Technology is changing the way people handle their finances. The term “fintech” was coined to describe this intersection of baking and technology, and it happens to be a great description for neobanks.
These banks are different from traditional brick-and-mortar banks in that the basis for their offerings is tech-enabled products and services. As the name “fintech” suggests, they pretty much embody the intersection of technology and finances. Here’s what you should know about neobanks and if it makes sense to open an account with one.
How a neobank works
One thing you’ll notice most about neobanks is how banking products and services are accessed—typically through a smartphone app. Neobanks may start providing simplified financial functions like budgeting or savings and eventually offer an expanded suite of financial services like checking and savings accounts.
Often, neobanks may not have their own banking charter but may instead use another traditional bank’s platform and charter to operate. When a neobank partners with a traditional bank, this typically means your money is also insured by the FDIC.
Aside from this, neobanks also allow you to access your money through a debit card and provide options to transfer money to other people and accounts. Neobanks offer a certain level of convenience for those who don’t mind handling most or all of their transactions online as opposed to visiting a physical branch to access banking services.
Pros and Cons of Neobanks
If you don’t use traditional banking products, then a neobank could work well for you. However, you should weigh the pros and cons of banking exclusively with these fintech companies.
Neobanks are extremely accessible and typically have minimal requirements to get started. If you’ve got access to the internet, a smartphone and can download an app, you can open an account almost instantly (in most cases.) Since neobanks don’t have branches or as many employees as traditional banks, the overhead is low—enabling these banks to offer lower-cost financial products. In many cases, neobanks charge customers little-to-nothing to bank with them.
Neobanks may offer accessibility and convenience, but they can also lack product depth and diversity. Many consumers choose traditional banks for their financial needs because there are some perks to having an established relationship. For instance, if you have a significant savings balance with a bank, it can be easier to obtain credit or discounts on other financial services the bank offers.
With a neobank, the product selection is limited. If you have a savings or checking account, there’s no guarantee that you’ll get access to mortgage, car loans or credit card products. The ability to get favorable terms across a wide variety of financial products with an established banking relationship is not available through neobanks.
The flipside of neobanks’ lower costs is fewer resources and customer servicing staff. If you need an immediate response regarding a banking issue, neobanks are not typically known for prompt, speedy customer service. In fact, your only option may be to interact with someone via email or chat. This can be incredibly inconvenient if you’ve got an urgent need involving your bank account.
Here’s a list of some popular neobanks to explore.
Chime® offers banking products to help you with budgeting and saving. The neobank offers checking and savings accounts and a secured credit card that provides a better way to build credit.* With Chime, you can get paid up to 2 days early with direct deposit^ and get access to over 60,000 fee-free ATMs.† Through Chime banking services are provided by The Bancorp Bank N.A. or Stride Bank N.A.
This neobank touts itself as a “green banking” alternative that helps customers save money and the planet. With every purchase you make, Aspiration plants trees and gives you double cash back rewards when you reach carbon zero. Aside from environmental contributions, the neobank offers accounts for spending and savings, retirement accounts, ID theft protection and alerts, and access to 55,000 free in-network ATMs.
Current offers an astounding 4% on savings deposits and allows you to create “pods” to help you organize your funds towards different savings goals. The neobank offers accounts for teens, cashback with select merchants, debit cards, and the ability to receive direct deposits.
Sofi is a financial services company that started with student loans for higher-income earners and has since evolved into a more full-service financial company with options ranging from credit cards, to retirement savings, investment brokerage services and more.
As of August 2022, the company did receive its own charter and now operates as an FDIC-insured bank. Though the company has technically graduated to traditional bank status, we think it’s helpful to note the recent change and highlight that neobanks can become regular banks.
We’d also like to point out that many fintech apps currently offer “banking-lite” services that will likely expand and venture into neobank territory. Neobanks typically start off with a single banking purpose or feature, then add more options and services. When these companies start to offer debit cards, there’s a chance they could evolve into a neobank. Here are some fintech apps to watch:
How do neobanks make money?
You might be interested in low-to-no fee neobanking, but wonder how these banks stay afloat without charging their customers any money. Here are a few ways that neobanks make money:
Neobanks can make money from in-app, email or even paid advertising campaigns. They can make use of affiliate partnerships that pay them for advertising other products and services. As a neobank customer, you are somewhat of a captive audience, and the likelihood that you’ll buy other financial products and services is pretty high.
Many fintechs have agreements with other entities that enable them to access and sift through the data related to their customer base. They might share the cookies that track your activity or other datasets that make it easier for them to develop and sell more products to you.
Neobanks that partner with traditional FDIC-insured banks earn interest on funds that you deposit with them. In essence, the neobank moves your cash into these banks that hold and invest it. The banks, in turn, pay the neobank for letting them use your funds.
Although a neobank’s core offerings may be free, they might have plenty of ways to upsell you. For example, they may charge for an instant transfer of funds if you don’t want to wait the standard amount of time transfers take. They may offer the opportunity to order paper checks through their platform – for a fee. Even if they don’t provide the checks directly, they may get a portion of the sales revenue they refer to the check vendor.
Neobanks versus online banks
Neobanks may look very much like online banks, but they are somewhat different. Online banks have their own charter and are typically FDIC-insured. This means they can legally operate as a bank and are subject to the same regulations as a traditional bank.
Good examples of online banks would be Ally or Discover. You’ll notice that these online banks also have a broad range of product offerings that range from deposit accounts to lending. Like a neobank, you’ll interact with them mostly online or through your smartphone. There will be no physical branches for you to visit.
A neobank, like an online bank, will have no branches and only be accessible through online means. However, you’ll notice that they have less to offer in terms of banking products and can not legally call themselves a bank. They will rely on banking partnerships to handle deposits and other regulated banking functions. A neobank may offer unique financial products like “second chance” bank accounts or credit builder accounts that you might not find with traditional banking institutions.
Should You Open an Account With a Neobank?
This all depends on your personal financial goals and situation. If you are trying to overcome a bad credit score or a checkered banking history, a neobank may offer the opportunity for you to access certain banking features that you’d not otherwise be able to. If using the features of a neobank could offer more convenience or opportunities to organize your finances, it could be a good fit.
Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC.
*To apply for Credit Builder, you must have received a single qualifying direct deposit of $200 or more to your Checking Account. The qualifying direct deposit must be from your employer, payroll provider, gig economy payer, or benefits payer by Automated Clearing House (ACH) deposit OR Original Credit Transaction (OCT). Bank ACH transfers, Pay Anyone transfers, verification or trial deposits from financial institutions, peer to peer transfers from services such as PayPal, Cash App, or Venmo, mobile check deposits, cash loads or deposits, one-time direct deposits, such as tax refunds and other similar transactions, and any deposit to which Chime deems to not be a qualifying direct deposit are not qualifying direct deposits.
^ Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. We generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.
†Out-of-network ATM withdrawal fees may apply except at MoneyPass ATMs in a 7-Eleven, or any Allpoint or Visa Plus Alliance ATM.