What Is a Neobank?

Definition and Examples of a Neobank

Woman connecting to neobank with smartphone
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Neobanks are online-only financial institutions that are similar to banks. The offerings of a neobank are usually limited compared to traditional banks—sometimes no more than a simple checking and savings account. The slimmed-down model often allows neobank customers to enjoy fewer fees and higher-than-average interest rates.

Learn about how neobanks work, what they offer, and whether they could be right for you.

What Is a Neobank?

Neobanks are financial technology firms that offer internet-only financial services and lack physical branches. Neobanks appeal to tech-savvy consumers who don't mind doing most of their money management through a mobile app.

Neobanks don't integrate new technology solely for the sake of being cutting-edge. By getting rid of physical branches and moving everything online, neobanks often save on the costs of banking, allowing them to cut fees and expand services to the underbanked.

Neobanks aren't identical in their offerings or structure, but they typically differ from credit unions and traditional banks (including online banks) in that they:

  • Aren't chartered with state or federal regulators as banks
  • Provide a streamlined process designed mainly for mobile devices
  • Partner with traditional banks to federally insure customer deposits
  • Don't extend credit (such as overdrafts)

How Neobanks Work

From a customer’s perspective, a neobank might amount to nothing more than an app you use to manage your money and make decisions. For those who are comfortable with technology, neobank accounts are easy to quickly set up. You can often establish a relationship with a neobank and start using its services without signing any physical paperwork; just sign up for an account and download the app.

Neobanks don't replace traditional banks for all customers. Some neobanks allow you to link your traditional bank accounts to the neobank so you can enjoy the best of both worlds.

Neobanks offerings are similar to those at traditional banks and credit unions, albeit more limited. They generally include:

Most neobanks offer limited or no credit to limit their risk, which helps them keep costs down. However, some neobanks offer loans for individuals and businesses through partner banks and credit unions. Others, like SoFi, were lenders before they offered neobank features, and therefore can offer both loans and deposit accounts.

Some neobanks are startups that go through the trouble of becoming chartered banks, but those represent a minority of neobanks. It's a significant undertaking to become a chartered bank, so many neobanks form alliances with existing banks, allowing them to offer FDIC insurance on the money you hold with the service. For example, Chime is a neobank that partners with The Bancorp Bank and Stride Bank to insure customer deposits.

Neobanks are as secure than traditional banks and credit unions, but customers should check for federal insurance. If your neobank doesn't offer federally insured deposit accounts, it introduces unnecessary risk to your deposited cash.

Big banks have recognized the demand for neobanking products and have begun rolling out similar offerings to compete. These products are meant to appeal to a mobile, tech-savvy consumer base, as well as underbanked populations. Bank of America, for example, offers an artificial-intelligence-driven virtual financial assistant dubbed "Erica" in its mobile app.

Pros and Cons of Neobanks

Pros
  • Low costs

  • Convenient

  • Quick processing time

Cons
  • Requires comfort with technology

  • Less regulated than traditional banks

  • No physical bank branches

Pros Explained

  • Low costs: Fewer regulations and the absence of credit risk allows neobanks to keep their costs low. Products are typically inexpensive, with no monthly maintenance fees.
  • Convenient: Neobanks allow you to do the majority (if not the entirety) of your banking through a smartphone app. In addition to basic banking tasks, you should be able to manage your finances and predict activity in your accounts to prevent problems.
  • Quick processing time: These tech-savvy institutions allow customers to quickly set up accounts and process requests. Neobanks that offer loans may skip the rigid and time-consuming loan application processes in favor of innovative strategies for evaluating your credit and speeding up the process. For example, SoFi lets you pre-qualify for a loan and see your interest rates within minutes.

Cons Explained

  • Requires comfort with technology: If you don't like keeping up with technology trends, you might want to avoid banking with cutting-edge institutions like neobanks. You won't be able to take full advantage of the offerings if you aren't comfortable tapping and swiping your way through brand new apps. Some people enjoy exploring new technology, but if you don't, neobanks might not be right for you.
  • Less regulated than traditional banks: Since neobanks aren't legally considered banks, you might not have any legal recourse or well-defined processes to follow if there’s a problem with an app, services, or non-regulated third-party service providers. There may be confusion as to who will be responsible for potential fraud and errors. Customers are also on the hook for ensuring that their neobank offers some sort of deposit insurance, such as through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF).
  • No physical bank branches: It’s becoming increasingly easy to do everything online, and neobanks often maintain partnerships with ATM networks, but some people want the ability to visit a branch and bank in person. This is especially true when it comes to complex transactions. While many neobanks offer robust customer service tools, some customers may prefer to ask questions in person.

Key Takeaways

  • Neobanks are online-only financial institutions.
  • Neobanks usually offer fewer products and services than traditional banks, which helps them reduce both institutional risk and customer costs.
  • While some neobanks are chartered banks in and of themselves, many neobanks partner with larger, chartered financial institutions to insure deposit accounts.

Article Sources

  1. Sutardja Center for Entrepreneurship & Technology at the University of California, Berkeley. "Applied Innovation Review Issue 1," Page 32. Accessed Aug. 19, 2020.

  2. SoFi. "SoFi Announces Availability of SoFi Money and Invest Products to Help You Get Your Money Right." Accessed Aug. 19, 2020.

  3. Chime. "What Type of Account Is My Chime Account?" Accessed Aug. 19, 2020.

  4. BBVA. "Why Should I Choose a Neobank?" Accessed Aug. 19, 2020.

  5. Bank of America. "Bank of America Delivers First Widely Available AI–Driven Virtual Financial Assistant." Accessed Aug. 19, 2020.

  6. SoFi. "How to Get Approved for a Personal Loan." Accessed Aug. 19, 2020.