What Is a Neobank? Everything You Need to Know
If you have spent time looking for a new bank or are sifting through Swagbucks offers to earn bonus points, you have undoubtedly seen multiple ads for online checking and savings accounts.
Many of these options are from “neobanks,” which offer banking services that can be cheaper and more innovative than a traditional bank. But what is a neobank, and what can it do for you?
In this article, I’ll answer those questions and share the benefits of neobanks and how they differ from traditional banks like Wells Fargo or Bank of America.
Table of Contents
- What Is a Neobank?
- Who Can Join a Neobank?
- How Do Neobanks Make Money?
- How Neobanks Work
- Differences Between Neobanks and Online Banks
- Neobank Pros and Cons
- Best Neobanks in the US
- The Bottom Line on Neobanks
What Is a Neobank?
A neobank is not an actual bank but a financial technology company (fintech) that provides digital banking services.
Legally, they cannot call themselves a bank, although they almost always partner with an FDIC-insured bank. Sometimes, these platforms are also known as “challenger banks.”
Neobanks can offer higher interest rates on savings than regular banks because they have fewer overhead costs. With neobanks, there are no bank branches to maintain, and they don’t require nearly as many employees. They also tend to offer unique products that you won’t find at most banks.
Some examples include:
- Higher interest rates on savings (i.e., 5% savings accounts)
- Rewards debit cards
- Banking services for minorities and immigrants
- Free checking accounts
- Environmental-friendly banking practices
In today’s competitive, tech-centric world, it’s incredibly difficult for a fintech to become a bank. Simultaneously, it’s challenging for conventional banks with a charter to offer innovative services.
As a result, neobanks help innovate the banking sector as they are subject to fewer expenses and regulations. To safeguard customer deposits and build trust, they partner with a federally-insured bank to provide FDIC Insurance and expand their customer base.
Who Can Join a Neobank?
Membership is open to legal residents at least 18 years old. Many platforms require a Social Security Number, although several are migrant-friendly and only require a government-issued ID, passport, or matrícula consular.
These platforms are favored by the underbanked, millennials, and people looking for a banking service specializing in a specific niche.
You may also consider a neobank if you have an imperfect banking history, as they are easier to join. Thankfully, many of these banks don’t use ChexSystems, a service similar to a credit score check that reviews your banking history for account closures and potential risks.
How Do Neobanks Make Money?
As most Neobanks don’t charge monthly or annual service fees, they must make money from debit card interchange fees. They receive a percentage every time a customer purchases with their debit card.
Neobanks can also earn interest on client account deposits. And some may offer premium plans that provide exclusive features but are still cheaper than a regular bank.
Neobanks also tend to offer fewer concierge services and don’t have to maintain a physical network which helps keep expenses low.
Sometimes, neobanks transform into full-fledged chartered banks, with SoFi being a prime example.
How Neobanks Work
The banking experience is similar to many national banks that are online only.
After downloading the mobile banking app, you can create a checking account to receive direct deposits. Your account will also come with a debit card to make purchases and request ATM cash withdrawals.
Here are some of the membership features that you can receive:
- Deposit accounts: Each platform offers a checking account (sometimes called a spending account). Savings accounts may also be available, but not every neobank offers them. Instead, you may have savings goals to set aside funds for specific purposes within your spending account.
- Debit card: Depending on the neobank, you will receive a free Visa or Mastercard debit card for online and local purchases. Your purchases may also earn cash back.
- Money transfers: Direct deposit is the easiest way to receive funds into a neobank account. And you can usually link your account to digital wallets or directly connect to external accounts to quickly transfer funds to friends, family, and businesses.
- Learning tools: Several neo-banking platforms offer educational tools that can help adults and tools to learn about saving money, spending money, and budgeting.
- FDIC Insurance: Most services offer up to $250,000 in FDIC coverage. Some platforms may partner with several banks to provide up to $1 million in federal insurance.
Related: Best Free Checking Accounts (if you still prefer a traditional local or online bank)
Differences Between Neobanks and Online Banks
While there are many similarities between neobanks and online-only banks such as Barclays Bank, there are several differences in available services and the organizational structure.
Most Neobanks are Young
Neobanking has been around for several years, the earliest starting after the 2008 Great Recession. They have more customer trust as the industry has experience but remains relatively young and can be riskier than well-established banks with healthy balance sheets.
Like any industry, some platforms inevitably fail, making it difficult for customers to withdraw their funds. A notable example is Beam Financial in 2019. Therefore, inspecting a neobank’s financial health and looking for customer complaints before joining would be best.
