What Is a Neobank, and Are They Safe?

What Is a Neobank? 

Neobanks are financial technology companies that connection integer banking products and services done websites aliases mobile apps. They purpose to disrupt accepted banking models by offering competitory rates connected loans, debased fees, and higher-than-average liking rates connected deposit accounts. 

However, neobanks—on their own—are not banks. Banks are chartered institutions that person been licensed to judge deposits and rumor loans; neobanks deficiency those distinctions. Instead, they partner pinch chartered financial institutions to connection slope accounts, loans, and wealthiness guidance services.

For consumers who for illustration a wholly integer acquisition aliases who person been disappointed pinch accepted banks successful nan past, neobanks tin beryllium appealing. However, location are immoderate risks to neobanks you should beryllium alert of earlier switching each your slope accounts. 

How a Neobank Works

Neobanks partner pinch chartered banks to connection deposit accounts, loans, and different financial services. Unlike accepted banks and in installments unions, which whitethorn connection integer portals while besides operating beingness branches, neobanks only connection their services and products online aliases done a mobile app.

For example, Chime is simply a well-known neobank. It's a financial exertion institution alternatively than a bank. As nan good people connected its website states, its banking services, in installments accounts, and debit paper are provided done partnerships pinch The Bancorp Bank and Stride Bank.

Neobanks differentiate themselves done robust and easy-to-use integer platforms.

"Neobanks tin connection customized services that accepted banks whitethorn not, specified arsenic budgeting devices and real-time transaction notifications," said Thomas Henske, a certified financial planner (CFP) astatine The Affluent Insurance Advisor. "It's easy to ideate that much banking will spell successful this direction, particularly post-pandemic wherever location is little of a desire to sojourn a brick-and-mortar branch."

Neobanks typically target consumers successful circumstantial groups:

• The unbanked and underbanked: As of 2022, astir 6% of adults successful nan U.S. were unbanked, meaning they did not person entree to a slope account. Adults whitethorn not person a slope relationship because of concerns astir slope fees aliases deposit requirements, aliases because they deficiency a adjacent branch. Neobanks service these customers by making lower-cost banking options disposable online.
• Hourly workers: Hourly workers tin return advantage of neobanks' features to negociate their cash; galore neobanks person features for illustration early direct deposit entree truthful workers tin person their paychecks early aliases return retired interest-free paycheck advances. 
• Students and young adults: College students and young adults are often connected tight budgets, whitethorn person student indebtedness debt, and whitethorn request assistance managing their finances. Neobanks tin beryllium appealing because they person debased fees and debased minimum deposit requirements, they whitethorn connection student indebtedness resources, and they often supply financial acquisition tools.
• Savers and finance enthusiasts: Neobanks tin beryllium a smart action for those looking to maximize their money. These digital-only institutions boast deposit accounts pinch higher-than-average APYs, helping you turn your money faster. 

"Two of nan biggest advantages to nan wide user of utilizing a neobank are that they often do not complaint a batch of nan fees that accepted brick-and-mortar banks charge, and [they] typically connection higher liking rates connected savings accounts and certificates of deposit (CDs) than accepted banks," said Drew Feutz, a CFP and laminitis of Migration Wealth Management. 

Neobanks thin to make money successful different ways, specified arsenic subscription aliases rank fees and interchange fees. Interchange fees—the costs merchants must salary whenever a customer makes a acquisition pinch a in installments aliases debit card—are responsible for a awesome portion of neobanks' revenues. For example, interchange fees made up astir 80% of Varo's non-interest gross successful 2022, according to an study by marketplace investigation patient Sacra. 

Pros and Cons of Neobanks

Pros Explained

• Higher APYs connected deposit accounts: Fintech companies and neobanks don't run beingness branches. As a result, they person little overhead costs than accepted banks, truthful they tin supply higher-than-average APYs connected savings accounts, money marketplace accounts, and CDs.
• Lower relationship fees: Because neobank services are only disposable online aliases done a mobile app, nan companies thin to complaint little relationship fees than accepted banks. For example, you tin unfastened a checking relationship pinch nary monthly fees done respective neobanks.
• Robust integer and mobile platforms: Neobanks specialize successful comprehensive, easy-to-use integer platforms and mobile apps that let you to grip astir banking tasks online aliases pinch your smartphone. 

Cons Explained

• No beingness branch locations: Neobanks don't run beingness branches, truthful you can't get in-person help. 
• Limited products and services: Neobanks whitethorn person constricted partnerships pinch chartered banks, truthful they whitethorn only connection immoderate accounts and services. For example, immoderate whitethorn person savings accounts but whitethorn not connection CDs aliases money marketplace accounts. 
• May not beryllium covered by FDIC insurance: Neobanks aren't chartered banks, truthful they aren't backed by Federal Deposit Insurance Corporation (FDIC) insurance. If nan neobank you take has collaborated pinch a chartered, FDIC-insured bank, your deposits are protected successful lawsuit nan slope fails aliases closes, but not each neobanks are affiliated pinch FDIC-insured banks. 

Popular Neobanks

Some of nan best-known neobanks see Chime, Dave, and Varo.