What Is A Neobank?

May 28, 2022

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Traditional banking might remind you of brick-and-mortar bricks as well as malfunctioning ATMs and a mountain of paperwork. Yet a new crop of non-bank fintech [financial technology] startups, known as neobanks, are combating these stereotypes in the form of digital-first–often, digital-only–banking platforms that promise seamless online experiences and low- or no-fee services.

But do you think the neobank experience is what it’s cracked to be for customers? Here’s a brief overview of the most well-known Neobanks, including how their business models function and what you’ll need to think about before making the change.

What is a Neobank?

Neobanks, also known as “challenger banks,” are fintech companies offering applications, software, and other tools to improve the process of banking on the web and mobile. They generally focus on specific financial products, such as saving and checking accounts. They are also more agile and transparent than their megabank counterparts, even though they frequently cooperate with banks to provide insurance for their financial products.

In the U.S., this fintech is often called neobanks. The phrase “challenger bank” was first used by the U.K. to refer to several fintech-based banking startups after the financial crisis in 2007 and 2009.

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It is believed that the “challenger” moniker is apt. They are frequently compared with digital disruptors in other sectors. This fintech is revolutionizing the banking industry in the same manner as Airbnb revolutionized the industry of hospitality and Uber and Lyft transformed transportation. In the U.S., some big-name Neobanks are drawing customers in a flurry. For instance, In February 2021, Chime was reported to have 12 million users, up from the eight million customers a year earlier.

As of December 20, 2020, research conducted by Exton Consulting, a strategy and management consultancy firm for the financial services industry based in Paris, France, found 256 new global banks.

How neobanks work

In contrast to traditional banks, the majority of Neobanks aren’t chartered. However, it’s not uncommon for them to join banks hired. A chartered bank could mean that the Federal Deposit Insurance Corp ensures your accounts. Check for an FDIC logo to confirm.

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Neobanks strives to offer clients of today’s banking ease, flexibility, and security they’re seeking. The majority of Neobanks have an affordable or no-cost structure and early deposit access that caters to all customers, whether they are cash-strapped or not. Their strategy is 100% digital and includes intuitive mobile applications and friendly websites.

The pros of neobanks

Easy access

Neobanks allows customers to manage most of their banking through smartphones or on a computer every day without going to branches. The top Neobanks offer apps that have been rated highly in the app stores.

Applying for a Neobank account can be less complicated than opening one with a traditional institution. Neobanks aren’t required to check bank history; for instance, your bank account will be more likely to be approved if you’ve had previously closed tabs.

Lower fees, competitive rates

Similar to online banks, neobank providers do not have to cover the cost of maintaining branches. Some providers transfer the savings to their customers. The savings could take form in the form of no or low monthly fees and the possibility of earning high-interest rates. If you’re currently paying a $10 monthly service fee at a traditional institution, changing to a new bank with an account fee-free account can save you $120 per year.

Be sure to know your provider’s policies but be aware of the guidelines. Certain neobanks charge fees for premium services or need you to make sure transactions every month to receive the highest interest rates. Before signing up, you should consider whether the deal aligns with your budget and savings objectives.

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Negatives of Neobanks

Limited customer service

Some companies offer customer service via social media or telephone. They might also provide chat rooms online, which include chatbots. There are no branches, and you can expect only limited personal assistance.

These options help answer basic banking questions. However, suppose your account has been closed or frozen because of the suspicion of fraud, for example. In that case, it could be difficult contacting someone with the proper authority to assist you in resolving the issue.

Fewer account services

Neobanks provide a few digital banking services. However, they have limited banking options, for instance, the ability to transfer wire funds or allow cash withdrawals. Additionally, they might provide limited accounts. As we said, the new bank could provide a savings account. Still, they could not offer certificates of deposit and investment options or loans.

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Unproven history

Neobanks do not have a lengthy record of success. They have only opened in the past few years and are likely to fail just like every other business.

In the event of a bank closing, customers usually don’t need to worry about losing their funds as the deposits of accounts are typically stored at an FDIC-insured partner bank. FDIC insurance is available for up to $250,000 for each depositor. Funds will return to the depositor in the event of a bank’s closure. However, getting the funds or changing to the partner bank might be a headache.

Neobanks vs. online banks

While Neobanks can provide services for banking, they’re not necessarily identical to online banks. They usually have FDIC insurance and can offer traditional services, including checking CDs, savings, loans, investments, etc.

Individual brick and mortar banks have online-only divisions which provide an array of accounts that consumers can manage through their smartphones or computer. Because traditional banks offer these accounts, they could be classified as”online banks” rather than Neobanks.

It’s important to note that many traditional banks allow an online interface to access their accounts. However, they’re not exclusively online. Customers can visit banks’ branches, and their accounts usually have monthly fees and low rates.

Since neobanks are not regulated by federal regulators like traditional banks, Their rules, regulations, and practices differ from one bank to the next. Here are a few of the most well-known Neobanks available within the U.S.

  • Aspiration: The Neobank has more than 3 million clients and is founded on ethical principles of sustainability, sustainability, and giving back. As an individual customer, you decide your price following what you think is fair and what you can afford, even if it’s not zero.
  • Chime: Chime has over 13 million customers. There aren’t any overdraft charges or monthly service fees. ATM charges security deposit credit checks or minimum balance requirements. Chime is proud of its motto of earning money from customers, not by them.
  • With a total of 3.0 million users, Current is becoming more widely known among neo banking clients as a firm to those who want greater transparency and control over their banking requirements. While fees for out-of-network transactions may be applicable, it also offers a no-fee method, including zero overdraft charges and no minimum balance charges. There are no transfer fees and absolutely no ATM charges.
  • Varo is “a bank for all of us,” Varo is growing its presence in the new banking sector. It has 3 million customers, zero credit checks, minimum balance requirements, no fees for overdrafts or monthly charges, and a vast range of ATMs with no fees.
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