Neobanks vs. Traditional Banks: The Battle for Gen Z Customers

23, March 2025:  The financial or banking industry is undergoing a fast transformation as a new name "NEO Banks" (Online-based banks) challenges the traditional banks for dominance. It especially among Gen Z people (the people who were born between 1997-2012).

With the mobile-first habit generation who want seamless, digital financial services, Gen Z is forcing traditional banks to rethink their strategies. While traditional big banks still hold the majority of the market share, the neo banks or I say digital banks are quickly gaining traction due to their better digital experiences, lower fees, and innovative financial tools.

According to the latest data from a report by Mordor Intelligence, the global neobanks market was valued at USD 18.6 billion in 2020. in 2026, it is expected to touch USD 333.4 billion. The growth rate (CAGR) of around 46.5%. 

1. What Attracts Gen Z to Neobanks?

As per the Forrester banking predictions in 2025, They say Gen Z customers demand hyper-personalization, real-time financial management, quick transactions, and conversational banking.

Here’s why they prefer neo-banks rather than old banks:

a) Digital-First, Mobile-Only Approach

• 73% of banking customers in Australia, 68% in the UK, and 65% in the US want to complete all financial tasks via mobile apps.
• Neobanks such as Revolut, N26, Niyo Bank, 811, YONO, and Jupiter provide app-based banking with no physical branches, catering to mobile-savvy users.

b) No Hidden Fees & Better Interest Rates

• Unlike traditional banks, neo-banks operate without physical infrastructure, allowing them to offer zero-balance accounts, low-cost foreign transactions, and higher savings rates.
• For example, Jupiter and Fi Money in India offer higher interest rates than traditional banks while keeping operational costs low.

c) Instant Sign-Ups and AI-Powered Financial Tools

• Neobanks uses AI-driven budgeting tools and real-time spending insights, helping Gen Z manage their finances better.
• Autonomous finance is a growing trend, where AI will automatically optimize savings and spending based on user behavior.

2. Why do Traditional Banks Still Matter for Gen Z?

While neobanks are growing fast, traditional banks remain the preferred choice for certain financial needs, such as loans, long-term savings, and regulatory security.

While neobanks are growing fast, traditional banks remain the preferred choice for certain financial needs, such as loans, long-term savings, and regulatory security.

a) Trust, Security & Regulatory Compliance

• 79% of consumers still trust traditional banks more for handling sensitive financial data.
• Neobanks operate under banking partners’ licenses, while traditional banks are directly regulated, offering more security in case of fraud or data breaches.

b) Wide range of Banking Services (Loans, Credit Cards, and Investments)

• Traditional banks offer a list of services, including home loans, personal loans, student loans, and premium credit cards, which neobanks often lack.
• Major banks like AXIS, HDFC, SBI, and ICICI in India still dominate the credit market due to their established loan structures and easy process. Also, these banks provide quick services by using digital options. 

c) Omnichannel Experience: Physical + Digital Banking

• Despite digital banking trends, 35% of Gen Z customers still prefer having access to physical branches for complex banking issues.
• Hybrid banking models, where traditional banks offer both mobile banking and branch services, help retain customer loyalty.

The Future: Will Neobanks Replace Traditional Banks?

The financial ecosystem is also gradually trending towards hybrid banking. Hybridization entails the typical bank enhancing its online offerings while the neobank branches out its services.

Trends set for 2025 and Beyond: 

• Conversational Banking: AI-driven chatbots and voice-assisted banking would take customer interaction to the next level.
• Embedded Finance: Banking services would be embedded into neobanking and fin-tech start-up social media, e-commerce and gaming platforms.
• Autonomous Finance: These would be personal finance assistants that would do the entire budgeting, saving, and investing part for the user, powered by AI.

Summary

Yes, Neobanking is growing in India, the USA, and among world due to their special digital solutions and cost benefits like zero balance savings accounts. However, The Traditional banks remain strong due to their history, trust, and regulatory compliance, also, As per RBI guidelines, Neo banks need to partnership with traditional banks such as KOTAK 811, SBI YONO, Niyo Equitas bank, Jupiter and CSB Bank and launched credit cards. the policy builds trust in both banks.

Rather than outright competition, the future will likely see a co-existence of both models, with traditional banks adopting more digital strategies to keep up with the fintech revolution.