5MF Issue 10: Understanding Banking’s New Terminology

Financial technology is evolving fast, and so is the language around it. Here’s a visual glossary of today’s popular terms.

Is a traditional challenger the same thing as a challenger bank? What happens when a neobank and a challenger fall in love and start a family (and do traditional challengers insist on getting married first)?

Below, we’ve laid out some simple definitions that will help make sense of the emerging ecosystem of banking. Terms to the far left lean most traditional and are typically licensed banks with physical branches. The farther to the right a term appears, the less likely it is to represent a traditional, licensed bank and the more likely it is to operate exclusively online.

1. Traditional Challenger: These banks come at banking from a familiar angle. They are recently licensed, modeled after traditional banks, have a full suite of products and physical branches, and use their own balance sheet to lend to customers. They are typically not a digital startup, though likely offer digital tools like apps and online statements.

Examples: Metro Bank, Secure Trust Bank

2. Challenger Bank: These banks are licensed, but less traditional. They lack physical branches, opting for strictly online banking and slick mobile apps that draw in tech-savvy customers. They generally offer full-functioning bank accounts with debit cards, and even services like investing, home loans, and auto financing. Some began as neobanks and/or were new challengers for a while.

Example: Ally

3. New Challenger: These banks are so contemporary, they may not even be licensed yet—but they intend to be licensed soon. If they are already licensed, they may not be operating as a bank yet, but will. They are fully digital when it comes to customer interactions, and challenge both traditional and challenger banks with innovative products like virtual cards, bill splitting tools, and cryptocurrency access that compete with current offerings. Many began as neobanks.

Example: Revolut

4. Neobank: A neobank is most often not a licensed bank, but rather a financial technology firm, making them nontraditional as a banking solution. Neobanks tend to rely on partner banks or linked bank accounts to operate, and a layer of unique features on top of simple checking or savings accounts and payment/transfer services. Neobanks do not have physical branches, but may offer digital budgeting tools, bookkeeping, or similar services to generate revenue. Some can become new challengers and challenger banks.

Examples: Chime, Simple

5. Banking-As-A Service: This term refers to a process more than a specific entity, specifically the end-to-end execution of a financial service provided over the internet. This digital banking service is provided not by a licensed bank, but by a financial company that is available on demand and usually partnered with a licensed bank. This company will have integrated as many service providers as needed to complete end-to-end processing that includes things like security, authentication, legal compliance, etc. for transactions and data management.

Examples: Stripe, Moov, Unit

6. Infrastructure Bank: This one’s tricky, because as of 2020, the term “infrastructure bank” is being used to describe two different things. Use context to decide which definition below makes sense:

6a. Licensed banks operating as modular banking platforms, or banking-as-a-platform. These banks are popular with tech-savvy companies looking to create completely customized online banking experiences for their business. These banks offer companies various fintech solutions in one place for services like banking, lending, payroll, capital markets, and more. These could also be considered challenger banks.

Examples: Solaris Bank, Finastra

6b. Licensed banks designed strictly to manage funds for infrastructure projects. These banks use seed capital to fund projects, then recycle repayments to finance future projects. A number of state and local governments use this model for public works projects, and conversations about a national infrastructure bank often arises in US politics. These banks have relatively traditional investment and project funding models.

Example: Franklin County Infrastructure Bank (FCIB) in Ohio.

7. Fintech: Short for “financial technology,” this broad term covers all banking and financial service software, platforms, and other technology. It is also often used as shorthand to refer to “fintech companies” in contrast to licensed banks. However, as you can see, there are many instances of bank-licensed fintech, and most traditional banks use some form of fintech today.

Examples: apps by traditional, challenger, new, neo, and infrastructure banks, cloud software used for financial services, crypto-currencies and other digital money, and more

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