A neobank is a technology company that provides banking services through a mobile app or website. Banking options may include the ability to transfer money electronically, pay bills, and receive direct deposits or mobile check deposits. Some of these fintech providers also offer tools to help with budgeting and saving money.
Neobanks, sometimes referred to as “challenger banks,” typically specialize in a few financial services, such as spending and savings, and insure deposits through a partnership with a bank insured by the Federal Deposit Insurance Corp. Institutions commonly referred to as neobanks include , and .
Providers typically focus on their mobile apps, but many also allow consumers to access accounts through a website and offer a physical debit card. It is also not uncommon for a neobank to receive a banking charter, as Varo did in 2020. (Read NerdWallet’s )
Here is an overview of the advantages of neobanking, as well as its disadvantages.
Neobanks allow consumers to manage most of their banking transactions on a smartphone or computer application, 24 hours a day, 7 days a week, without having to go to a branch. Some of the best neobanks have popular apps in app stores.
Applying for a neobank account might also be easier than opening one at a traditional institution. Some neobanks don’t check banking history, for example, which means your account is more likely to be approved if you’ve already closed accounts.
Like online banks, neobank providers don’t have to pay to maintain branches, and some providers pass savings on to customers. Savings can come in the form of low or no monthly service charges and the opportunity to earn high interest rates. If you pay a monthly fee of $ 10 at a traditional bank, switching to a neobank with a no-fee account could save you $ 120 per year.
However, make sure you understand the provider’s policies. Some neobanks charge a fee for premium services or require you to complete a certain number of transactions each month to get the best interest rates. Before signing up, find out if the offer matches your spending habits and savings goals.
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Without branches, expect limited personal help. Some providers offer customer service through social media accounts or over the phone. They may also have online chat options, including chatbots.
These options can be useful for basic banking matters. But if your account is frozen or closed due to suspected fraud, for example, you might have a hard time reaching someone who is authorized to help you resolve the situation.
Neobanks offer some digital banking services, but many lack broader banking options, such as the ability to send wire transfers or easily accept cash deposits. In addition, they may offer fewer accounts. As mentioned above, a neobank may offer an expense account, but it may not offer certificates of deposit, investment options, or loans.
Neobanks do not have a long history. Many have only opened in the past few years, and they could fail, just like any other startup.
If this happens, consumers usually don’t have to worry about losing their money, as account deposits are typically held at an FDIC-insured partner bank. FDIC insurance covers up to $ 250,000 per depositor, and the funds would be returned to the consumer in the event of a bank closure. But managing the process of claiming the money or going to the partner bank could be a problem.
Although neobanks offer banking services, they are not necessarily the same as online banking. The latter usually has FDIC insurance and offers a range of traditional products, such as checks, savings, CDs, investments and loans.
Some physical banks have online-only divisions that offer a full suite of digital accounts that consumers can manage from a computer or smartphone app. Since the accounts are offered by a traditional bank, these divisions could be viewed as online banks rather than neobanks.
It should be noted that many traditional banks offer online access to their regular accounts. But they’re not just online. Customers have access to bank branches and accounts tend to have monthly fees and low rates.
»Ready to compare the accounts of neobanks and online banks? Read NerdWallet’s List of
If you are looking for banking convenience and prefer to do most of your financial tasks online, a neobank might be a good choice. You could save on fees and even earn interest. But a neobank account is best for people whose accounts are mostly on autopilot and don’t need to deposit money, send wire transfers, or use extended account services.