Key takeaways
- Neobanks are digital-only financial institutions that offer online banking products with minimal fees.
- They partner with traditional banks, and many provide FDIC-insured accounts.
- Neobanks are ideal for tech-savvy consumers. They offer convenience, higher interest rates, and even early direct deposits.
Technology impacts many aspects of our lives, including banking. These days, you likely bank from your phone. The rise of mobile banking is not just due to traditional banks providing online services and mobile apps, nor is it solely due to the rise of online-only banks. Credit also has to be given to neobanks.
What is a neobank? Neobanks are financial technology companies that offer banking services. They emerged as innovative alternatives to big-name banks, challenging the old banking model.
Neobanks or fintech banks offer a small range of core products, similar to traditional banks. You can set up a checking account, open a savings account, access your paycheck early, and utilize budgeting tools. Their primary advantage is their low fees.
Here’s a look at what neobanks are, their services, and whether they are a secure choice. A neobank just might be a good option for you and your money.
What is a neobank?
A Neobank is a financial technology company (or fintech) that offers digital banking services. They are also called challenger banks because they aim to disrupt traditional banking with competitive rates and low fees. Neobanks do not have physical branches. All the services are offered exclusively through online platforms like websites or mobile apps.
Neobanks are not new. They have been around since the early 2010s and are growing. Plaid, the banking platform, projects that neobank users will reach 350 million globally by 2026. Popular neobanks include Chime®, Revolut, Current, Varo, and SoFi.
How do neobanks work?
Neobanks are not banks in the traditional sense of the word since they do not have a banking license. They are fintech companies that partner with one or more chartered banks to provide banking services such as deposit accounts, savings accounts, loans, and more.
Traditional banks are chartered. Being chartered means that they are licensed to accept deposits and issue loans. A neobank will accept your deposit, but the affiliated chartered bank will hold the money. The affiliation with a chartered bank typically means that your deposits are FDIC-insured, but double-check to be sure.
Neobanks are advantageous because they are low-cost and cater to all consumers. As an entirely digital service – no physical locations – they have lower overhead costs. They pass the savings on to their customers through little to no fees and higher interest rates than their traditional counterparts. Many offer perks not available at conventional banks. Potential perks include early access to direct deposits, fee-free overdraft coverage, budgeting, and savings tools.
By offering online services with minimal fees, neobanks can help people who lack access to the traditional financial system. The Federal Reserve Board found that 13% of Americans are underbanked – have one bank account but lack access to sufficient financial services. An additional 6% of Americans are unbanked – they do not have any access to a bank account. Fintech banks give people who lack access to banking services a way to manage their money.
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Neobank rates and fees
What makes neobanks stand out is their low fees. As an entirely digital operation – no brick-and-mortar branches to maintain or staff – neobanks can charge less.
The exact fee structure will depend on the neobank. The majority do not charge a monthly service fee, require a minimum balance, or hit customers with overdraft fees.
The fewer fees equal more savings. Not only can customers save on costs, but neobanks tend to have higher-than-average APYs (annual percentage yields). The competitive interest rates on savings accounts mean customers will earn more passively with their money.
Neobanks do charge fees, but they are often transparent. Typical costs include out-of-network ATM fees, international transfers, cash advances, or fees for premium services.
What services do neobanks offer?
Neobanks provide a similar but limited range of services compared to big-name banks.
Some of the services fintech banks offer include:
- Checking accounts
- High-yield savings accounts
- Cash advances
- Overdraft protection
- Mobile check deposit
- Early direct deposit
- Debit cards
- Online money transfers
- Access to a large network of ATMs
- Secured credit cards or credit builder loans
The exact range of products depends on the neobank.
As they are not chartered, fintech banks cannot offer all the same services. You will need to go elsewhere if you want investment portfolio management, financial advice, or larger loans, such as auto loans or mortgages.
Fraud can happen to anyone!
How do neobanks make money?
Neobanks make money through various fees. The exact revenue model depends on the fintech company.
Interchange fees: The fee they charge every time a customer uses their debit card for purchases. These fees are small percentages paid by merchants.
Transaction fees: Some neobanks charge a small fee for bank transfers, use of an out-of-network ATM, money transfers, or depositing cash through a third party.
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Subscription fees: Customers can pay a fee to access premium services. A paid subscription account can offer perks like higher withdrawal limits, cash-back rewards, or additional financial tools.
Interest earned: Neobanks that offer credit products—loans, cash advances, and credit cards—earn interest from their services.
Neobanks are for-profit institutions, but they require a smaller revenue stream. They do not need to earn as much money as established banks, so their fees are lower. While it’s hard to avoid fees entirely, fintech banks are a cost-effective option.
Are neobanks FDIC insured?
Neobanks partner with larger financial institutions that have a bank charter. The partner bank follows all the required regulations and is FDIC-insured. The fintech bank is protected under the chartered bank’s umbrella. The partner banks handle insurance and regulations, whereas the neobanks focus on customer service and online access.
