Neobanks Explained: A Comprehensive Guide to Fintech Banking

With so many new options for banking, your head might be spinning, but don’t worry – we’ve got you covered. Here we’ll talk about neobanks, how they differ from brick-and-mortar banks and whether they’re right for your financial situation.

Neobank Definition

What is a neobank and how does it work? Neobanks, also known as challenger banks, are essentially financial technology (fintech) companies that offer banking services via the use of a mobile app or website. A growingly popular alternative to traditional banking, a neobank has no physical branch and provides all banking services in their entirety online.

Neobanks Vs. Traditional Banks

For purposes of clarity, neobanks are basically financial providers that offer a variety of banking services via digital and online methods. Several key differences distinguish these companies from traditional financial providers such as banks and credit unions. For example:

• Neobanks have no physical bank branches and operate fully online.
• A neobank is not chartered by federal or state regulators.
• A neobank does not extend credit or offer loans.
• Neobanks primarily offer services via mobile app. 

However, in select cases, neobanks may opt to partner with a traditional bank in order to help insure customer deposits.

In effect, a neobank leverages technology to let customers perform functions such as making mobile or direct check deposits, paying bills, and transferring money electronically. Often, these solutions provide a more cost-affordable alternative to traditional banks, but limited access to a smaller subset of these providers’ services.

It’s also common for a neobank to prioritize the use of websites, mobile apps and other online tools over physical mediums, though some may issue real-world debit cards.

Neobanks Vs. Online Banks

Neobanks also differ in nature from online banks. For example: An online bank – though powered by technology – can act as a digital extension of a traditional bank’s services and accounts through the provision of a mobile app or website access. A neobank, however, only offers services through online mediums (meaning no physical branches provide complementary services).

How Does A Neobank Work?

Neobanks are generally targeted at tech-savvy individuals who don’t mind managing money online or via an app. By leveraging cost-affordable digital solutions, these institutions can pass greater savings onto customers and offer more financial opportunities to audiences who otherwise might not be able to access them.

In most instances, signup and money management is handled via mobile app. However, select neobanks may allow you to link traditional bank accounts to access funds via a variety of mediums.

Neobanks typically offer a limited subset of services that you might expect to access via a traditional bank or credit union such as:

• Checking and savings accounts
• Electronic money transfers
• Direct deposit and mobile check services
• Federal Deposit Insurance Corporation (FDIC) protection when partnered with a traditional bank

Pros Of Neobanks

Neobanks can provide significant savings and convenience for some customers. Whether or not they make sense for your household largely depends on money management needs and usage patterns.

Lower Fees

Among their largest perks, neobanks help save customers money by having no physical branches. By also avoiding credit risk and having to maintain compliance with fewer regulations that traditional finance providers, they are also able to help pass additional savings along to users.

Easy And Convenient Access

Another upside of neobanks is that they allow customers to manage and conduct banking entirely online from the comfort of their own home, or via their smartphone, computer, or tablet while on the go. Neobanks also offer quicker processing times than banks and credit unions.

Competitive Rates

Neobanks additionally offer higher interest rates paid out on savings in your account because of the monies that they’re able to save on other areas of operation.

Cons Of Neobanks

As we mentioned above though, neobanks won’t make sense for everyone. Here are some other aspects of their operations that you may wish to consider as well. 

Less Regulation

Per earlier discussion, neobanks aren’t as well-regulated or subject to as much scrutiny as traditional banks. Keeping this in mind, your legal options may be more limited in the case of fraud or stolen identity.

Inconvenient Customer Service 

As part of their online-only operations, neobanks often offer limited customer service options, traditionally delivered in the form of social media support, online chat options, or a dial-in phone number. It can sometimes be difficult to reach authorized personnel in the event of a financial emergency.

Limited Account Services

Unlike banks and credit unions, neobanks may not offer certificates of deposit or various investment options. In addition, you also won’t find them to be a ready source of mortgages or personal loans in most cases.

Neobanks In The U.S.

A growingly popular option for many customers, neobanks continue to grow in awareness and uptake. Some of the United States’ most well-known neobanks include:

• Chime – A popular option that emphasizes no hidden fees and free overdraft protection.
• Revolut – Manage savings, bills, and investments, and access debit cards as needed.
• GoBank – Enjoy mobile and online banking using a mobile app on-demand.
• Varo – Provides online banking with no fees alongside high-yield savings accounts.

The Bottom Line

These online-only financial institutions offer a more cost-affordable alternative to traditional banks and credit unions, albeit a limited subset of their services. Neobanks provide a quick and convenient way to manage your money digitally. No two are created equal, however: Before signing up to utilize a neobank, be sure to do your research and compare providers.

Looking for more tips on how to manage your money and finances, including how to open a bank account for your household? Be sure to check out the Rocket HQ^SM Financial Learning Center.