What is a neobank? When we think about banks, we often think about them as traditional financial institutions we keep our bank accounts with. But there are a growing number of fintech companies emerging that are focused on challenging the traditional banking model and streamlining financial services. We’ll explore Neobanks, also known as challenger banks, in more detail to better understand what a neobank is.
What are Neobanks Used for?
Neobanks are 100% online banks that are used for personal finance and business finance. Using fintech or financial technology, neobanks offer a wide variety of services like many traditional banks, including:
- Bank accounts such as a checking account with a physical debit card
- Savings accounts
- Credit cards
- Offer loans such as personal loans and business loans
How do Neobanks Work?
Neobanks use technology platforms such as a mobile app to provide financial products for customers similar to a traditional bank. For example, they can provide banking services such as a bank account like savings accounts, direct deposit options, a cash account, and more.
Neobanks mostly raise funds from investors, interchange fees between merchants and consumers, and other innovative strategies. In addition, because they do not have a physical presence such as a brick and mortar branch, neobanks save significant money on overhead and rent.
Neobanks Vs. Digital Banks Vs. Traditional Banks
The first thing to note is that neobanks and digital banks are interchangeable terms and they are great fintech examples. As digital banks are commonly referred to as digital banks. Both neobanks and traditional banks offer similar services such as savings and checking accounts and other financial products.
Small Business Deals
However, the main difference between neobanks and digital banks versus traditional banks is that they do not have physical branches. Instead, neobanks are online banks and provide digital banking services through mobile apps. They may also have a partner bank that provides additional services as needed.
Traditional banks might have a digital presence, but they also have physical branches they provide financial services through. Neobanks are also subject to fewer regulations compared to a legacy bank because they partner with other banks and vendors to provide services.
|Feature/Characteristic||Neobanks/Digital Banks||Traditional Banks|
|Terminology||Interchangeable terms. Also known as digital banks.||Often referred to as legacy banks.|
|Service Offering||Savings, checking accounts, and other financial products, similar to traditional banks.||Savings, checking accounts, loans, mortgages, etc.|
|Physical Presence||Do not have physical branches.||Have physical branches where customers can receive services.|
|Platform||Primarily online; services accessed through mobile apps or web interfaces.||Digital presence (online banking, mobile apps) in addition to in-person services.|
|Regulatory Framework||Subject to fewer regulations (because they often partner with established banks or vendors).||Subject to extensive banking regulations.|
|Key Advantages||Speed, convenience, and often lower fees. Might offer innovative features quickly.||Trust from long-standing presence, in-person customer service, wide range of services.|
Pros of Neobanks
Using a Neobank can be very beneficial for a variety of reasons; we’ll look at some of the main ones below:
Neobanks, due to their tech-focused nature, are often quicker to adapt and integrate new technology or features into their services. This flexibility means they can offer the latest in financial technology to their customers ahead of traditional banks.
Many neobanks have made strides in offering banking services to the underbanked or those who traditionally might face hurdles with conventional banking institutions. They often require fewer prerequisites to open an account, thereby making banking more accessible.
Compared to brick and mortar banks, neobanks tend to have lower fees, particularly for customer deposits. With a neobank account, there are usually fewer fees such as reduced monthly maintenance fees or none in some cases and are typically inexpensive to set up and use.
Like traditional banks, neobanks offer FDIC insurance for customers. There are significant measures taken to protect customer deposits and keep money safe. Through the Federal Deposit Insurance Corporation, neobanks are FDIC insured financial institutions for deposit accounts and more.
Competitive interest rates
One of the biggest fintech trends is higher interest rates, and this also applies to many neobanks. This will depend on the type of savings account, and generally will offer a wider range of financial products for customers. However, even if interest rates are not as higher, fewer fees mean that customers can save money using neobanks versus traditional banks.
Ease of use
Easily accessible through a smartphone app, neobanks ensure that customers can access money wherever they are. In addition, a neobank is simple and easy to set up and access versus going through traditional financial institutions.
Plus, they are more tech-savvy with their features and offer services even for those that may have more of a credit risk.
Cons of Neobanks
While neobanks are definitely innovative, there are some cons associated with using them for a primary account:
Dependency on Tech Infrastructure
While being digital is a strength, it can also be a drawback. If a user faces internet connectivity issues or if the bank’s servers are down, they might be left unable to access their funds or carry out transactions.
While all banks, traditional or neo, are vulnerable to cyber threats, the complete digital nature of neobanks can sometimes make them more enticing targets for hackers. Users need to ensure they follow best practices to keep their accounts secure.
Customer service is challenging
Since there is no in person assistance, it’s often difficult for customers to get the attention and care they need. All customer service for neobanks takes place via phone and chat, and it might be difficult to get help in a timely fashion when problems arise.
Potentially fewer services
Because many neobanks partner with other banks to provide their financial services, they might not offer as much as a traditional bank. As a result, Neobanks might be limited in the types of lending and products compared to larger banks and may not have as much variety comparatively.
A new innovation
Neobanks is a new player in the financial field, which can lead to many to be wary of it. While neobanks offers services similar to a traditional bank, there may be some hesitancy to fully adopt this new type of bank using fintech as we learn more about it, which could potentially lead to more regulations.
Popular Neobanks to Consider
There are many great emerging neobanks that can be used for business finance and personal finance, some of the top ones include:
- Chime: By far one of the most popular neobanks out there, Chime has partnered with Stride Bank and Bancorp Bank to provide customers with a wide range of financial products. Features include direct deposits, debit cards, and auto savings accounts.
- Arrival: Arrival is a good option for business finance for small companies and freelancers. Key features include different types of accounts, accounting software, lending, invoicing, and many more features that will be released soon.
- Current: Another growing neobank, Current is great if you’re looking for low to no free types of banks. They offer accounts across different age groups and include features such as saving pods and early paycheck if using direct deposit.
- Wise: One of the pioneers of neobanks, Wise is a very good option for business and personal finance. It has a host of banking features, including savings and current accounts, multi-currency accounts, and offers competitive exchange rates when transferring money abroad.
- Douugh: A newer player in the neobank field, Douugh helps its customers with money management and banking. It has features such as bill management, spending reports, and ways to invest as well.
- Sofi: For a variety of financial services, Sofi is one of the best neobanks out there. Customers can access hybrid checking and savings accounts, cashback rewards, automated investing, and much more.
Decide Whether a Neobank is Right for Your Businesses Financial Services
Neobanks are an innovative way to access financial services and can be a fantastic choice for both personal and business finance. Especially for those with a lower credit score, neobanks can be a way to start building back credit while taking more control of financial management.
With neobanks, you can have access to traditional bank accounts, investment opportunities, lower fees, and better financial oversight. A neobank is the right option for you if you are less concerned with physical locations and would prefer a wide range of banking services that can be quickly accessed through smartphones.