What Is a Neobank (and Should You Try One)?

Young woman using smartphone to connect to her neobank account in a traditional style restaurant
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If you can’t stand the phrase “that’s the way we’ve always done it,” you may want to check out Neobanks for money management. A neobank is a broad category of financial services providers that appeal to information-hungry consumers who are comfortable with technology. They can also bring down banking costs and expand services to the underbanked.

What Is a Neobank?

Neobanks are financial technology firms that offer digital or mobile-only financial services including:

  • Checking and savings accounts
  • Payment and money transfer services
  • Loans for individuals and businesses
  • Other services, including budgeting help and more

Unlike traditional banks and credit unions, which handle the same services, neobanks:

  • Typically don’t have branches
  • Might not be chartered with state or federal regulators as financial institutions
  • Tend to provide a streamlined process designed for mobile devices

Some neobank offerings come from existing banks and credit unions. To appeal to tech-savvy demographics and unbanked populations, established banks develop new products with new names. But the most interesting neobanks are probably fintech startups that improve your banking experience.

Functionality

There’s no standardized definition of what is—or isn’t—a neobank. The environment is fluid, but there are several ways to understand challenger banks. From a customer’s perspective, a neobank probably just looks like an app that helps you manage your money and make decisions. They’re typically easy to work with, and they don’t come with the bad reputations that some banks have earned themselves.

Financial information is increasingly available for sharing. With open banking protocols, a variety of services can combine data from multiple secure sources to provide you with intelligent suggestions and easy-to-use dashboards. If you like everything in one place, it’s now easier than ever.

Financial Institution Relationships

Some neobanks are startups that go through the trouble of becoming chartered banks. But that’s a significant undertaking. Others form alliances with existing banks, allowing them to offer FDIC insurance on the money you hold with the service. For example, Chime Bank is an online-only bank that partners with The Bancorp Bank.

Big banks also see a demand for new ways of doing business, and they’re rolling out new offerings to appeal to a mobile consumer base. Finn was a mobile-only bank offering from the behemoth Chase Bank. The app included checking and savings accounts and a debit card, but it appealed to younger customers who want to gain control of their money.

Interfacing

Some financial products add functionality and make it easier to use your bank and credit union. They don’t replace those financial institutions, but you might use neobank services instead of (or at least more often than) your bank account.

For example, PayPal might be an example of an early neobank. With PayPal, you link bank accounts and payment cards, and you can even store money at PayPal (but it’s not FDIC insured). PayPal makes it easier to shop online because you can:

  • Avoid providing credit card numbers and bank account information to unknown websites
  • Potentially use PayPal’s buyer protection features if there’s a dispute
  • Choose from multiple funding sources whenever you pay (with just one login)

If you just used your primary banking relationships, you’d have fewer options, and you’d directly expose your bank account to potential fraud and errors.

Pros of Neobanks

You can look forward to several advantageous features of neobanks.

  • Low costs: Products are typically inexpensive, with no monthly maintenance fees.
  • Transparency: Expect fewer “gotchas,” like surprise charges and exorbitant overdraft penalties. Neobanks often only let you spend what you have.
  • Useful technology: If you’ve ever wondered why you can’t just do something simple on a mobile device, neobanks promise to let you do more. In addition to basic banking tasks, you should be able to manage your finances, predict activity in your accounts (and prevent problems).
  • Easier loan approval: Instead of rigid and time-consuming loan application processes, neobanks use innovative ways to evaluate your credit and speed up the process.
  • Small business loans: Banks have traditionally focused on large loans and have been less interested in funding small businesses.

Neobanking Downsides

Change is often good, but you need to be aware of several challenges. Funds at a neobank may or may not be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF) coverage. If you keep money with a neobank, verify that deposit insurance exists or decide to accept the significant risk of going without.

The current laws and regulations may not be ready for neobanks. If there’s a problem with the app or its function, new services, or non-regulated service providers there is some confusion on who will be responsible for the blame and resolving the issue. In some cases, you (as a consumer) may not have any legal recourse or well-defined processes to follow.

Some people like bank branches and you can definitely get a lot done in person. That said, it’s becoming increasingly easier to do everything online. Plus, some neobanks allow you to deposit cash at retail stores and use a vast network of ATMs at no charge.

Neobanks are still evolving, and there's a lot we still don't know. For the most part, they should have a positive impact on financial management, but there may be a few bumps in the road.