The established bank’s FDIC insurance extends to the funds held at a covered institution by the neobank. In this case, deposits are protected up to $250,000 per account. It’s the same as with a big-name bank.
Not all neobanks are FDIC-insured. Always verify whether or not the neobank has partnered with an insured institution. You should be able to find the information on the neobank’s website or mobile app.
Neobanks vs. online banks
It is easy to confuse neobanks, online banks, and online banking. Neobanks operate entirely online but without a bank charter. As a result, they are limited in the products and services they can offer.
Online banks, on the other hand, have bank charters. They can provide a wide range of traditional banking products. Their products may include checking accounts, savings accounts, certificates of deposit (CDs), investments, loans, and financial advisory services. Like neobanks, they do not have physical branches. The low operating costs also allow them to offer high-yield savings accounts and competitive interest rates on CDs.
Online banking is when you manage money online via a website or mobile app. Most traditional banks and credit unions offer online banking.
Is a neobank right for you?
Neobanks are reshaping traditional banking. They are easy to use, have lower fees, and perks like early direct deposit that big-name banks don’t offer.
When to use a neobank
Prefer online banking: Neobanks are great if you are comfortable with technology and prefer doing financial tasks online. They provide banking convenience, and you avoid the hassle of visiting a bank branch.
Want minimal fees: Traditional bank fees add up fast. Neobanks have cut overdraft fees, monthly service charges, and minimum balance fees, to name a few. They are a cost-effective way to manage your money.
Need budgeting tools: One of the many perks of neobanks is they offer budgeting tools and spending insights. These features can help you develop good financial habits, cut spending, and increase your savings.
Seek higher interest rates: Neobanks offer higher APYs to consumers. The high-yield savings account options mean your money will grow faster.
You’re a digital nomad: Online banking with neobanks makes it easier to manage your money wherever you are.
Ease of access: Fintech bank accounts tend to be easier to open and have fewer barriers. You may not need a Social Security Number or Individual Taxpayer Identification Number (ITIN) to open an account.
Value early paycheck access: Most fintech banks offer early direct deposit when you meet certain criteria.
Neobanks work best for people who don’t need to deposit cash, send wire transfers, take out loans, or use investment services.
Can you borrow money without a bank account?
When not to use a neobank
Neobanks offer many benefits, but there are situations when you should consider sticking with a traditional bank.
Like to visit physical branches: If you prefer face-to-face banking, a neobank is not a good choice. Neobanks are solely digital. While fine for basic services, this can be problematic if you have complex financial needs or are not comfortable with online banking.
Limited financial products: Neobanks do not offer a full range of banking services. Traditional banks could be better if you require loans, mortgages, investment portfolio management, or financial advisors.
Concerns about stability: Established banks often provide more reassurance regarding stability and security. A conventional bank could be safer if you are worried about the longevity of a fintech company.
Regularly make cash deposits: Neobanks often do not allow for cash deposits or have limited options. They are less than ideal if you regularly handle cash.
Overdraft needs: Many neobanks either do not offer overdrafts or have strict limits. If you rely on overdraft protection, check what the neobank offers.
Deciding if a neobank is right for you depends on your banking needs and lifestyle preferences.
Frequently asked questions
1. What is the definition of a neobank?
A neobank is a fintech bank that provides banking services in partnership with a chartered bank. Banking services may include checking accounts, savings accounts, online payments, and cash advances. A neobank operates solely online and is not a licensed bank.
2. What are examples of neobanks?
Chime, Current, and Revolut are three popular fintech banks. All three have minimal fee options.
3. Are neobanks safe?
Neobanks are generally safe, but like all financial institutions, they come with risks. The best fintech banks work with FDIC-insured partners, meaning deposits are protected up to $250,000. They also use encryption, multi-factor authentication, and fraud monitoring to safeguard user data. Always verify that your money is FDIC-insured before using a neobank.
4. Who uses neobanks?
Neobanks attract tech-savvy users, millennials, Gen Z, and those seeking more convenient banking experiences. Many neobank users have avoided traditional banks in the past due to the fees and minimum balance requirements. Or they do not have access to physical bank branches near them.
5. Can I get a loan through a neobank?
Some neobanks offer personal loans, cash advances, lines of credit, and credit-building products. The options vary by provider. Generally, they offer fewer services than traditional banks, and not all neobanks offer borrowing options.
Bottom line
Neobanks are an excellent way for consumers to manage their finances online and maximize their savings. They typically offer higher interest rates and fewer fees than traditional banks. They also give customers benefits like early direct deposit, low-fee cash advances, and an extensive network of fee-free ATMs.
The ease of access, minimal fees, and additional perks have made neobanks popular among bank-adverse consumers. Signing up can be as easy as visiting a website or downloading an app. There are fewer pesky fees to eat into people’s savings. And there’s no need to visit a physical branch. Fintech banks have made banking services accessible and beneficial to people who historically have lacked them.
