How Does Neobanking Work? - SmartAsset

Neobanks offer internet banking services and are created by partnerships between financial tech firms and banks to offer federally insured bank accounts. Do you find yourself wondering what a neobank is and whether it’s a good option for you? We’ll take a look at how neobanks work, as well as their pros and cons.

To understand how the right banking accounts play into your bigger financial picture, you may want to work with a financial advisor.

What Is a Neobank?

A neobank is a financial technology company that offers services similar to that of a traditional bank. But it’s usually digital and at a lower cost. These neobanks can be completed online or partner with traditional banks in various ways.

Part of the idea of a neobank is that by operating almost entirely online, these banks save money by not having physical locations and front-line staff. Then they pass those savings on to their customers by offering better interest rates and lower fees.

While neobanks often function primarily online, they’re not exactly the same thing as an online bank. Instead, neobanks are considered fintech companies that partner with traditional banks to offer banking services while complying with financial regulations and qualifying for Federal Deposit Insurance Corporation (FDIC) protections.

How Do Neobanks Work?

Neobanks work in much the same way as regular banks, offering basic banking services such as savings accounts, checking accounts and debit cards. Some also offer loans, investing options and credit cards. And some neobanks have products and missions that serve a special purpose. Those include helping the unbanked or helping their customers build credit.

With a neobank, you’ll be doing all or almost all of your banking through their mobile app or website. You’ll likely be able to call a customer service number for help with your thornier questions. And you’ll usually have ATM access depending on the neobank.

But most of your banking interactions will take place digitally. Neobanks also often offer budgeting and savings features. This will help you automate and track your spending with algorithms, analytics and other tools.

Examples of neobanks are Chime, Aspiration, Varo and Current.

How Is a Neobank Different from a Regular Bank?

Traditional banks must adhere to strict regulations and are covered by the FDIC, meaning up to $250,000 of your money is insured. Many neobanks do carry that same protection for their depositors, too. So make sure any neobank you consider banking with has FDIC-insured accounts.

However, neobanks are not subject to many of the same regulations as traditional banks. Though, regulators have shown interest in addressing the gaps in regulation to better oversee neobanks and other fintech firms.

Compared to traditional banks, neobanks usually offer lower fees or no fees and competitive interest rates. Since the money they save on physical real estate and staffing branches goes into their products, you can often find features such as no overdraft fees or cash back on some debit card purchases at neobanks.

Of course, the downside of no physical branches is that there’s nowhere to go if you want in-person help. While many neobanks offer chat lines or 24/7 customer service by phone, if you perform a lot of cash transactions or value in-person service, that’s not an option with these banks.

Finally, neobanks usually don’t offer the full range of services you find at a traditional bank. Most traditional banks offer multiple types of checking accounts and savings accounts, certificates of deposits (CDs), money market accounts, various types of loans, credit cards and more. Neobanks will often offer a limited selection, such as one checking option, one savings option and a debit card.

Is a Neobank Right for You?

If you’re intrigued and are considering opening an account with a neobank, consider these questions first.

Can You Do All Your Banking Tasks Online?

If you’ve never been inside of your current bank’s physical branches, neobanking might be a good option for you. If you really value having the option of face-to-face customer service or use cash frequently, you’re probably better off with a traditional bank.

Do You Need Only Relatively Simple Services?

If you only want a savings account and a checking account with debit card access, neobanking may be right up your alley. However, if you find yourself preferring to use a wide suite of banking products at your home bank—such as a checking account, a savings account, a money market account, a mortgage and a line of credit—you might be better off sticking with traditional banks.

Do You Need a Particular Service Neobanks Provide?

If you need to build credit or you often overdraft your banking accounts, you might benefit from the specific services that many neobanks provide. Some neobanks allow a certain amount in overdrafts a month with no fee, like neobank One. If you have a specific problem a neobank can solve, it might be worth making the switch.

Is Your Neobank of Choice FDIC-Insured and Well-Reviewed?

Make sure any neobank you consider is FDIC-insured. You don’t want to leave your deposits vulnerable if something goes wrong. And research how customers who have used the neobank view it. You can use their app ratings in the iOS or Android store. And you can search the Consumer Financial Protection Bureau’s customer complaint database.

Bottom Line

Neobanks can be a great choice if you do your research. That includes insuring the neobank itself has good business practices and that what it offers will work for you. While there are definitely pros and cons to doing most of your banking with a neobank, the ease of online access, competitive rates and low or no fees might offer compelling arguments for a switch.

Tips for Opening a Checking Account

A financial advisor can help you work through your banking needs and put together a plan that works for your unique situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The best checking accounts pay some of the highest rates and often do away with costly fees. See SmartAsset’s list of the best checking accounts to find one that’s right for you.