What’s the difference between a traditional bank, an online bank and a neobank?

If you’ve become used to your bank and how it operates over the years, online institutions, including the mysteriously named ‘neobanks’ may leave you scratching your head. Do they offer the same services as a traditional bank? Are they just as secure? Will they meet your needs? Here’s a guide to a complex and fast-changing market.

Digital banking services

The first point to make is that there is now a range of different kinds of bank, just as there are banks of differing quality. Today virtually all of the traditional banks everyone grew up with offer online banking services for their customers, accessible through websites and tablet or smartphone apps, but which can also be accessed through bank branches.

However, there are also purely digital institutions, sometime called neobanks, that may be authorised credit institutions or payment providers – the difference will determine what services they are authorised to offer – and may not be part of established financial groups, have no physical branches, and offer services accessible only via the internet. They include some of the best-known European providers of digital-only banking services such as Revolut, N26 and Monzo.

In many cases these new institutions have been developed as part of a financial technology offering rather than by mainstream financial groups. Typically, they offer innovative banking services predominantly via smartphones, and sometimes charge lower fees than bricks-and-mortar institutions, since they do not have the same physical infrastructure to manage or employ as many staff.

Typically, these new institutions offer innovative banking services predominantly via smartphones, and sometimes charge lower fees than bricks-and-mortar institutions.

Some have their registered offices or regulatory authorisation in other countries – Revolut’s head office is in London, for example, but it provides banking services throughout the EU from Lithuania. Bank accounts opened with such institutions are classified as foreign accounts and must be declared to tax authorities in the holder’s country of residence, although increasingly providers such as Revolut offer domestic accounts and Ibans in many markets.

Services on offer

Traditional banks offer the widest array of banking services, including bank accounts and cards, loans, savings products, stock or bond market investments, personalised advice, insurance and foreign exchange operations. They offer clients the option of carrying out certain operations at a branch (with or without help from bank employees), while others independently use remote banking services. Their online solutions continue to improve and increasingly compete on convenience and cost with digital-only providers.

At the same time, improvements to the services offered by online-only banks are gradually bringing them closer to the offerings of traditional institutions. Online banks that initially had only a limited range of services now offer clients attractive savings rates, the ability to take out loans, and conduct certain types of investment.

However, not every standard banking product is available from all online banks. Regarding the online onboarding process for an online bank and a traditional bank, they are becoming closer. Furthermore, traditional banks have the advantage of being able to assist prospective customers more easily, as they can help them on site if the online process is blocked. In addition, applicants might be asked by online banks to demonstrate that they meet a minimum monthly income threshold and make an initial deposit specified by the bank. And online banks’ services tend to be reserved for residents of the country in which the bank operates, whereas traditional banks often also serve non-residents, and their account-opening process tends to geared to cross-border banking relationships.

Restrictions on banking services

Digital-only banks initially based their appeal on offering simple and quick account opening, mostly without income criteria or minimum deposit requirements. To begin with their banking services were more restricted, in some cases limited to withdrawals, payments and credit transfers, and it was not always possible to open a joint account, obtain an authorised overdraft, take out a loan or invest in a savings product. Account Ibans were from the country in which the bank was situated, with an impact on the ‘nationality’ of credit cards and other services linked to it. However, these restrictions have now largely been superseded.

It remains difficult to deposit cash with an online-only bank because of the lack of physical branch infrastructure at which to make physical deposits.

It remains difficult to deposit cash with an online-only bank because of the lack of physical branch infrastructure at which to make physical deposits. However, some online institutions that are part of large financial groups can enable customers to use their parent company’s ATMs. It should be noted that this argument may no longer hold true in the future for certain neobanks if they decide to deploy their own network of ATMs or open bricks-and-mortar branches. A bank such as Revolut has already embarked on this path in Spain for examples.

Client autonomy

Traditional banks are continuously working to improve their digital services to offer clients greater access to services such as bank card requests, adding new payment beneficiaries, budget management tools, card blocking, mobile payments and virtual payment services such as Apple Pay and Google Pay. However, in some cases certain banking operations cannot be carried out without help from an adviser.

