Neobanks are capturing global market attention fueled by the widespread mobile adoption and a shift towards digital-first financial services. They will experience rapid growth in the coming years, and most of them will continue to grow exponentially as international neobanks expand into US markets, where they currently have a limited presence. In the United States, neobanking is generating momentum as customers gravitate toward a different experience than what was previously offered by traditional banks. Due to the current structure of neobanks, they offer customers a cheaper, more efficient banking model, with quicker product and service delivery and connection to their overall financial lives as consumers. These factors have created both an opportunity for neobanks to build a competitive advantage over their established banking competitors, and a threat to the viability of traditional banks. In this article, we will discuss how US-based banks can leverage their well-established customer bases, regulatory expertise, and other assets to create a competitive advantage for themselves in this evolving digital landscape.
5 Key Advantages of Neobanks
Neobanks are becoming increasingly popular among younger users for various reasons, including low/no fees, simple mobile interfaces, and the ability to provide personalized services. Here are some of their core strengths:
Better User Experience: Neobanks operate completely on mobile devices, offering intuitive user interfaces and instant access to customers’ financial data. In contrast, most of the conventional banks provide not so integrated digital banking experience.
Personalized User Experience: Neobanks leverage advanced data analytics, providing their clients with personalized recommendations & services with regard to their spending, budgeting, investments, etc.,. Such data-driven approaches establish a connection between neobanks and their clients that leads to more satisfied and engaged customers.
Lower/No Fees: Since neobanks are not required to pay rent, utilities and miscellaneous costs to maintain a physical branch network, and they do not need to support the large-scale IT infrastructure, they can operate at a lower cost than traditional banks. This enables neobanks to offer low fees or high-interest rates to their customers.
Agility and Innovation: The Cloud-native technology that neobanks use enables them to practice rapid iteration of new functionality, faster product release, and respond to the customer demands more quickly than the conventional banks.
Target niche markets: In the initial stage of growth, many neobanks focus on a specific demographic or underserved portion of the market and gain significant loyalty in those groups, before expanding into new areas.
What legacy banks must fix (and quickly)
Conventional banks are not deprived of any advantage! They have their brand recognition, established trust throughout decades (or even centuries), capital reserves, and deep knowledge of regulatory compliance as a few strong assets. The key is to use these strengths to the fullest and address the weaknesses. Banks must focus on fixing:
Focus on Digital Transformation and User Experience: This is non-negotiable. Banks should and must invest adequately in upgrading their legacy core banking systems, as well as front-end applications. They should aim to become as seamless as neobanks and preferably even more so.
Poor mobile-first UX: Most banks continue to see mobile as a medium but not as the primary strategy that is particularly important to young users. All services offered by banks should be optimized to the full extent of mobile devices, providing intuitive navigation and functionality.
Engagement-driven features for younger demographics: Legacy banks must introduce features that resonate with younger users, such as Personal Financial Management (PFM) tools that provide budgeting insights, financial education, and spending analytics.
Gamification of financial goals: Banks should adopt gamification techniques for saving, investing, and planning large purchases, as these features naturally drive engagement in mobile-first banking experience.
Smart notifications: Smart notifications can significantly increase customer engagement by prompting timely actions and insights, encouraging users to interact with their banking apps more frequently.
Integration with everyday transactions: Neo-banks engage users during daily non-banking moments such as BNPL at checkout, price comparisons in eCommerce, or splitting bills for rides and dining. Legacy banks must incorporate their services into these everyday financial moments to stay relevant.
Shift from transactional to lifestyle banking: Traditional banking apps are typically used only for core banking tasks (e.g., checking salary credits), whereas neobank apps are used throughout the day. Legacy banks must evolve toward lifestyle-driven, highly engaging mobile experiences to remain competitive.
Self-Service Capabilities: Banks should empower their customers to manage their tasks related to accounts, troubleshoot, and access information without having to call their customer service.
Voice and AI Integration: Banks should consider the possibility of using AI chatbots & voice banking for instant support and added user convenience.
How US banks can respond to this competition?
Modernize selectively and pragmatically: It is often costly and risky when a bank is fully core-replaced; banks must seek an evolutionary model. Banks should move new features to the Cloud and implement microservices in front-end features. The ability and cost-effectiveness of Cloud environments have already been proven by large banks that have shifted some of their workloads to Cloud. Banks should wrap old cores with APIs to facilitate a faster front-end development, partner integrations; to decouple payment, deposit, and lending domains using domain-driven design. These methods assist the banks in rapid shipping features without compromising regulatory stability and back-office stability.
Adopt Open Banking and APIs: Banks need to consider fintechs as a potential partner rather than a competitor by adopting open banking efforts. With APIs, banks are able to open their infrastructure to third-party developers to develop new applications and services on top of their existing core infrastructure. This may result in the creation of new sources of revenue, better solutions to customers, and accelerated innovation.
Mobile-first experience: Banks should start using mobile as their primary channel. It means that, first and foremost, consider user flows that are designed to maximize the one-handed user experience, minimize friction during the onboarding process, and verify instantly. Mobile-first experience will enable retention with younger users as well as more engagement that support cross-sell.
Smart pricing and bundling: Neobanks usually compete well on price, but traditional banks are able to compete with them on value (premium checking, overdraft protection, priority support, high savings rates). Banks need to provide tiered subscription (insights, premium cards, partner perks) that increase revenue per active user and provide competitive options to the simple no-fee propositions. In addition, traditional banks should also improve their transparency on pricing.
Move fast on payments and rails (FedNow, RTP): Real-time rails unlock new use cases like instant payroll disbursements, P2P settlement, merchant instant refunds, and programmable payments. Banks that integrate FedNow and RTP can offer unique, sticky products (e.g., instant bill-pay with guaranteed settlement) that neobanks will struggle to match at scale without similar clearing relationships. Fintech and banking reports highlight instant payments as a strategic lever for customer experience and business services.
Partner, don’t always build: Establishing internal innovation labs or partnering with fintech accelerators to explore new technologies and business models are a few things that banks should focus on. Partnerships with fintechs let banks test new UX and features fast and cheaply.
Conclusion
The rise of neobanks is not merely a threat; it’s a powerful catalyst for innovation within the traditional banking sector. US banks, with their deep reservoirs of trust, capital, and regulatory expertise, are uniquely positioned to meet this challenge. By prioritizing digital transformation, embracing open banking, leveraging data, rethinking their physical presence, and fostering a culture of continuous innovation, legacy institutions can not only compete effectively but emerge as more resilient, customer-centric, and technologically advanced financial powerhouses in the digital age. The future of banking isn’t about one model dominating the other, it’s about the evolution of both, leading to a more diverse and dynamic financial ecosystem.
