Understanding Neobanks: A Modern Approach to Banking

In today’s digital age, the way we manage our finances is evolving rapidly. One of the most significant changes in the banking sector is the rise of neobanks. These digital-focused banking providers offer many of the same financial services as traditional banks but with a modern twist. In this blog, we’ll explore what neobanks are, their advantages and disadvantages, and help you determine if a neobank is the right choice for you.

What Is a Neobank?

A neobank is an online-only provider of financial services such as checking accounts, savings accounts, and loans. Unlike traditional banks, neobanks operate exclusively through websites and mobile apps, eliminating the need for physical branches. This digital-first approach allows neobanks to offer more competitive terms on their products, such as lower fees and higher interest rates on deposits.

It’s important to note that most neobanks are not banks in the traditional sense. They are fintech (financial technology) companies that partner with licensed banks to provide their services. This partnership allows neobanks to offer a range of financial products, including high-yield savings accounts, checking accounts, early access to direct deposits, debit cards, cash back and credit builder credit cards, loans, and digital tools for money management or debt reduction.

While the number of neobank account holders is still relatively small compared to traditional banks, their popularity is growing. According to Insider Intelligence, there are currently 17.3 million neobank account holders in the U.S., representing 6.5% of the population. This number is expected to rise to 40 million by the end of 2025.

Pros of Neobanks

Neobanks aim to compete with traditional banks by excelling in areas where the latter often falls short. Here are some of the key benefits of neobanks:

Potentially Earn and Save More

Since neobanks don’t have the overhead costs associated with operating physical branches, they can pass these savings on to customers. This often translates to higher annual percentage yields (APYs) on deposit accounts and lower interest rates on loans. Additionally, many neobanks don’t charge monthly account fees or foreign transaction fees, helping you save even more.

Convenient Account Management

With neobanks, you can manage your finances entirely online or through a smartphone app. This convenience allows you to deposit checks, make payments, apply for loans, and perform other financial tasks with just a few clicks or taps.

Enhanced Customer Service

Many neobanks offer 24/7 customer support via phone or chat, making it easier to get help when you need it. Additionally, neobanks often provide innovative apps and budgeting tools to help you improve your financial health.

Global Banking Benefits

If you frequently travel internationally, a neobank’s multicurrency account can be a significant advantage. These accounts allow you to deposit dollars and convert them to other currencies quickly, often with lower conversion fees and no foreign transaction fees.

Deposits Could Be FDIC-Insured

While neobanks themselves are not licensed banks, the deposits they manage can still be covered by Federal Deposit Insurance Corp. (FDIC) insurance through their partner banks. Before opening an account, ensure the neobank offers deposit insurance by checking their website or the account’s terms and conditions.

Cons of Neobanks

Despite their many advantages, neobanks also have some downsides to consider:

No Physical Branches

While managing your account online is convenient, some people prefer the option to visit a branch for in-person assistance, especially for more complex transactions. Neobanks typically offer live phone or chat support, but this may not be sufficient for all banking needs.

Limited Access to Cash

Neobanks usually provide access to partner ATM networks rather than maintaining their own ATMs. While this can be convenient, you may incur fees if you withdraw cash from an out-of-network ATM. However, many neobanks cover these fees.

Potentially Limited Range of Financial Products

Neobanks often focus on a few specific benefits rather than offering a broad array of products and services. As a result, you may not find mortgages, auto loans, or other products commonly available at traditional banks. Additionally, many neobanks don’t provide services like notary services, investments, or insurance policies.

Is a Neobank Right for You?

Neobanks are becoming increasingly popular, thanks to their lower fees, higher deposit APYs, and innovative digital tools. However, they may not be the best fit for everyone. If you prefer in-person banking or find using technology more of a nuisance than a convenience, a neobank might not be the right choice for you.

For those who want the best of both worlds, consider using multiple bank accounts. You can use a neobank for its favorable yields and interest rates while maintaining an account with a traditional bank for in-person services and cash deposits.

The Bottom Line

Neobanks offer a modern and convenient way to manage your finances, often with better terms than traditional banks. While you may lose access to in-person services, the benefits of neobanks can more than make up for it.

At O1ne Mortgage, we understand the importance of managing your money wisely. If you’re considering a neobank or need any mortgage services, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.

Remember, managing your credit is just as crucial as managing your money. It’s a good idea to get your credit report and score for free at least once a year. Additionally, free credit monitoring can alert you to potential identity theft issues and help you track your credit score over time.

Thank you for choosing O1ne Mortgage. We look forward to assisting you with all your mortgage and financial needs.