Are neobanks secure? Top cybersecurity challenges faced by online-only banks
Neobanks provide exceptional digital banking experience, but security hazards arise from the banks' online-only nature. Read on to learn more.
During the outbreak of the Covid-19, many financial institutions adopted mobile technology to meet consumer demand for safe, convenient, and contactless banking services provided remotely. With consumers feeling more comfortable paying online or with their credit or debit cards, neobanks, a new digital banking type that rejects traditional infrastructure shifting to a virtual environment, are gaining momentum.
According to Accenture, the number of consumers owning neobank accounts increased from 17% in 2018 to 23% in 2020. Researchers named simplicity, costs, and convenience at which the account holders could get serviced among the main drivers for the growing consumer interest.
There are plenty of concerns over the reliability of online-only banks, which discourage large audiences from entering a new banking reality. Are there currently any grounds for considering neobanks insecure? What are the hidden risks of using neobanks, and what are the tempting gains? Read on to find out the answers.
Neobanks or traditional banks - how to distinguish?
Neobanks provide virtual banking services and operate digitally without having any physical infrastructure and without using paper money or other physical instruments, such as checkbooks, debit cards, and so on. These banks are based on virtual platforms and directly connect their clients with participating banks. Online-only banks allow consumers to deposit or withdraw funds from their accounts within a few clicks while processing a request with a traditional bank might require visiting a physical branch. Below are some distinguishing features of neobanks and traditional banking institutions.
- No physical branch, run on a digital platform
- Automated and facilitated customer servicing
- Usage of modern technology, like AI and chatbots, for virtual online support
- Allow opening accounts, payment and money transfers, loans, budgeting
- Physical banking branches for operating their business
- Involve manual and automated tasks; servicing might be lengthy
- Telephone or in-person support
- Allow opening accounts, payment and money transfers, loans, insuring, wealth management, mobile banking, merchant services
Apart from the benefits mentioned above, neobanking platforms like Zolve meet the needs of individuals moving abroad to pursue higher education or for work, unable to apply for traditional banking services in local institutions.
Consumers wish to be a part of increasingly digital societies and receive advanced technology-based servicing, and neobanks provide alternatives to poor and time-consuming services that traditional banking institutions might offer. But another aspect is the vulnerability of online-only banks caused by breaches in security systems.
5 cybersecurity challenges neobanks may face
The day-to-day infrastructure of financial institutions is focused on increasing customer and operation security, either for the digital environment and for physical branches. On average, large financial services firms spend 10% of their IT budgets on cybersecurity. But most often, neobanks cannot afford to spend much on security or hiring a full-time cybersecurity team, which might lead to facing serious security threats:
- Inadequate security investments
- Dependency on third-party providers
- Fraud scams
- Compliance issues
If neobanks jeopardize sensitive data, it could result in a customer loyalty decrease and increased customer churn. New digital architectures and technologies of the future might help neobanks solve current issues and become as secure as the traditional institutions. But today, neobanks struggle to ensure a high level of security.
Executives of neobanks have to adopt a security-first mentality to avoid exposure to critical security risks. But the security of digital financial systems requires expertise for which neobanks, being smaller than traditional banking institutions, cannot allocate substantial budgetary resources. Neobanks have to rely on third-party services providers and dedicated teams to save a part of a budget.
Dependency on cybersecurity agencies
Owning an in-house team is the best option, which many neobanks cannot afford. They often turn to third-party vendors to employ savvy and highly-trained cybersecurity staff within certain budget constraints. But the dependency on third-party organizations increases the chances of data breaches if a third-party vendor doesn’t have robust cybersecurity regulations in place.
The killer feature of neobanks is their digital nature, which attracts consumers but makes neobanking platforms extremely vulnerable to hacking attacks. If any device connected with a network is compromised by malware, the security of a whole platform gets ruined. Networks of IoT devices, if employed, might become insecure after being exposed to malicious hacking.
Phishing and spoofing
Cybercriminals might attempt to access sensitive data by attracting consumers to websites similar to the original neobank web resources. If users enter credentials on such websites, hackers might steal personal data and access critical information. Likewise, consumers could receive emails with malicious links that look like they came from trustworthy organizations. For neobanks that are fully digital, the risks are higher.
Compliance with regulations
Neobanks would have to comply with general regulations, including PCI DSS standards, and local ones, as per their location or origin. Compliance is a critical pillar on which the success of neobanks will depend. With neobanks operating sensitive consumer data, they need to stick to compliance regulations that could be extended as the neobanking sector grows.
Neobanks are growing since they meet the new reality, where online or contactless payments become more convenient and safe. They offer advanced online servicing backed up by new technology and entice customers to go for new experiences.
However, the cybersecurity issues that neobanks struggle with require robust solutions to ensure the adequate security level vital for financial institutions of any type. The technology development would help overcome the barriers to the highest possible security for customer servicing and operations on neobanking platforms.