The days of visiting your local bank branch and interacting with a teller face-to-face may be behind us. When it comes to choosing where to put their money, many Americans are switching gears and opting for neobanks.
In the United States and around the world, neobanks are rapidly gaining traction, especially among Generation Z and Generation Y, according to united fintech. In one year, the number of these customers with a main account in a neobank increased from 4% to 15%.
But how are neobanks different from traditional banks? And how to choose one? Let’s start with the basics.
What is a neobank?
A neobank is a fintech company that offers banking services such as checking or deposit accounts to its customers through online or mobile platforms. These banks are generally not regulated in the same way as traditional “megabanks”. Unlike traditional banks or online-only banks, neobanks are often not banks and therefore do not have banking charters with state or federal regulators. Instead, they often partner with an already regulated entity so that their deposits are FDIC insured.
Neobanks first came to the fore at the end of the Great Recession in hopes of attracting customers who could benefit from fee-free accounts and financial management services such as budgeting, expense tracking and automated savings. Since then, neobanks have grown and many popular options like Chime or Acorns have become household names.
“Neobanks generally aim to offer more value and a better experience than traditional banks,” explains Renaud Laplanche, co-founder and CEO of Upgrade. “They serve their customers online and through a mobile app and therefore do not incur the cost of a branch network and legacy technology, and strive to pass these reduced costs on to consumers by not charging any fees account and sometimes offering greater rewards on debit and credit cards.”
Neobanks vs traditional banks
Neobanks differ from traditional banks and online banks in several ways. It should also be noted that some traditional banks are online only, but these should not be confused with neobanks. For example, Ally Bank is a fully licensed online bank, but it is not considered a neobank (we’ll explain why this matters below).
Although not all neobanks are the same in their offerings or structure, they generally differ from traditional banks in that they…
- Are not chartered by state or federal regulators like banks. When a bank is licensed, it is governed by a state or national charter and must follow certain rules and regulations. Chartered banks must have FDIC insurance to protect customer deposits.
- Lack of physical branches. In order to reduce costs and meet the needs of the digital consumer, neobanks generally do not have a physical location. Lower overhead means that neobanks have the ability to offer lower-cost or no-cost products and more competitive rates.
- May offer fewer products. In order to mitigate risk and reduce costs, neobanks may not offer the same range of products as big banks.
- Have a first digital interface. Because neobanks only operate on mobile and online platforms, their platforms are tailor-made for mobile and online use. This could be a major benefit for the consumer who prefers to do all their banking virtually.
- Must be associated with a bank to insure customer deposits. The vast majority of neobanks are not FDIC insured like many traditional banks are. Neobanks can offer FDIC-insured accounts (insured up to $250,000) if they have a partnership with an institution that is already FDIC-insured.
Advantages and disadvantages of neobanks
Neobanks do not cater to all types of consumers. They come with their own set of pros and cons that you need to be aware of before switching to a neobank.
Pros: Neobanks provide a seamless digital experience. As mobile and online-only banks, neobanks can provide a better user experience on your phone or computer. “Benefits typically include a better user experience, thanks to digital native processes rather than analog processes that traditional banks are trying to modernize in a digital world,” says Laplanche.
Advantage: You can benefit from lower costs. Neobanks are able to reduce the costs of opening and maintaining physical locations, and as a result, they often pass on these savings in the form of reduced costs and fees to customers. “At a time when a growing portion of U.S. consumers are experiencing financial difficulties, neobanks have helped consumers reduce banking fees and make their money grow,” said Paul McAdam, senior director of banking and payments at JD Power. . “Chime and Cash App, in particular, have grown rapidly, with brand awareness and market share rivaling that of incumbent direct banks Capital One, Ally and Discover.”
Disadvantage: You may be limited when it comes to product offerings. “Neobanks build their products from scratch and don’t always offer the full range of banking products and services,” says Laplanche. “Credit products in particular are not always available, although some neobanks offer loans and credit cards.”
Disadvantage: You might have trouble reaching a customer service representative. While physically going to your bank’s location might not be your first resort, it’s certainly better than being caller #64 in a customer service queue. Before considering a neobank, assess whether or not having a face-to-face customer service option is important to you.
How to choose a neobank
When evaluating different neobanks, you will want to consider a few different factors to determine if a specific neobank will meet your needs.
- Ratings and Reviews: Visit your phone’s app store to read reviews about your neobank’s app (which may be the main platform you’ll use for your banking needs).
- Product offerings: Your product options may be limited to a standard savings or checking account, as most neobanks keep it simple. Explore the bank’s site to determine if the products it offers will meet your needs or if you should continue to seek a bank that has more to offer.
- Interest rate and fees: Depending on the purpose of your account, you will want to research each bank’s current fee structure and interest rates to determine which neobank will help you achieve your goals. If the goal is to boost your savings, opt for a neobank that offers a competitive rate on a high yield savings account Where CD. If the goal is to use this neobank for your day-to-day expenses, choosing a neobank that offers a free current account may be a higher priority.
- Deposit insurance: Not all banks are FDIC insured, so you will need to verify that the bank your neobank is associated with is a member of the FDIC. The FDIC BankFind Suite can help you determine if a bank is FDIC insured, or you can contact the FDIC by phone to verify that this particular bank is a member.
- Customer Support Channels: Do some research to determine what types of customer support options each neobank offers, such as chat, phone, email, or text support, and what their hours of operation are. If you find yourself in a situation where you need help or have questions about your account, you’ll want to know what your options are to resolve these issues quickly.
The take-out sale
Neobanks are still the newcomer to banking, but their digital-first approach resonates with many consumers. Still, it’s important to thoroughly check out the platform you plan to use to make sure it meets all your banking needs.