
of modern financial technology” conducts a comparative analysis of Neobanks and traditional
banks along with discussing the benefits of the Neobank. It has been found from the
comparative analysis of one of the banks in Russia and traditional bank that the business
models of Neo banks needs big investment despite the fact that they generated effective
financial results. It is considered easier to partner with the traditional banking system in order
to have a more stable business (Gudova, 2018).
The Neobank concept in literature is described as the digital bank or mobile bank that
uses digital channel to offer the standard banking services by particularly using mobile
channel and providing higher accessibility and transparency compared to the traditional
banks. The traditional services such as conducting transactions, opening accounts, offering
personal financial management tools and attracting deposits and the new services such as
crowd funding platforms, financial robo advisors and crypto currencies trading are offered by
the Neobanks. In addition to this, Neobanks has the distinct advantage of becoming efficient
and more flexible in lending services and raising funds as they are not supervised and
regulated by the authorities compared to the traditional banks (Letts, 2017). The fact that
makes Neobanks original is their effort to bring down the fees and commission and
emphasizing transparency and focus on the digital channels, mobile phones and providing a
better user friendly experience. With the help of this approach, Neobanks are able to improve

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their services by catering to the needs of customers and building up loyalty and obtaining
feedback and data. There has been increase in the number of online banking and mobile users
due to increase in informatization and computerization. Another article titled” Achieving
Competition in the Financial Sector” have found that the entrance of the Neobanks in the
financial market of Europe have disrupted the model of traditional business in the financial
sector. The introduction of customer centric area and forces introduced by the digital
disruption have weakened the traditional business model (Boss et al., 2019).
3.5 Comparing the traditional online banking services with that of Neobanks:
The traditional banking system has been revolutionized by the introduction of
electronic banking system with the help of which greatest expediency is provided to the
customers in performing banking transactions. There exist fundamental difference between
Neobanks and traditional bank as the former operates digitally either through the mobile app
or internet and the latter operates through the physical branches with the options of online
banking services. The status quo of the established traditional banks is directly challenged by
the Neobanks due to its hyper personal customer experience and lower cost. Neobanks have
various benefits due to the absence of complicated organizational structure, legacy system
and heavy regulatory requirements. However, its acceptance in the market is somewhat
difficult due to its focus on the segments of niche customers and millennial as they are likely
to be keen on the tech savvy and gig economy. The flexible nature of this particular segment
of customer is supported by offering the necessary financial solutions (Okunevych &
Hlivecka, 2018). Unique banking services are offered by the Neobanks startup located in
United States that encompasses zero interest rate and flat fee credit facilities to freelancers.
Fintech companies such as Neobanks do not only have information technology as the factor
of differentiation but they strives for streamlining process and offering efficient services. It is
important for identifying the distinction between new disruptive entrants such as Neobanks