Definition:
Neobanks are financial institutions that operate exclusively online and are comparable to banks. In comparison to traditional banks, neobanks typically only offer a few services, sometimes just a straightforward checking and savings account. Customers of neobanks frequently benefit from lower fees and above-average interest rates thanks to the slimmed-down model.
Key Learnings
- Neobanks are financial organizations that operate only online.
- Neobanks typically offer fewer products and services than traditional banks, which helps them lower institutional risk and customer costs.
- While some neobanks are banks with their own charters, many of them collaborate with bigger banks with charters to insure deposit accounts.
Neobank: Defined and Illustrated
Neobanks are companies in the financial technology sector that provide financial services exclusively online and don’t have any physical branches. They appeal to tech-savvy customers who don’t mind managing the majority of their finances via a mobile app.
Neobanks don’t adopt new technology just to show off their cutting-edge status. Neobanks frequently reduce fees and increase services to the underbanked by removing physical branches and moving everything online.
Neobanks don’t all have the same products or organizational structures, but they typically differ from credit unions and conventional banks (including online banks) in the following ways:.
- Are not banks and do not have charters with state or federal regulators.
- Offer a streamlined procedure geared toward mobile devices.
- Join forces with conventional banks to provide federal deposit insurance for customers.
- Don’t extend credit (such as overdrafts)
Functioning of Neobanks
An app you use to manage your finances and make decisions could be all that a neobank is to a customer. Neobank accounts are simple to set up for those who are familiar with technology. The majority of the time, all you need to do is open an account and download the app to establish contact with a neobank and begin using its services.
Note
Not every customer chooses neobanks instead of traditional banks. You can take advantage of the best of both worlds by connecting your conventional bank accounts to some neobanks.
Although more constrained, the offerings at neobanks are comparable to those at conventional banks and credit unions. Typically, they comprise:
- Savings and checking accounts.
- Services for making payments and transferring money.
- Tools for financial education, such as guidance on setting a budget.
To lower their risk, the majority of neobanks only grant small amounts of credit or none at all. Some neobanks do, however, provide loans to both individuals and companies through affiliated banks and credit unions. Others already provided lending services prior to adding neobank features, so they can provide both loans and deposit accounts. 2.
A small minority of neobanks are start-ups that go through the rigorous process of becoming chartered banks. Being a chartered bank is a big undertaking, so many neobanks partner with established banks to offer FDIC insurance on the money you keep with the service. As an illustration, Chime, a neobank, works with Stride Bank and The Bancorp Bank to insure customer deposits.
Note
Customers should verify whether there is federal insurance even though neobanks are just as secure as conventional banks and credit unions. Your cash deposits run an unnecessary risk if your neobank doesn’t provide federally insured deposit accounts.
The need for neobanking products has been recognized by large banks, who have started to roll out comparable products to compete. These goods are made to appeal to populations who lack access to banking services as well as mobile, tech-savvy consumers. In its mobile app, Bank of America, for instance, provides “Erica,” a virtual financial assistant powered by artificial intelligence.
Neobanks’ benefits and drawbacks
Pros
- low prices
- Convenient
- Speedy processing
Cons
- Demands familiarity with technology.
- Less strictly governed than conventional banks.
- No physical branches of banks.
Pros Detailed
- Cost-effectiveness: Neobanks can maintain their costs at a low level because there are fewer regulations and no credit risks. Products typically cost little money and don’t require ongoing maintenance.
- Convenient: Neobanks let you perform the majority (if not all) of your banking through a smartphone app. Along with performing fundamental banking operations, you should be able to plan your spending and anticipate account activity to avoid issues.
- Quick account creation and request processing are features offered by these technologically advanced organizations. Neobanks may forego lengthy and rigid loan application procedures in favor of creative methods for evaluating your credit quickly. You can pre-qualify for a loan, for instance, and see your interest rate with SoFi in just a few minutes.
Cons Explanated
- Requires familiarity with technology: You might want to avoid banking with forward-thinking organizations like neobanks if you don’t enjoy staying up to date on technology trends. If you’re not confident tapping and swiping your way through fresh apps, you won’t be able to take full advantage of the offerings. Neobanks might not be the best option for you if you don’t like to experiment with cutting-edge technology.
- Less regulated than traditional banks: Since neobanks aren’t considered banks by law, you might not have any legal recourse or clear procedures to follow if there’s a problem with an app, service, or unregulated third-party service provider. Who will be held accountable for potential fraud and mistakes could be unclear. Customers are also responsible for confirming that their neobank provides deposit insurance of some kind, such as through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF).
- No physical bank branches: Although it’s getting easier and easier to do everything online, and neobanks frequently partner with ATM networks, some customers still prefer the option of visiting a branch and banking in person, particularly for complex transactions. Although many neobanks provide robust customer service tools, some customers might prefer to ask questions in perso