What is a Neobank?

Banking
Updated: 29th Sep 2021
Written by Jordan Blansit
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The recent rise of FinTech (financial technology) innovation has led to a new kind of banking boom: namely, neobanks.

These online banks offer a small range of banking services popular with underserved populations such as migrant workers, poorer individuals, and the younger crowd.

But what, exactly, is a neobank?

What is a Neobank?

A neobank sometimes called a “challenger bank,” is an online-only institution that, technically, is not a bank.

Rather, these FinTech companies partner up with traditional banks to offer FDIC-insured accounts under their own brand.

But neobanks don’t usually offer advanced financial products such as credit lines or investment services.

Furthermore, the slimmed-down model lets customers save on fees and earn higher-than-average interest rates – at the expense of expansive product lines and direct regulatory oversight.

A few common names in the neobank industry include Chime, HMBradley, and GoBank.

Some investment apps such as M1 Finance and Betterment also offer a functional neobank account.

How Do Neobanks Work?

Neobanks are bank-adjacent institutions that offer a small range of specialized services.

Typically, these include:

Because these banks are online-only, most of their services are available via mobile app or a website portal.

By cutting out physical branches in favor of an online presence, neobanks can cut overhead costs (and, therefore, customer-paid fees).

However, most neobanks don’t offer credit lines, including overdraft protection or credit cards.

What are the Pros and Cons of Neobanks?

Pros:

  • Convenient and easy to access
  • Lower fees than traditional banks
  • Higher rates on interest-bearing accounts
  • Some don’t check banking histories

Cons:

  • Less regulated than traditional banks
  • Require comfort with basic mobile technology
  • Fewer banking, deposit, and investment services
  • Limited customer service due to lack of physical branches
  • Shorter institution and individual histories than established banks
  • FDIC insurance is usually only offered via partner banks

Neobank Features and Benefits: What You Need to Know

Neobanks come with a unique set of features that only online banks can hope to imitate. (And even then, neobanks occasionally get the upper hand.)

Quick, Efficient Signup Process

For the tech-savvy among us, getting started with a neobank is easy. There’s no physical paperwork – just sign up for an account and download the app.

Plus, many don’t check banking histories.

Easy Access

Traditional banking hours don’t exist online – and why should they? As such, you can access neobank accounts 24/7 via mobile phone or website portal anywhere you have an internet connection.

Rock Bottom Low Fees

Thanks to their online-only presence and reduced overhead, neobanks can pass savings to their customers.

While some do charge fees for premium services or require a minimum number of monthly transactions, they also offer low or no overdraft fees and better interest rates than traditional banks.

User-Friendly Technology

Neobanks are almost 100% digital – even down to their customer service – which means they’re designed with the end-user in mind.

Several successful neobanks have highly-rated apps on Google Play and the App Store, thanks to their slick design and ease of use.

Digital Banking Experience

As digital-only banks, the online experience is both a selling point and primary offering for neobanks.

As such, most function smoothly, with common sense app designs and workflows that cater to the human desire for ease of use.

Who Should Use a Neobank?

Neobanks are best for tech-savvy individuals (or quick learners) who just want basic banking services.

They also work well for those new to the banking world, such as high schoolers or college students, who want to learn how to manage a basic banking account before graduating to more traditional offerings.

High-interest-bearing neobanks may also serve you well if you plan to stash away large amounts of cash for a long time.

Downsides of Neobanks: Some Things to Consider

Of course, even the best bank has downsides to consider. Neobanks are no exception.

No Historical Data to Track Service Delivery & Experience

Because neobanks are relatively new, there’s little in the way of historical precedence.

This can make it difficult to determine what’s to be expected in terms of service, customer helplines, and even BBB ratings.

And, as many neobanks are technically in their “startup” phase, they’re more prone to volatility – which means they can go belly-up on a moment’s notice.

No Physical Branches

A lack of physical branches is good for a neobank’s bottom line – but if you have issues with your account or complex questions that require a personal touch, there’s no way to talk to a human representative in person.

Geared Toward Those Who are Comfortable with Digital Banking

If you’re uncomfortable with technology in general or digital banking in particular, neobanks may not be for you.

Tapping, swiping, scrolling, and digital interaction are the key centerpiece to accessing your accounts and spending money.

Spotty Customer Service

Because neobanks don’t maintain physical offices, getting in touch with a live customer service agent can be painful.

Most neobanks, in keeping with their digital services, promote chatbots and live chat agents to deal with basic questions.

But for complex financial questions, account issues, or even claims of fraud, it can be difficult to access a rep with both the clearance and know-how to address your issue.

Fewer Services & Financial Products Offered

Neobanks also offer limited financial services compared to other banks. For instance, most – with exceptions like lender-turned-neobank SoFi – don’t extend lines of credit.

As such, if you need a mortgage, auto loan, or even a credit card, you’ll have to go to a traditional bank or credit union.

Moreover, many neobanks don’t offer cash deposits, wire transfers, or advanced financial products like investment services.

Neobanks vs. Online Banks: How are They Different?

While neobanks offer some banking services, they’re not necessarily the same as an online bank.

For instance, many online banks carry more products, including a full range of checking, savings, investment, and loan accounts.

And while online banks offer mobile apps and web portals, they also tend to include phone service and even snail mail statements.

Furthermore, most online banks are chartered, which means they don’t need to partner up for FDIC insurance. (Some are technically the online extensions of traditional banks – just with lower overhead.)

Is My Money Safe in a Neobank?

Most neobanks partner with chartered banks to offer FDIC insurance on deposit accounts.

In the case that a neobank goes belly-up, your accounts are covered up to $250,000 per depositor.

That said, you may way to check that a neobank’s claims of FDIC coverage or partnerships are true before handing over your money.

What Are Some Examples of Neobanks?

With the rise and global acceptance of online banking, Neobanks are slowly but surely becoming mainstream.

Here are some of the biggest Neobanks that have raised millions of dollars from Venture Capitalists and Traditional Financial Institutions:

Neobank FAQs

Is Chime a Neobank?

Yes, Chime is an example of a neobank. They partner with The Bancorp Bank and Stride Bank to insure customer deposits.

Are Neobanks FDIC Insured?

Neobanks themselves are not FDIC-insured. However, your money is typically held in an account with their partner banks, which are covered by FDIC insurance.

But be sure to do your research! If a particular neobank doesn’t partner with a traditional bank to insure your funds, you’re introducing unnecessary risk into your financial life.

How Do Neobanks Make Money?

Most neobanks have a freemium model where customers don’t pay for basic services or monthly fees.

That said, they may charge upsell prices for pay-it-forward programs, paper statements, or more complicated financial tools.

Those that offer lines of credit of some form, such as SoFi, may also charge interest. And some earn interest on your deposits or charge service fees to businesses via credit or debit card transactions.

Bottom Line: What is a Neobank?

Neobanks are the next wave in FinTech products and banking technology. While they’re not right for everyone, a little bit of research may help you determine whether you’re ready to take the next step and go fully digital with your banking services.

But before you do, be sure to take a few steps before entrusting your hard-earned dollars to a (basically) people-free institution:

  • Check their customer reviews
  • Determine if the bank is currently or has previously dealt with legal challenges
  • Verify its status with the FDIC or partner bank

And remember, if you’re easily flustered by technology or need advanced banking options, chances are, a neobank isn’t for you.

Jordan Blansit
Jordan Blansit
Jordan is a freelance writer with an inexplicable predilection for investing and personal finance. When she’s not click-clacketing from the comfort of her living room, you can find her (or not) craftily avoiding human contact in the California redwoods or Oregon Siskiyous with her black cat, Bean.