What is a neobank?

A neobank is a tech company that provides banking services via mobile app or website. Banking options may include the ability to transfer money electronically, pay bills and receive direct deposit or mobile check deposits. Some of these fintech providers also offer tools to help with budgeting and saving.

Neobanks, sometimes called “challenger banks,” usually specialize in a few financial services, such as spending and savings, and insure deposits through a partnership with a bank insured by the Federal Deposit Insurance Corp. Institutions that are commonly referred to as neobanks include Chime, Revolut and GoBank.

Providers typically emphasize their mobile apps, but many also let consumers access accounts via website and offer a physical debit card. It’s also not unheard of for a neobank to receive a bank charter, as Varo did in 2020. (Read NerdWallet’s Varo review.)

Here’s a look at neobank upsides, as well as some drawbacks.

Pros of neobanks

Easy access

Neobanks let consumers manage most of their banking on a smartphone app or computer, 24/7, without having to visit a branch. Some of the best neobanks have apps that are highly rated in app stores.

Applying for a neobank account could also be easier than opening one at a traditional institution. Some neobanks don’t check banking histories, for example, meaning your account is more likely to be approved if you’ve had accounts closed in the past.

Lower fees, competitive rates

Like online banks, neobank providers don’t have to pay to maintain branches, and some providers pass on the savings to customers. The savings can take the form of low or no monthly service charges and the ability to earn strong interest rates. If you’re paying a $10 monthly fee at a traditional bank, switching to a neobank with a fee-free account could save you $120 a year.

Make sure you understand the provider’s policies, however. Some neobanks do charge fees for premium services or require that you make a certain number of transactions each month to get the best interest rates. Before signing up, consider whether the offer matches your spending habits and savings goals.

Cons of neobanks

Limited customer service

With no branches, expect limited personal help. Some providers offer customer service through social media accounts or by phone. They may also have online chat options, including chatbots.

Those options can be helpful for basic banking questions. But if your account is frozen or closed because of suspected fraud, for example, you may have a tough time reaching someone who is authorized to help resolve the situation.

Fewer account services

Neobanks offer some digital banking services, but many lack broader banking options, such as the ability to send wire transfers or easily accept cash deposits. In addition, they may offer fewer accounts. As mentioned above, a neobank might offer a spending account, but they might not offer certificates of deposit, investment options or loans.

Unproven history

Neobanks don’t have long track records. Many have opened only within the last few years, and they could fail, like any other startup.

If that happens, consumers typically don’t have to worry about losing their money, because account deposits are usually held at an FDIC-insured partner bank. FDIC insurance covers up to $250,000 per depositor, and funds would be returned to the consumer in the event of a bank closure. But dealing with the process of claiming the money or switching to the partner bank could be a hassle.

Neobanks vs. online banks

While neobanks offer banking services, they’re not necessarily the same as an online bank. The latter usually has FDIC insurance and offers a range of traditional products, such as checking, savings, CDs, investments and loans.

Some brick-and-mortar banks have online-only divisions that offer a full suite of digital accounts consumers can manage from a computer or smartphone app. Since the accounts are offered by a traditional bank, those divisions could be considered online banks instead of neobanks.

It’s worth noting that many traditional banks offer online access to their regular accounts. But they aren’t online-only. Customers have access to bank branches and accounts tend to have monthly fees and low rates.

Neobanks may work for some

If you’re looking for banking convenience and prefer doing most of your financial tasks online, a neobank could be a good choice. You could save on fees and even earn interest. But a neobank account is best for people whose accounts are mostly on autopilot and who don’t need to deposit cash, send wire transfers or use expanded account services.

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