Clients of online banks are expected to be self-sufficient and able to carry out all authorised transactions online without needing assistance. This can be a complicating factor for clients with profiles that don’t fit precisely the model envisaged by the bank or that have particular needs.

Fully digital banks offer clients complete autonomy, and frequently innovative features to help them manage day-to-day financial transaction, including real-time monitoring of spending, account aggregation, payments using mobile phone numbers, automated savings allocations, activation or deactivation of contactless payments, authorisation of transactions abroad, and, in some cases, trading and storage of crypto-currencies – although many of these services are increasingly offered by traditional banking groups.

Advice and availability

Traditional banks have the advantage of being able to provide human interaction within a branch, by phone or through secure messaging. Clients can make an appointment to speak face-to-face about their projects with a bank expert. Wealthier clients who require more extensive, in-depth and regular support will be able to build up a relationship of trust with their account manager – someone who knows them, understands the local context and can offer advice tailored to their particular situation and that of their family.

A bank adviser can answer customers’ questions and provide them with guidance on managing their budget or achieving a life goal. They can also help with specific matters requiring in-depth expertise such as estate planning, taxation, creating a company or managing investments.

At an online bank, financial advisers are available and can be contacted through the internet by e-mail, instant messaging, webcam, social media or by phone. Phone contacts may be available outside regular office hours, for instance on weekday evenings or on Saturdays. However, clients generally do not have a designated adviser and can only communicate with the bank remotely, meaning there is no personalised connection. Furthermore, using an adviser rather than conducting transactions autonomously may entail charges.

At digital banks, clients manage their finances independently, and their communications with the institution are limited to interaction with customer services (in many cases AI-driven adviser bots), through instant messaging or by phone. Traditional banks are moving in the same direction for customers who prefer autonomy and use only their basic services for the day-to-day management of their finances by providing chatbots and virtual assistants that can assist customers in a growing range of services and functions. The major difference is that traditional banks still offer human support if the chatbot is not able to help while for online only this is not possible.

Bank fees

Traditional banks tend to charge slightly higher fees than purely online institutions because of the additional overheads they need to pay and the quality of the service they provide. However, they increasingly provide introductory offers and fees tailored to the profile of their clients, so fees tend to be competitive with those of institutions focusing on clients who only want to use online services.

Online banks can offer highly attractive fees due to their lower operating costs, and charge competitive prices for transactions, including payments and withdrawals abroad. They are often looking to attract new clients with introductory offers, referral bonuses and access to certain types of bank card.

Online banks can offer highly attractive fees due to their lower operating costs, and charge competitive prices for transactions, including payments and withdrawals abroad.

However, their services are not free, and there may be extra charges for other types of transaction. Resolving payment issues, non-use of a bank card, communication with an adviser and certain transfers and withdrawals may lead to additional fees.

Security

Traditional banks still provide the greatest reassurance for clients thanks to their long experience and extensive branch networks. Customers also appreciate being able to seek assistance from a dedicated adviser, as well as the assurance of statutory protection of deposits up to €100,000 in the event of an institution’s bankruptcy. But just like branch-based banks, online banks are subject to regulatory constraints and offer clients equivalent guarantees, in particular deposit guarantees.

Digital banks are subject to regulatory controls, whether they are licensed as banks or as payment institutions, although they do not offer the same level of protection as traditional institutions. A digital bank authorised in another EU member state will also offer clients deposit protection, but in practice it may be harder to exercise if the bank is based thousands of kilometres away.

Deciding whether a traditional or an online bank is right for you is largely down to your profile and needs. Are you comfortable with internet transactions and online technology? Are you planning complex investments? Will you need guidance and support from your bank in making financial choices? Do you need to deposit cash in your account? Do you require complete personal control over the management of your finances?

The answers to these questions will help you choose the type of institution – bricks-and-mortar or purely digital – best suited to your expectations and needs. Remember that since most traditional banks have fully embraced digital technology, their remote banking offerings rival those of internet-only institutions. If you’re still not convinced, take a look at the standalone products and packages on offer to compare actual prices institutions charge for the same services.