Neobank: What Is It and How Would it Impact the Future of Banking Service
As technology keeps progressing, more financial institutions are looking to take advantage of and offer services to tech-savvy consumers. Introducing the neobank–online-only financial institutions offering limited services. However, the advantage is that there are less fees and higher interest rates offered for savings and checking accounts.
Interested in how these future banking services work? Let’s dive right in.
Neobanks are financial technology companies that offer services online, typically through their mobile app. It’s best for those who are comfortable with technology and don’t mind banking this way. In other words, there are no brick and mortar locations, allowing neobanks to save on costs and passing on those savings to their customers
You’ll find that neobanks may look like your average bank, but they may not offer as many products and services such as overdrafts. Plus, they’re typically not chartered with any state or federal regulators, and instead partner with existing banks. However, they’re more streamlined in their process for mobile devices.
What is the Neobank Business Model?
Most Neobanks have a freemium model where customers don’t have to pay monthly fees but there may be upsells like pay it forward programs or charges for paper statements. Neobanks also operate online only, relying on technology to automate or streamline their operations.
How do Neobanks Make Money?
Since neobanks have less overhead costs compared to traditional banks, they can increase their profit margin this way. Partnering up with banks instead of getting a charter may result in less fees, further keeping costs low.
Other ways neobanks make money is by charging fees for additional services, earning interest off your deposits, making loans (though not necessarily to consumers) and charging service fees to businesses through credit or debit card transactions.
Neobank vs Traditional Banks
On the surface, a neobank might look similar to what a traditional bank offers except you do all your banking through an app and it’s likely easier to set up. All you need to is download the app and go through a similar application process than what you would at a brick and mortar location.
Services you find at a traditional bank are also similar to a neobank.
Some of these include:
- Checking accounts
- Savings accounts
- Money transfer services
- Tools to help with your financial well-being like credit monitoring or budgeting assistance
Most neobanks don’t offer loans or other products like credit cards. However, there are neobanks that have partnered up with other financial institutions to offer lending products and services.
As mentioned above, most neobanks aren’t chartered banks, instead relying on partnerships or alliances with existing banks. This means your qualifying deposits are FDIC-insured, whether that’s with a traditional bank or neobank.
Neobank vs Digital Banks
Digital or online banks are similar to neobanks in that they operate online and have no physical branches. Online banks may also offer mobile apps, but account holders can also conduct transactions by logging in online through their computer, via the phone, and in some cases, snail mail.
Online banks also tend to be chartered and don’t need to partner up with other banks to become FDIC-insured. They may also offer more products and services like loans and credit cards. Some online banks are part of a traditional bank–think of the digital bank as the online department–whereas a neobank is a digital only institution.
Pros and Cons of Neobanks
Before opening a neobank account, consider the pros and cons of your decision.
- Fewer fees: Since neobanks tend to have lower overhead fees compared to digital or traditional banks, these savings are passed onto the consumer. That means no monthly fees, and/or lower ATM fees.
- Faster banking: Because all your transactions are conducted through the app, there’s no need to wait in line for regular services like withdrawals and deposits. If you need to process other requests like ordering checks and conducting bill pay, that can be done quickly as well. Opening an account tends to be quick — think minutes — since neobanks purposely set up their technology to do so, like using AI to conduct credit checks faster.
- More convenient: There’s no need to show up at a physical location to do any of your banking. Since your app is available 24/7, you can bank whenever you want, even in the middle of the night.
- No brick and mortar locations: Sure, you can conduct all your transactions online, but sometimes it’s nice to be able to talk to a human. For example, if you want to complete a complex transaction or like to ask questions in person, a neobank may not be for you.
- Limited products: Most neobanks have both checking and savings accounts, but not much more than that. Sure, some have partnered up with other companies to provide additional products but not all do.
- You need to be comfortable with technology: Those who aren’t comfortable with using an app may want to avoid opening a neobank account. While technology is great, if you’re stumbling through learning how to use a new app or swiping your way through a transaction, you’re better off elsewhere.
- Not as regulated: Even though some neobanks offer FDIC insurance through partner banks, there may be some confusion as to who is legally responsible for issues like errors and fraud. Since they’re not chartered or considered banks in a legal sense, there may not be a well-written structure to follow if you have an issue.
Where Can I Open a Neobank Account?
Opening a neobank account can take a few minutes to complete. Before doing so, make sure you know what features you want and take the time to compare fees and features of a few.
Here’s a list to get you started:
- Chime – Features include a free debit card, no monthly fees and an automatic savings tool. If you qualify, you may be able to take advantage of their cash advance feature at no cost. Read our review here.
- M1 Finance – Primarily an investment app, there’s also a checking account and more. Read more about it in our review.
- Betterment – A robo advisor that offers a checking account which reimburses ATM and foreign fees. Learn more in our review.
- Empower – You can earn 0.25% APY and pay no monthly maintenance or overdraft fees. Find out more about Empower in our review.
- Current – innovative mobile banking service, loaded with smart money management features and tailored checking account solutions for various audiences (for an instance, bank account for teens).
- Qapital – This banking app helps you save money through a series of settings you design and you can also use it to invest.
- Stash – Mainly an investing app, you can invest in fractional shares and bank with no hidden fees. Read more in our review.
- Acorns -This app helps you invest and save your spare change.
- NorthOne – a banking service designed with entrepreneurs and small business needs in mind. With out-of-the-box business management systems integrations, running your business finance will be a breeze. Read our full review for more information.
- Bank Novo – There are no hidden fees, including ones for incoming wires, ACH transfers, and mailed checks.
- BlueVine – What started as a lending company has morphed into offering checking accounts for small business owners. You can earn 1% interest as long as your account has $1,000, conduct unlimited transactions, access to over 38,000 ATMs and more.
Neobanks are a great way to bank on the go, save money on fees, and earn higher-than-usual interest rates. They key is to ensure the one you pick is FDIC-insured and offers excellent customer service in case you do run into issues or concerns.