Opportunities for Merchants with Narrow Banks and Neobanks

Following the 1999 repeal of Glass-Steagall, which had separated conventional banking from riskier investment activities, narrow banks and neobanks have emerged as alternative models with distinct approaches to risk and services. Narrow banks hold full reserves and invest only in low-risk assets such as government securities, limiting lending-related exposure but relying mainly on customer fees for revenue, while neobanks provide app-based banking services through partnerships with licensed banks and commonly earn fees, interchange markups, and foreign-exchange charges. Few businesses fully combine both models because neobanks generally depend on traditional banks to safeguard deposits, although Wise is presented as a close example because it avoids lending and holds much of its customer funds in government-backed securities. For merchants, neobanks may offer more practical benefits than narrow banks by supporting multicurrency treasury management, helping serve customers with limited access to conventional banking, and potentially enabling payment methods that reduce reliance on established card networks and payment intermediaries, while pure narrow banks are expected to remain difficult to establish and largely niche.

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