Neobanks have garnered a lot of attention and investment dollars, promising to bring sexy back to banking by making it more efficient and tech-friendly. But customers may not agree.
Not to be confused with online financial services companies, so-called "neobanks," which exist in the online and mobile realm alone, have captivated investors. However, new research released today points out that bank customers do not necessarily trust these digital-only financial services providers, and that fraud represents a major concern here.
"Criminals are committing funding fraud at neobanks," says Nathaniel Harley, co-founder and CEO for banking technology firm MANTL, which sponsored the banking report. "They are using weak underwriting at neobanks to acquire accounts and then have access to the ACH network and are using it to execute payment fraud."
In fact, more than three out of five bank executives (61%) observed an increase in fraudulent activity with accounts held at neobanks in the past year, according to the 2021 Banking Impact Report, commissioned by MANTL in partnership with Wakefield Research, which surveyed bank executives and small business owners.
"Fraudsters target neobanks because they generally have fewer fraud controls," says Nathaniel Harley, co-founder and CEO for banking technology firm MANTL. "Fraudsters will take advantage of this and use neobanks to help move money from other banks and spoof companies." Harley points out that this is why certain firms, like rental car companies, will not allow consumers to pay with neobank accounts like Chime.
And bank customers are reticent to trust neobanks too. Only 7% of consumers and 8% of businesses trust neobanks over a traditional bank, according to the report. And yet, given the promise of digital banking, the report also found that 47% of consumers and 44% of small business owners said they would open an account at a neobank or a fintech company in the next year.
"They are using weak underwriting at neobanks to acquire accounts and then have access to the ACH network and are using it to execute payment fraud," says Harley. "Outside of fraud concerns, the lack of physical locations could still have an impact on consumer sentiment."
Consumers and small businesses are making fraud prevention a priority: 57% of consumers and 67% of small business owners expect their bank to offer notifications for fraud and large purchases, according to the report. A whopping 99% of community banks and credit unions admit they have not fully embraced digital banking and 44% listed security risks or concerns as a top reason, according to the MANTL/Wakefield report.
