An Ultimate Guide On What Is A Neobank And How It Works

The foundation of the first banks in the early 19th century forged the revolution in the world's financial industry. Naturally, since that time, banking services have been constantly changing and expanding to stay up-to-date with the current level of innovative technology development. Yet, most traditional banks still can't address all the needs and demands of their clients. As a consequence, more and more people are switching to neobanks.

In this article, we will highlight what sets neobanks apart from most traditional banks. Let's explore together what a neobank is, the services it offers, and which of the neobanks are worth your attention.

What Is A Neobank?

Given that neobanks usually lack most legal requirements to be banks, they are fintech companies. Such companies offer similar services and features to regular banks but within branchless operations. Access to such banks is conducted through a mobile app or digital platform. Also, all neobanks are partnering with traditional banks that provide the legal backing for their services. Here is the list of the key features neobanking has to offer:

The Rising Popularity Of Neobanks

The popularity of fintech banks or neobanks can be easily explained by their numerous advantages compared to traditional financial facilities. Neobanks are easy to use, offer lower fees, and have more liberal rules identifying the person's credit score. Therefore, many members of the underbanked population receive additional tools to improve their financial status.

Common Services Offered

The neobanks’ primary feature is that they are always relatively new retail banks with a perfect digital presence. Hence, they are challenging banks to those known as traditional, long-established ones. At the same time, neobanks usually offer the same type of services but with numerous additional perks. Here are the most common services provided in the neobanking world:

• Checking/Saving/Credit Builder accounts
• Cryptocurrency integration
• Credit cards
• Personal/Student loans
• Mortgages
• User-friendly mobile applications
• Loan refinance

How Does A Neobank Work?

First of all, you should remember that neobank’s business model heavily relies on online operations. It makes the banking services cheaper, but it might be a problem for those who are used to face-to-face interaction with banks. Another milestone for neobanks is near-instant seamless transactions with round-the-clock access. Any customer can receive banking services anytime and anywhere. Finally, to successfully compete with traditional banks, public neobanks usually charge less fees.

Neobank Vs Digital Bank

To make it easier for you to decide which type of bank addresses your needs better, we have outlined a detailed comparison of both digital and fintech banks. Review the core differences between them below:

How Do Neobanks Make Money?

Given that neobanks by their definition are fintech disruptors, many people cannot understand how they can stay profitable. The answer is simple, as most neobanks rely on interchange fees paid by businesses each time customers purchase with a neobank’s debit card. As an example, one of the most popular neobanks in the US, Chime, issues debit cards to its users. Hence, every time the Visa debit cardholder makes a purchase, there will be a 1.5% charge by Visa. Some fraction of it will be paid back to Chime. In addition to interchange fees, neobanks also rely on the following ways of income:

• Subscription fees;
• Transaction fees;
• Loan interest.

The Most Popular Neobanks

Thanks to the fast and advanced digital banking services that neobanks offer, they are becoming increasingly popular, especially among the younger generation. Yes, in the US alone, neobanks had approximately 23 million users in 2023. Let’s review the seven most popular fintech banks in the market and their features and services.

Chime

Founded in 2013, American fintech company Chime is now trusted by over 12 million users. This California-based neobank adheres to the customer-centric approach. For example, the company has developed a product named SpotMe that enables customers to overdraw on debit card transactions up to $200 without charging overdraft fees. Another great feature many customers value is the ability to access direct deposits with Chime early. This means customers can receive their paychecks up to two days earlier.

GoBank

Another neobank with a huge customer base in the US is GoBank, which was launched back in 2013. Among the biggest advantages of GoBank is the ability to easily deposit cash at retailers and make an early direct deposit. Moreover, GoBank has a great ATM network throughout the United States, offering a free-of-charge service. Yet, with GoBank, you will have to pay monthly fees.

Revolut

Revolut is real proof that what a regular neobank offers is not even a fraction of what is possible. This UK-based neobank was founded in 2015 and has now become one of the most successful companies in both the EU and the US. With Revolut, you can get a savings account, debit card, great mobile app, low fees, peer-to-peer lending, and numerous account security features.

Varo

Solely American fintech bank Varo began its history in 2015 and is trusted by many users thanks to consistent interest rates and almost zero fees. Among the services of Varo, you will find checking and savings accounts, personal loans, and credit cards. Finally, Varo offers a convenient mobile app with biometric authentication, a user-friendly interface, and a multilingual menu.

Sofi

One of those who have crystallized the neobank definition as we know it today was the SoFi bank. In 2011, Dan Macklin, Mike Cagney, Ian Brady, and James Finnigan created SoFi so that students could get help paying tuition fees. Nowadays, SoFi has almost 5.7 million users, as it offers savings and checking accounts, credit cards, and, obviously, loans for different purposes.

Current

What is the Current neobank’s uniqueness? It offers hybrid accounts that combine checking and savings features. Moreover, Current is generally a unique fintech company that does not charge monthly fees. Also, with Current you will be able to utilize contactless payments, early access to direct deposits, and even earn rewards at over 14,000 retailers across the US.

Pros And Cons Of Neobanks

Bear in mind that all banks disregarding the type have their benefits and pitfalls. However, in this chapter, we will concentrate on the universal advantages and disadvantages tied to the concept of neobank itself:

Pros:

• Convenience. Unlike many traditional banks, a neobank allows you to fully manage your finances without needing to drive down to the bank branch. You can access your account via the mobile app 24/7.
• Competitive rates and products. The branchless business model makes operational processes much cheaper. Hence, neobank platforms charge lower fees and have bigger budgets for upgrading services based on data-driven insights.
• FDIC Insurance availability. Due to their partnership with traditional banks, neobanks offer the same level of banking charter as regular banks.

Cons:

• Fewer services. Neobanks will not usually provide you with some classical banking services. For example, you will not likely be able to send wire transfers or flawlessly accept cash deposits.
• Unpersonalized experience. Due to the lack of branches, you must accept that you will have impersonal customer service.
• Regulatory challenges. You do not have to worry about the funds frequently held in FDIC-insured partner banks. Yet, due to indirect insurance, some customers tend to have trust issues with the neobanks concept.

Should I Switch To Neobank?

Yes, if you are more comfortable dealing with money remotely, value the ability to get the loan without the credit score, and admire the low fees neobanks offers. Yet, when it comes to neobank vs. digital bank or neobank vs. traditional bank competition, you will see that each type of banking has its own advantages and drawbacks.

What The Future Holds For These Banks

Many people have fears of trusting the fintech industry given that it is still a relatively new concept in the financial world. Yet, it is worth looking at what neobanks are facing ahead of them but not in the past. Numerous researchers suggest the compound annual growth rate for the next few years will be 13-49%. So, most likely, neobanks will get the enlargement of their client base, gradually integrate open-banking APIs, and will start to offer a broader array of services.

Final Thoughts

In today’s digitalized world, some financial institutions are becoming outdated at a very fast pace. Hence, it is no surprise that the new banking concepts are coming into the light. The most recent concept is a neobank, which features branchless operations, hence almost zero fees. At the same time, the client receives full FDIC insurance, convenient online customer support, and even artificial intelligence to improve the customer experience. So, neobanks are the future of the financial industry, and switching to them can be the right choice for each person and entrepreneur.

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