by Michael Archambault
Despite the name, neobanks have nothing to do with the Matrix, and Keanu Reeves won’t be showing up the next time you want to make a deposit. Rather, neobanks are technology companies that provide online banking services that you can access from your digital devices.
Neobanks, commonly referred to as “challenger banks,” aim at providing essential financial services, such as savings and checking accounts, with an end goal of making personal finance a bit less intimidating and a whole lot more transparent than traditional banks.
These new fintech (financial technology) services are attempting to disrupt the banking industry by providing easier access to your financials via digital banking services, while also typically offering attractive features, including lower (or non-existent) banking fees and more competitive rates.
Keep on reading to learn more about how neobanks are re-shaping the banking landscape, and if they might be the right fit for your financial needs. But first, let’s answer the most basic question: What is a neobank?
Neobanks are typically not banks, which is a shocking idea since the word ‘bank’ is right in the name. To be a true bank, an institution must be properly chartered, answering to federal and state regulators, while offering FDIC insurance to protect customer assets.
Rather, neobanks are technology companies that provide apps and software to make the entire banking process a bit easier. They are a new breed of financial institutions.
Neobanks, such as Chime, offer mobile apps and websites that allow you to easily manage your money. However, on the back-end, your money is being managed by a traditional bank. In the instance of Chime, your money is managed by a partner bank, either The Bancorp Bank or Stride Bank.
Some neobanks are take a similar approach as credit unions, attempting to forge close relationships with their customers and provide an overall better experience, such as higher interest rates on checking and savings accounts.
In fact, Bank Dora is the first neobank to partner with credit unions to secure its deposits.
Like most things in life, neobanks have their own set of pros and cons. Here’s a deep dive into some of the exciting banking services and features that neobanks and have to offer, and a few things you’ll want to keep an eye out for when researching.
The primary difference between neobanks and online banks falls back to the idea that neobanks are not banks. Rather, neobanks are fintech companies that provide you with an online banking platform in partnership with a traditional banking institution.
An online bank typically has a bank charter and is able to provide you with the full range of services that a physical bank might offer, such as personal loans.
Some traditional banks have also begun to reach out into the digital domain, offering accounts for customers who are looking to bank primarily online.
Similar to selecting a traditional bank, you’ll want to do a bit of research before handing over your hard earned cash. With neobanks, it is essential to research the actual bank behind the fintech company that will be securing your money. For the most part, if you ensure that the supporting bank offers FDIC insurance, you should have little to worry about.
One additional consideration is that neobanks are not legal banks, so there are less regulations in place if problems arise. Let’s say that you have an instance of fraud, there may be a bit of finger-pointing when it comes to who is at fault, the neobank or the banking institution.
As with any monetary decision, researching your options before making a move is essential. With neobanks, just a bit more investigation may be required. Most importantly, be sure to keep an eye on the partner bank’s FDIC insurance offering.
We started by asking ‘what is a neobank,’ but should you consider one for your own personal finance needs?
Whether or not a neobank is the ideal banking option for you will pertain to your individual preferences and the banking services that you prefer. A neobank might be the perfect option for you if you are someone who prefers to bank online, take advantage of no-fee savings, and leverage better interest rates for savings accounts to help achieve your long-term goals.
On the other hand, if you prefer face-to-face interactions with a banker at a local branch, the ability to apply for loans and mortgages with your primary bank, and want a time-tested well-regulated institution, a traditional bank may be the better choice.
Don’t be fooled, however, in our best checking accounts roundup, Chime and Varo, two popular neobanks sit at the top. Neobanks have a lot to offer, and with significant fee-savings and competitive rates for savings accounts, they are worth considering against traditional banks.
Michael Archambault is a senior writer for The Penny Hoarder specializing in technology.
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What Is a Neobank?Written by admin
by Michael Archambault