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Understanding Neobanks: A Modern Banking Solution

Despite what the name might suggest, a neobank is not a concept from a science fiction movie. Instead, a neobank is a digital-focused provider of banking services that competes with traditional banks and other financial institutions. Neobanking services, which may include checking accounts, savings accounts, and loans, are delivered solely through a website or mobile app; neobanks don’t operate branches. However, many consumers are willing to give up access to branches in exchange for generally lower fees and higher interest rates than traditional banks.

What Is a Neobank?

Neobanks target customers who are unhappy with traditional banks, are unbanked, or prefer a digital-only experience. They attract customers with promises of convenience, higher-than-usual interest rates on deposits, and no or low fees. Among the biggest names in neobanking are Aspiration, Chime, and Current.

The cornerstone of neobanks is their heavy focus on technology. They operate without the networks of brick-and-mortar locations that traditional banks typically run. Instead, neobanks offer their services digitally—through apps and websites. Neobanks generally are not licensed or chartered banks; instead, they team up with traditional banks to provide products and services. Traditional banks that support neobanks include MetaBank and Wells Fargo.

Pros and Cons of Neobanks

Whether a neobank might work for your needs depends on what you’re looking for in a financial institution. Consider the following benefits and drawbacks.

Pros

• Lower fees and higher interest rates: Because neobanks don’t operate physical branches, they can pass along the savings in the form of lower fees (or no fees at all) and higher interest rates than traditional banks might offer.
• New tech features: Neobanks may hold an edge over traditional banks in terms of their flexibility in adding or upgrading technology, such as mobile apps and financial management tools.
• Emphasis on customer engagement: Neobanks engage customers by providing user-generated content, personal finance tools, discounts, and other appealing features.
• Early access to paychecks: In many cases, neobanks give customers access to direct-deposited paychecks up to two days in advance of the actual payday.
• 24/7 customer support: Some neobanks offer around-the-clock customer service via phone or chat.

Cons

• No FDIC insurance: Neobanks that aren’t licensed or chartered as banks—a status that applies to most of them—don’t have direct access to insurance from the Federal Deposit Insurance Corp. (FDIC). The FDIC generally covers deposits at partner banks of neobanks, but not deposits held solely by a neobank.
• No branches: Because of their laser focus on digital banking, neobanks don’t operate branches. So, if you want in-person customer service, you’ll need to do business with a traditional bank.
• Lack of some products and services: You may not find the same offerings at neobanks that you do at traditional banks, such as mortgages and car loans.
• Limited ATM access: As opposed to most traditional banks, neobanks don’t operate their own ATMs. However, most neobanks provide access to ATM networks controlled by traditional banks and other companies.
• Different regulations: While neobanks may confront their own regulatory hurdles, they typically aren’t overseen by state or federal banking regulators. Therefore, they usually aren’t official banks and must team up with government-regulated banks to provide products and services.
• Financial pressures: Many neobanks are startups backed by venture capital. As a result, they may face periodic financial woes that can disrupt business operations.

Are Neobanks Safe?

Generally, neobanks are considered to be as safe as traditional banks—as long as they partner with banks that provide FDIC insurance on the neobank customers’ deposits. Because neobanks generally aren’t licensed or chartered as banks, they can’t gain direct access to FDIC insurance.

To find out whether money you’ve deposited in a checking or savings account at a neobank is federally insured, check the neobank’s website. For instance, the Acorns neobank clearly states on its website that its checking accounts are insured by the FDIC up to at least $250,000 per depositor, per ownership category. The insurance comes thanks to its two banking partners, Lincoln Savings Bank and NBKC Bank.

If you know the name of a neobank’s partner bank, you can use the FDIC’s BankFind tool to see whether the partner bank is an FDIC member.

How to Choose a Neobank

If you’re trying to choose a neobank, consider these questions:

• Does it charge fees, and if so, what fees does it charge?
• How do the neobank’s interest rates compare with those paid by traditional banks?
• Does it provide access (ideally fee-free) to an ATM network?
• What kinds of products and services does the neobank offer? Would these products and services meet your needs?
• How good (or bad) is its customer service? Check online reviews and rankings to get an idea of how you’d be treated as a customer.
• How is the neobank’s reputation when it comes to tech additions and upgrades? Are they ahead of or behind the tech curve?

The Bottom Line

A neobank can be a good choice if you are comfortable with a financial institution that is not a chartered bank and are seeking attractive interest rates on deposits, low or no banking fees, and an abundance of tech-savvy features. Just keep in mind that neobanks do business digitally, so if you’re not a fan of banking via a website or app, a neobank may not be the right option for you.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence and ease.

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