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.

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 do not 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, and they are gaining popularity in the U.S. Data suggest there are about 23 million neobank customers. That number is expected to more than double, to 50 million, by 2025.

Popular neobanks

Since neobanks do not have federal regulators like traditional banks, their rules, regulations and banking practices can vary widely from one to the next. Here are some of the most popular neobanks available in the U.S.

  • Aspiration: This neobank has over 3 million customers and is founded on ethics, sustainability and giving back. As a customer, you set your own fee based on what you think is fair and can afford, even if it’s zero.
  • Chime: Chime has over 13 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 3 million customers, Current is becoming more well known by neobanking 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.
  • Varo: As “a bank for all of us,” Varo is increasing its visibility in the neobanking industry. It also has about 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., 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 strapped for cash or not. 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.

Pros Cons
Digitally based for tech-savvy users No physical branches
Easy mobile access 24/7 No in-person customer service
Low or no fees Don’t offer one-stop shopping for other accounts, such as mortgages or auto loans
Many offer early access to direct deposits Money may not be FDIC insured

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.