As the space is relatively new, platforms may go out of business if they fail to attract enough customers or investor funding. For instance, Simple Bank ceased operations in 2021, although customers were given advance notice to move their assets to another platform.
Limited Premium Services and Customer Service
Neobanks are ideal for getting free banking accounts while earning rewards. However, many neobanks limit customer service hours and offer few additional services to save money. For example, customer agents may only be available during daylight hours instead of 24/7. It’s also not uncommon to only provide chat and email support.
You may not have access to online bill pay, remote check deposits, paper checks, or wire transfers. The list of available services varies by platform, so it’s important to compare your membership benefits and customer service options and decide what’s important to you.
Also, neobanks don’t offer personal, auto, and home purchase loans, though you may have access to cash advances if you need to borrow money.
Many are Mobile-Only
Some neobank platforms are mobile-only and lack a desktop web browser application.
While fewer people access their financial accounts through desktop computers, it’s nice to have this capability when needed.
Neobank Pros and Cons
There are several advantages to dealing with a neobank, but as I’ve pointed out, there are a few drawbacks, too. Here’s my list of neobank pros and cons:
- Ideal for the underbanked, Gen-Z, or new immigrants
- No-fee banking
- Earn cash back rewards on checking and savings
- More likely to specialize in a specific niche or background
- Offer unique products, like free credit reporting, rewards debit cards, etc.
- Can usually offer FDIC insurance coverage through a partner bank.
- Lack of traditional banking services, like wire transfers or cashier’s checks
- Limited check writing capability (if any)
- You’re not dealing with a chartered bank
- Limited customer support
- Less-common banking services are usually unavailable.
Best Neobanks in the US
If dealing with a neobank sounds appealing, I recommend you do the proper research before signing up. To help you get started, here are six top neobanks to consider. As you’ll see, each one puts its unique spin on banking and managing money.
Chime is one of the biggest neobanks and offers many features that make it a great alternative to a typical bank.
Some of its benefits include:
You will need to receive at least $200 in monthly direct deposits to unlock the credit building and overdraft protection benefits. Learn more in our full Chime banking review.
You can use Cleo to save for various goals, make a budget, and analyze your transactions. Cleo Save uses roundups to make saving easy. Cleo rounds the amount up to the nearest dollar every time you make a purchase and moves the change into savings.
The service also includes interest-free paycheck advances of up to $100 and credit builder loans. Cleo is worth a look if you’re looking for a neobank that can help you budget, save, and build credit while being fun to use.
Our Cleo Review has more details.
Current offers free personal accounts for high-interest savings pods (4.00% APY), earning cash back on debit purchases, and up to $200 in overdraft fee protection.
The service is also an excellent teen banking option. Parents can schedule allowance payments and block merchants. Meanwhile, teens can make purchases and save with interest-bearing Savings Pods. Get all the details in our Current Bank Review.
Part-time freelancers and sole proprietors can use Lili to avoid the fees and hassles of a traditional business bank account. Some of the most valuable features include invoicing software, an expense write-off tracker, plus automated tax savings transactions.
The free business checking account is satisfactory for many small, single-employee businesses.
A Lili Pro account costs $9 monthly after a 30-day free trial and lets you earn a high-interest rate on deposits. You can also earn cash rewards on purchases and split expense categories. For more information, check out our Lili Review.
Some neobanks focus on interest-bearing savings accounts instead of checking rewards. SaveBetter partners with banks and credit unions from across the United States to offer savings accounts, money market accounts, and CDs with competitive yields.
The minimum deposit is $1 for many products, and several banks offer exclusive rates only through this platform that are higher than on the bank website. In addition, all SaveBetter banking partners are FDIC or NCUA-insured. For more information, read our SaveBetter Review.
Varo Money is a free banking service that offers several different products:
- Bank Account: A spending account with 55,000+ in-network ATMs and no hidden fees
- Savings Account: Earn up to 5% interest on deposits when receiving at least $1,000 in monthly direct deposits.
- Varo Advance: Receive up to $100 in interest-free cash advances (maximum $5 fee applies)
- Varo Believe: A secured credit card without a minimum security deposit, annual fee, or hard credit check. Earn cash back from over 50 brands and build credit with the three major credit bureaus.
Our Varo Money Review has all the details.
The Bottom Line on Neobanks
A neobank can be an excellent way to start banking as an adult or to help your teen learn the ins and outs of saving and spending. These platforms can handle most daily banking activities. You can link your payroll direct deposit, make debit card purchases, and save for the future.
Eventually, you may need to switch to a traditional bank to access more services such as bill pay, check writing, and 24/7 customer support. If you prefer a chartered bank, try to grab a bank bonus for opening a new account and completing the necessary activities.
Comments are closed.