Everything You Need to Know About Neobanks

You have many different options of where you put your money, and how you allocate your cash and other liquid assets can make a difference to your overall financial health. While past generations might have only had the option for a checking or savings account at the local bank, now there are many different options. Neobanks are a relatively recent invention that you might want to consider as you look for the best asset allocation for your situation.

What is a Neobank?

A neobank is a fintech firm that offers many of the same features of traditional banks. Usually a neobank will specialize in specific types of financial accounts or transactions, like checking or savings accounts. Most neobanks are app-based and entirely online, without any physical branches. This helps keep costs down, which allows neobanks to sometimes offer lower interest rates or higher savings rates.

Some popular neobanks include:

  • ONE
  • SoFi
  • Chime
  • Varo Bank
  • Current
  • GO2Bank
  • Mercury

What’s the difference between a Neobank and an online bank?

The biggest difference between a neobank and an online bank is that, despite the name, a neobank is not a bank. That means that they do not typically have a bank charter, though most deposits with neobanks are typically FDIC-insured. An online-only bank (like Ally Bank or Discover Bank) has a bank charter and is officially a bank, just without physical locations.

Neobanks also typically offer fewer features than either traditional or online banks. So if you’re looking for several different types of financial products, you might be better off with a more traditional bank. But if all you are looking for is a basic checking or savings account, it may be a good idea to consider a neobank.

One other way that neobanks differ from online banks or more traditional banks is the way they make money. Most neobanks make their money from the interchange fees that are charged when customers use their debit card. Since they are smaller than most traditional banks, they can charge higher rates for their interchange fees.

Are Neobanks safe?

As we mentioned earlier, the money deposited with most neobanks is FDIC-insured, though you will definitely want to make sure of that before you deposit any money with a neobank. The standard FDIC insurance is for $250,000, per bank, per type of account. So unless you have a hugely significant amount of money in one particular neobank, you shouldn’t need to worry about the safety of your money.

Nearly all neobanks also use the highest level of security and encryption for their apps and online sites. As long as you’re sticking with a relatively well-known and reputable neobank, you should feel just as comfortable interacting with their site as you would with any large retailer or other large online site.

Pros and Cons of Neobanks

Here are some of the pros and cons of neobanks:

Pros Cons
Lower fees — Since neobanks don’t have the higher costs of traditional banks (including physical branches), they often come with lower fees. They’re not actually banks — Neobanks typically don’t have a bank charter so they’re not bound by the same regulations that banks are
More convenient — It can be nice to deposit checks, check balances and do other banking features without having to go into a bank. No in-person branches — You’ll interact online or through the mobile app — neobanks usually don’t have any physical locations
Often quicker — It can often be quicker to open an account and do other banking transactions with a neobank. Fewer services offered — Most neobanks only offer a few basic services like checking and savings accounts
Better rates — Because neobanks typically have lower fees, they can offer higher interest rates on savings accounts and lower interest rates on loans.

The Bottom Line

You have plenty of choices for where and how to deposit your money. There are advantages and disadvantages to using a traditional bank, an online bank or a neobank. It’s important to understand what a neobank is and how it operates to know if it’s right for you. Neobanks offer many similarities to traditional banks but do not have an actual bank charter. This means they are not subject to the same rules and regulations as traditional banks. Still, if you’re only looking for basic checking and savings accounts, a neobank may be right for you. Look at the pros and cons of using a neobank and decide if it makes sense for you.

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Dan Miller (97 Posts)

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.


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