August 21, 2024

What is a Neobank? Everything You Need to Know

Banking is now something you’re likely to do right from your phone. And that’s not just because traditional banks offer online services. It’s also thanks to neobanks.

Let’s dive into how neobanks work and whether they might be a good option for you and your money.

What is a neobank?

Neobanks are financial institutions that operate entirely online. They don’t have any physical locations where you drop in to use the ATM or speak with a teller to close an account. Instead, their services are exclusively available through mobile apps or websites.

They provide most of the same services digitally, including:

Opening checking and savings accounts
Getting cash advances
Depositing checks
Paying bills

How do neobanks make money?

Neobanks typically generate revenue in some ways similar to traditional banks: They charge transaction fees for international transfers, ATM withdrawals, or overdrafts. But the fees are usually lower, making neobanks a more cost-effective option. Some of their revenue also comes from the transaction fees a business must pay to process purchases from credit or debit cards.

Most neobanks offer monthly or yearly subscription plans with enhanced features, such as early paycheck access. These subscription-based features benefit customers while providing these banks another source of revenue.

Some neobanks even earn income through partnerships and collaborations, such as referral fees for recommending third-party financial products or services.

Pros and cons of neobanks

Customers are flocking to neobanks because they offer several advantages over traditional banks, including:

Pros

1. Easy access

Nearly all banks now have some digital banking services, but neobanks offer all services through websites or mobile apps. This accessibility appeals to consumers who value convenience and efficiency.

2. Lower fees, competitive rates

Many neobanks operate with lower overhead costs compared to traditional banks, allowing them to offer more competitive interest rates on savings accounts and loans. Additionally, they often charge lower fees for services such as overdrafts and ATM withdrawals, making them an attractive option for cost-conscious customers.

3. Digitally advanced

Neobanks use technology to provide real-time transaction tracking, automated savings tools, and personalized financial insights. Their user interfaces are intuitive and user-friendly, enhancing the banking experience for customers who prefer managing their finances digitally.

However, even the best neobanks have some drawbacks that are worth considering when signing up:

Cons

1. Limited customer service

Neobanks may offer limited support options compared to traditional banks. While they often provide customer service through online chat, email, or phone, some customers may prefer face-to-face interactions or want assistance with complex banking issues they aren’t comfortable resolving in chatbots.

Phone calls are a great option, but if you prefer to speak face-to-face, a neobank isn’t the best option for you.

2. Fewer account services

Neobanks may not offer the same range of account services as traditional banks, such as business accounts, joint accounts, or premium credit cards. Customers with specific banking needs or complex financial situations may find that neobanks don’t fully meet their requirements.

3. Unproven history

Some consumers may hesitate to trust neobanks, particularly if they’re new to the market or lack a long track record of financial stability. While regulatory oversight and deposit insurance schemes usually provide protection for customers (just as they do with traditional banks), there may still be concerns about the reliability and longevity of neobanks compared to established financial institutions.

Neobanks vs. Digital banks

Neobanks, often referred to as challenger banks, are typically fintech (financial technology) startups that exclusively offer services online. They often prioritize user-friendly interfaces, innovative features, and quick account setup processes to streamline the user experience. There’s no need to make banking an errand you need to run on your lunch break— you can do it right from your phone.

“Online” or “digital” banks are typically extensions of traditional brick-and-mortar banks that offer similar online services alongside their physical branches. But you’ll likely experience hybrid banking with these more traditional banks, meaning some features are available online, while others are still only in-person services. An example of this could be that you can pay bills through the bank’s app but need to visit a branch to close an account. And because of this existing in-person requirement, they don’t offer the same flexibility.

Is a neobank the right choice for you?

When considering whether a neobank is the right choice, consider these factors:

1. Digital convenience

Neobanks offer easy-to-use mobile apps and online platforms, making banking convenient for users who prefer to manage their finances 100% digitally.

2. Fee Minimization

If you're looking to minimize banking fees, neobanks often have lower fees compared to traditional banks, meaning you’ll pay less for similar services.

3. Global accessibility

Many neobanks provide services that are accessible globally, making them suitable for digital nomads and individuals who travel frequently or have international banking needs.

4. Innovative features

Neobanks often offer early direct deposit (the ability to access your paycheck a few days early), and budgeting and analytical tools. Some also offer environmental benefits, such as planting trees or offsetting carbon usage, that appeal to users looking for banking solutions that reflect their values.

5. Financial goals alignment

The competitive interest rates offered by neobanks might better align with your financial goals and values, whether those include sustainability initiatives, ethical banking practices, or high yield savings accounts.

FAQs

Who uses neobanks?

Neobanks are increasingly popular among younger, tech-savvy consumers. They appeal to a wide range of people, whether by age — including millennials and Gen Z — or freelancers, digital nomads, and individuals seeking convenient banking experiences.

How are neobanks regulated?

Neobanks, like traditional banks, are subject to financial regulations to ensure consumer protection and financial stability. In the U.S., neobanks report to the Federal Deposit Insurance Corporation (FDIC) or the Office of the Comptroller of the Currency (OCC) if they have a banking charter. Additionally, they must comply with anti-money laundering (AML) and know your customer (KYC) regulations.

But FDIC protection is only available if the neobank has partnered with a traditional financial institution. Do your research before opening an account to see if your neobank can offer you protection.

What does the future of neobanks look like?

The future of neobanks remains promising as they continue to disrupt the banking industry. With advancements in technology, neobanks keep expanding their services, enhancing their digital capabilities, and partnering with other fintech companies to offer a broader range of products and services.

Are neobanks safe to use?

Neobanks are generally safe to use, especially if they’re FDIC-insured or have a banking charter. However, like any financial institution, it's essential to research and choose a reputable platform with strong security measures in place to protect your personal and financial information. You can find more information on each neobank’s website.

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Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

1. EarnIn is a financial technology company not a bank. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. Restrictions and/or third party fees may apply. EarnIn services may not be available in all states. For more info visit earnIn.com/TOS