What is a neobank? Definition and examples of popular neobanks

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.

That is where mobile banking can help, but what is a neobank exactly? These banks offer an alternative for customers who have tired of the drawbacks associated with traditional banks and could end up saving you money. Here’s how.

Neobank definition

Neobanks, sometimes called challenger banks, are fintech companies, often startups, that offer nontraditional banking services digitally. They 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.

The Neobank definition is a mobile-based bank without traditional branches. Typically, neobanks provide checking accounts and savings accounts through a mobile app or website because they don’t have branches.

Because of this, neobank customers often enjoy lower fees and higher interest rates than their traditional counterparts. It is also common for neobanks to include tools designed to help customers budget, so they can reach their savings goals.

Popular neobanks

Because neobanks don’t have federal regulation standards like 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 their research to ensure their bank is reputable, safe and appropriate for their financial situation.

These are some of the most popular neobanks available in the U.S.

• Aspiration: Aspiration is founded on ethics, sustainability and giving back, with the goal of planting one 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 38 million customers and prides itself on 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 over four million customers, Current is becoming more well known by neobank customers as a company with greater transparency that offers more control over your 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 50 million users worldwide and supports 33 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 seven million customers and requires no credit check, no minimum balance requirements, no monthly or overdraft fees, with a vast network of fee-free ATMs.

How neobanks work

There are some common features that neobanks share:

• Chartered bank affiliations: 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.
• Low fees: Most neobanks offer a low or no fee structure.
• Early deposits: Neobanks typically offer early deposit access to cater to all consumers, whether or not they’re strapped for cash.
• Mobile-friendly: Neobanks are 100 percent digital with intuitive mobile apps and user-friendly websites. With this approach, neobanks are able to give today’s banking customers the convenience, flexibility and transparency they’re increasingly seeking.

Neobanks vs. traditional banks

While both banking institutions, there are some pronounced differences between neobanks and traditional banks.

Neobanks vs. online banks

It is easy to confuse neobanks and online banks, but there are some key differences.

Pros and cons of neobanks

As with all financial decisions, it’s essential to weigh the pros and cons of neobanking vs. traditional banking.

Pros

• 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 through mobile banking. 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 to 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 direct deposit, making it easier for individuals who need immediate access to their funds to meet their financial needs.

Cons

• 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.
• Limited services: 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 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 because there are plenty that partner with chartered banks to receive FDIC coverage.

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:

1. 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 a welcome change. Neobanks can be particularly beneficial for those who rely heavily on mobile devices for banking tasks.
2. You want to minimize fees. Neobanks often attract those seeking to minimize the bank fees associated with traditional banking. If you want to cut down on things like overdraft fees and monthly service charges, a neobank may offer a more cost-effective solution.
3. You’re a global citizen or non-U.S. resident: Some neobanks can be a great option for individuals who are non-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.

Neobank FAQs

• How do neobanks make money?

  Neobanks typically make money from credit card purchases and the corresponding merchant fees.

• Are neobanks safe?

  Neobanks have their risks because they are not directly insured by the FDIC. Instead, they partner with charter banks who carry FDIC insurance for your protection. Always check to see what coverage is provided so you can be sure your money is safe.

• How are neobanks regulated?

  Neobanks are not typically subject to federal regulations so it is important to check that they are partnered with chartered banks for appropriate FDIC insurance.

Bottom line

Neobanks can be a convenient and affordable banking option for those who do not mind mobile-only services. They can offer greater convenience through mobile tools with potentially lower fees. 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.