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The rapidly advancing digital landscape has empowered consumers with many options for just about everything, including banking and money management. Today’s banking customers are looking for convenience, flexibility, control, transparency and quick results that aren’t offered by many traditional banks.
For customers who are no longer satisfied with the drawbacks of traditional banks, neobanks offer an alternative.
- Neobanks are a type of fintech company that offer banking services digitally.
- They often provide tools for budgeting and savings goals, and offer lower fees and higher interest rates than traditional banks.
- Neobanks may partner with chartered banks for FDIC insurance, but customers should always check for the FDIC logo.
What is a neobank?
Neobanks, sometimes called challenger banks, are fintech companies, often startups, that offer nontraditional banking services digitally. Typically, these companies provide checking and savings accounts through a mobile app or website and don’t have branches. It is common to find neobanks that include tools to help customers budget and reach savings goals. Neobank customers often enjoy lower fees and higher interest rates than their traditional counterparts.
Neobanks aren’t a new concept, having arrived in the 2010s after the Great Recession. According to the banking data platform Plaid, neobanks are projected to reach 350 million users globally by 2026, up from around 150 million users as of 2021.
Because neobanks don’t have federal regulation standards to adhere to like those at traditional banks, their rules, regulations and banking practices can vary widely from one neobank to the next. As such, it’s important that consumers interested in neobanks do some research to ensure they’re banking with a company that’s reputable, safe and suits their financial situation.
Here are some of the most popular neobanks available in the U.S.
- Aspiration: This neobank is founded on ethics, sustainability and giving back, with the goal of planting 1 billion trees by 2030. As a customer, you set your own fee based on what you think is fair and can afford, even if it’s zero. Aspiration’s debit card earns cash back on certain eco-friendly purchases.
- Chime: Chime has over 14 million customers and prides itself on the motto of profiting with customers, not from them. There are no overdraft fees, monthly service fees, ATM fees, security deposits, credit checks or minimum balance requirements.
- Current: With about 4 million customers, Current is becoming more well known by neobank customers as a company for those seeking more transparency and control over their banking needs. Although out-of-network fees may apply, it offers a no-fee approach, including no overdraft fees, no minimum balance fees, no transfer fees and no ATM fees.
- Revolut: Originally founded in Europe, Revolut expanded its reach to the U.S. in 2020. It now has over 35 million users worldwide and supports 28 currencies. Those in the U.S. without a Social Security number can also access basic banking services through Revolut by opening an account with a Visa.
- Varo: As “a bank for all of us,” Varo is increasing its visibility in the neobanking industry. It also has over 3 million customers and requires no credit check, no minimum balance requirements, no monthly or overdraft fees, and offers a vast network of fee-free ATMs.
How neobanks work
Unlike traditional banks, most neobanks aren’t chartered, but it’s common for neobanks to partner with chartered banks. An affiliation with a chartered bank may mean your deposits are insured by the Federal Deposit Insurance Corp. (FDIC), but check for the FDIC logo to be sure.
Most neobanks offer a low or no fee structure and early deposit access to cater to all consumers, whether or not they’re strapped for cash. Their approach is 100 percent digital with intuitive mobile apps and user-friendly websites. Neobanks strive to give today’s banking customers the convenience, flexibility, and transparency they’re increasingly seeking.
Pros and cons of neobanks
As with all financial decisions, it’s essential to weigh the pros and cons of neobanking vs. traditional banking. Here are some things to consider.
- Digitally advanced: Neobanks operate entirely online and through mobile apps, making them well suited for users who are comfortable with technology and prefer digital banking.
- 24/7 mobile access: Users can manage their finances at any time from the convenience of their smartphones. This flexibility is advantageous for those with busy schedules, or anyone who prioritizes on-the-go banking over making a stop at a branch.
- Low or no fees: Many neobanks pride themselves on offering reduced or no fees compared with traditional banks. Having fewer fees can translate into more savings.
- Early access to direct deposits: A notable feature of neobanks is their ability to provide users with early access to direct deposits, making it easier for individuals who need immediate access to their funds to meet their financial needs.
- No branches: The absence of physical branches can be a drawback to those who prefer face-to-face interactions. Neobanks rely on online channels, which limits the personalized customer service you might get at a bank branch.
- Don’t offer one-stop shopping for other accounts: Neobanks often focus on core banking services (especially those that don’t require a Social Security number to open an account), and may not provide a comprehensive suite of financial products. Customers looking for specialized financial services, such as mortgages and auto loans, may find the options limited at neobanks compared with traditional banks.
- Money may not be FDIC-insured: Unlike traditional banks that come with FDIC coverage, not all neobanks guarantee the same level of deposit insurance. It’s important to verify what deposit protection measures are in place when considering a neobank — there are plenty that partner with chartered banks to receive FDIC coverage.
Neobanks vs. online banks
It is easy to confuse neobanks and online banks. Though neobanks are, in fact, online, many traditional banks also offer online banking through websites and apps. If the traditional bank has minimum account balances or fees, however, the same rules and fees typically apply to its online banking products. Unlike traditional online banks, neobanks aren’t chartered or FDIC insured, unless they have partnered with a chartered bank.
Is a neobank right for you?
Neobanks are disrupting the traditional banking landscape by emphasizing easy-access accounts, lower fees and innovative digital services. The unique structure of neobanks can make them an enticing option for consumers who are frustrated with traditional banks, particularly if they’re comfortable with the technology.
Here are some situations where a neobank might be worth considering:
- You prioritize digital convenience. If you’re comfortable with technology and want to avoid the hassle of going to a branch, you might find a neobank to be a welcome financial home. Neobanks can be particularly beneficial for those who rely heavily on mobile devices for banking tasks.
- You want to minimize fees. Neobanks often attract those seeking to minimize the fees associated with traditional bank accounts. If you want to cut down on things like overdraft fees and monthly service charges, a neobank may offer a more cost-effective solution.
- You’re a global citizen or non-U.S. resident: Some neobanks can be a great option for individuals who aren’t U.S. citizens or residents. The digital nature of neobanking allows for easier accessibility, while potentially having fewer barriers to open an account than traditional banking channels. For example, you might not need a Social Security number or Individual Taxpayer Identification Number (ITIN) to open an account with a neobank, as some only require a U.S. Visa.
As with any type of bank account, make sure to understand what fees you might be charged by a neobank and check for FDIC insurance. Compare the benefits and limitations of neobanks with those of traditional banks to help make an informed decision about whether it might be a good idea to switch over from your old bank account.
– Bankrate’s René Bennett provided updates to this article.