What Are Neobanks? Here’s Everything You Need To Know

woman doing her banking using a tablet

Neobanks, also known as challenger banks, are tech firms that offer online-only financial services through mobile and online banking. Neobanks tend to appeal to tech-savvy consumers since nearly all transactions can be performed online, including transferring money, paying bills and depositing mobile checks. Unlike traditional banks, neobanks lack physical branches.

How Neobanks Work

Neobanks are online replicas of traditional banks and credit unions. However, their services are more limited. From a user perspective, these institutions are nothing more than money management apps. Their convenience is one of their strongest pillars. You can set up your account within a matter of minutes and start transacting right away.

Most neobanks don’t advance credits to minimize their risks. And even those that do use established banks and credit unions. This keeps their cost low, and they can afford to offer subsidized services compared to traditional banks. Some of their popular services are:

Pros of Neobanks

Take a look at some of the advantages that neobanks have.

More From Your Money

Easy Access

With a neobank, your money is a few clicks away. These institutions allow you to access your funds through mobile apps or websites. That means you can get your money any time you want without visiting a physical branch. The systems are also very sophisticated so you rarely experience downtimes.

Easy To Set Up

Opening an account at a traditional bank is subject to rigorous vetting of your financial history. That means the chances are high of your application being declined if you have poor credit history. With neobanks, opening an account is different. Some of them don’t even check your credit history. That means your account has a high chance of approval.

Competitive Rates

Neobanks don’t pay for any physical premises. Therefore, their cost of operations is always low. That gives them the freedom to offer competitive rates, unlike traditional banks. While people may pay to save their money in traditional banks, neobanks can do the same without charging a dime.

The interest rates for neobanks are also better. All this is because of their low cost of operation.

Cons of Neobanks

Limited Services

Unlike traditional banks, neobanks lack elaborate financial services. Because of their nature of operations, they can only offer limited digital services. Wire transfers and cash deposits are some of the services you can’t get at neobanks. It’s also not easy to secure loans or investment plans with neobanks.

Limited Customer Service

Without any physical branches, all the assistance is purely online. Different institutions use varied platforms for customer assistance. Some of the common channels include social media, mobile phones and automated chatbots. The downside is that some of these channels aren’t effective especially in an emergency.

Imagine a situation where you’ve sent cash to the wrong person and you have to tweet and wait for a correspondent. That may mean losing your cash altogether.

Lack of History

The unproven history of neobanks is a downside you shouldn’t overlook. Some of them last as short as a year and then collapse. If depositors can get their money back, the process is tedious.

More From Your Money

All deposits into a neobank are held by a FDIC insured partner bank. So, even in the case of the bank’s closure, the money is safe. However, the inconvenience that comes with retrieving your money if this happens is huge. That’s why most people still feel comfortable with their traditional accounts that have a proven track record.

Neobanks vs. Online Banks

There seems to be a lot of confusion between neobanks and online banks. Neobanks offer online banking services, but that doesn’t qualify them to be online banks. The difference between the two is that online banks have FDIC insurance which neobanks often don’t. Make sure the neobank you’re looking at is recognized by the FDIC or partners with an FDIC insured bank.

Simply put, online banks are a virtual recreation of traditional banks where customers can access all the services. They were created by physical banks to offer competition to neobanks as well and bridge the digital gap. Online banks offer the unlimited services of a traditional bank, and their customers can access their accounts from their computer or mobile apps.

Noteworthy Neobanks and Features

As more banks and corporations evolve to become more mindful of their environmental impact, this has correlated with the gaining popularity of neobanks. Here are some neobanks that offer high transfer limits and are noted for socially conscious practices.

Chime

Chime is arguably one of the well-known neobanks in the United States. Chime’s checking account boasts of its lack of fees usually associated with most traditional banks. You can transfer up to $10,000 per day and a maximum of $25,000 per month. The platform also offers early direct deposit payments and a competitive annual percentage yield.

Aspiration

Aspiration is a socially conscious U.S. neobank committed to helping you spend and save as well as protect the planet — whenever you shop, the bank reforests. It offers several other perks, as well, including cash back and access to more than 55,000 fee-free ATM networks.

The 1.00% APY on savings up to $10,000 is competitive, too. There’s a $4,000 daily limit for purchases requiring your signature and a $1,000 daily limit for withdrawals.

Monzo

Like Aspiration, Monzo offers nearly the same benefits along with some socially conscious perks such as planet protection. For U.K. residents, you can save with Monzo and earn up to 1.10% interest on your money. Additionally, the high transfer limit allows bank transfers of up to £10,000.

At this time, Monzo is available only in the U.K., with plans to expand to the U.S. soon. Monzo is partnering with Sutton Bank, Member FDIC, allowing for FDIC insurance up to $250,000, with no monthly minimums, overdraft fees and the ability to use 38,000 ATMs across the U.S. without fees. You can join the waitlist here.

Final Take

Neobanks were born out of the technology invasion into the banking sector. Just as with the other sectors, there have been tremendous changes. Instead of staying glued to the standard brick and mortar banks, banking has diversified. If you fancy transacting online, perhaps neobanks might be perfect for you since you can access everything on the go.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Lydia Kibet has been writing professionally since 2017. Her passion for helping brands in all aspects of content marketing flows through in the expert industry coverage she provides — personal finance, investing and healthcare. Her work has been featured in The Motley Fool, Investor Junkie, Green Market Report, and Medical News Today. When she’s not writing, she’s either reading, playing guitar or catching up with nature. Follow her on Twitter.

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