What is a neobank? When we think about banks, we often think about them as traditional financial institutions where we keep our bank accounts. However, a growing number of fintech companies are 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 mobile apps to provide financial products for customers, similar to traditional banks. For example, they can provide banking services such as bank account 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.
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 that 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
Utilizing a Neobank offers numerous advantages for several reasons. Below, we will explore some of the key benefits:
Adaptable Features
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.
Inclusivity
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.
Lower fees
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.
Financial protection
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 major trends in fintech is the rise in interest rates, which is also relevant for many neobanks. The impact will vary based on the type of savings account, and neobanks typically provide a broader array of financial products for their customers. Furthermore, even if the interest rates are not significantly higher, the reduced fees associated with neobanks allow customers to save more compared to 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
Although neobanks are certainly innovative, there are several drawbacks to consider when using them as 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.
Security Concerns
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
Without in-person assistance, customers often struggle to receive the attention and care they require. Customer service for neobanks is conducted exclusively through phone and chat, which can make it challenging to obtain timely help when issues occur.
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: As one of the leading neobanks, Chime collaborates with Stride Bank and Bancorp Bank to offer customers a diverse array of financial products. Its features encompass direct deposits, debit cards, and automatic savings accounts.
- Arrival: Arrival is an excellent choice for small businesses and freelancers seeking financial services. Its key features encompass various account types, accounting software, lending options, invoicing capabilities, and many additional features that are set to launch 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: As a pioneer in the neobank sector, Wise is an excellent choice for both personal and business finance. It provides a variety of banking features, such as savings and current accounts, multi-currency accounts, and competitive exchange rates for international money transfers.
- 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: Sofi stands out as one of the top neobanks, offering a wide range of financial services. Customers can benefit from hybrid checking and savings accounts, cashback rewards, automated investing, and a host of additional features.
Decide Whether a Neobank is Right for Your Businesses Financial Services
Neobanks offers a modern approach to accessing financial services, making them an excellent option for personal and business finance. They can be particularly beneficial for individuals with lower credit scores, as neobanks provide a pathway to rebuild credit while gaining better control over financial management.
With neobanks, you gain access to traditional bank accounts, investment opportunities, lower fees, and enhanced financial oversight. A neobank is ideal for you if you prioritize a diverse range of banking services that can be easily accessed via smartphones rather than being focused on physical branch locations.
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