INVESTING EXPLAINED: What you need to know about neobanks

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s neobanks. 

What are these?

These are banks that have sprung up this century which aim to end the dominance of the traditional names.

They have funky names like Atom, Kroo, Monese, Monzo, Revolut and Starling, operate via apps not branches – and are seen as crucial to Britain’s future as forward-looking global financial services centre.

These ‘fintech’ banking platforms provide most banking services, but some do not take deposits or offer loans because they are not yet fully licensed.

Why are we hearing now?

HSBC is launching Zing, an app for frequent travellers, which will allow users to be able to hold money in 10 currencies.

New sensation: Neobanks have sprung up this century aiming to end the dominance of the traditional names

The move is seen as a response to surging competition from the neobanks which are growing fast. This is thanks to their ability to use the wealth of information that they collect on customers’ finances. Traditional rivals have difficulties exploiting this data because of their legacy systems. 

Many people have a second account with a neobank for the convenience and cost savings when spending abroad. With a neobank card, you can swerve the foreign currency transaction fees charged by High Street players.

Weren’t they called challengers?

Yes, but neobanks is now the preferred term. Maybe names beginning with ‘n’ are in fashion. After all, we call the fame-seeking children of the famous ‘nepo babies’.

Who are the largest players?

Monzo – which is known for its ‘hot coral’ debit card – has 8m customers, while Starling boasts 4m. Both are fully licensed, which means that they are authorised by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) through which the Bank of England supervises banks.

Revolut has 8m customers in Britain and a further 30m in other countries, but has yet to acquire a UK banking licence which would allow it to offer more services to customers.

Why doesn’t Revolut have a licence yet?

Revolut may be Britain’s largest private tech company. But, controversially, its licence application has been delayed by auditing issues and objections to its shareholder structure. 

The PRA has told Revolut to get rid of the preference shares, acquired by Japanese group SoftBank and others during a 2021 financing round, which valued Revolut at $33billion. SoftBank has been slow to give its assent, but an agreement to introduce a single share structure could be close, or so it has been reported, allowing a licence to be granted.

How does a neobank operate without a full banking licence?

Revolut has an e-money licence. Customers’ cash is not protected by the Financial Services Compensation Scheme (FSCS) but it is held in ring-fenced accounts and may not be lent out. If disaster strikes, customers can make a claim on these accounts.

Can I invest in these banks?

The neobanks are not publicly-quoted, being largely financed by institutions, although some Monzo customers do hold shares. There have been rumours for a while that Starling was set to float.

But this may not happen while it is searching for a permanent chief executive following the resignation of founder Anne Boden.

This post first appeared on Dailymail.co.uk