What Is a Neobank and How Should You Choose One?
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Gone are the days when we'd happily wait in long queues to deposit a check or to open a new bank account. With the latest technology, we can do the same from the comfort of our couches. If you are like me, you would love the idea of an online bank. One that offers the same services as a traditional bank but has no physical branches. As long as it gets the job done, what more do we need to ask for? In this guide, we take you through the services offered by neobanks and how they differ from traditional banks.
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What is a neobank?
A neobank, also known as a digital bank, online bank, or fintech bank, is a type of financial institution that operates exclusively online, without traditional physical branch locations. neobanks offer a range of banking services similar to traditional banks, but they do so primarily through digital platforms such as mobile apps and websites.
Related: A Helpful Guide to Fintech Investing
Features and services of a neobank
Neobanks often prioritize user-friendly interfaces, streamlined processes, and enhanced customer experiences compared to traditional banks. Some common features and services offered by neobanks include:
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
Digital savings and checking accounts
Neobanks provide digital savings and checking accounts where customers can manage their funds, make deposits, and perform transactions online. Like traditional checking accounts, digital checking accounts offered by neobanks allow you to manage your day-to-day expenses, make transactions, and pay bills online.
Payments and transfers
Neobanks facilitate online money transfers, bill payments, and peer-to-peer (P2P) payments through their platforms. You can use neobanks to perform online transactions, including transferring money between accounts.
Debit and prepaid cards
Customers can usually obtain physical or virtual debit cards linked to their neobank accounts for making purchases and withdrawals. These cards can be used for purchases, online transactions, and ATM withdrawals.
Budgeting and financial management
Many neobanks offer tools and features to help customers track their spending, set budgets, and manage their finances effectively. They offer features that help you track your spending, set budgets, and analyze your financial habits. These tools provide insights into your financial health.
Foreign exchange and international transfers
Some neobanks provide favorable exchange rates and lower fees for international money transfers and currency conversions.
Investment opportunities
Some neobanks offer investment options such as stock trading, exchange-traded funds (ETFs), and other financial products, allowing you to invest your money directly from your account.
Loans and credit services
Certain neobanks offer their customers personal loans, credit lines, and other credit services, providing an alternative to traditional loans.
Customer support
While neobanks don't have physical branches, they typically offer customer support through online chat, email, or phone. Some banks may also provide in-app customer support for quick assistance.
Mobile banking apps
Neobanks offer mobile apps that allow you to manage your accounts, check balances, view transactions, and perform various banking tasks using your smartphone or tablet. Many neobanks support mobile payment platforms like Apple Pay, Google Pay, and Samsung Pay, allowing you to make contactless payments using your mobile device. Neobanks often send real-time alerts to your mobile device whenever a transaction occurs on your account, helping you stay updated on your financial activities.
Neobanks often leverage technology and automation to reduce overhead costs, leading to lower fees, higher interest rates on savings accounts, and more competitive financial products. They also aim to provide a seamless and convenient banking experience by allowing customers to perform transactions and access their accounts anytime and anywhere through mobile devices or computers.
Related: Best Neobanks
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
Key differences neobanks and traditional banks
Neobanks and traditional banks differ in several ways, primarily due to their operational models, technology adoption, and customer experience. Here are some of the main differences between the two:
Operations
Neobanks operate exclusively online and do not have physical branch locations. They provide their services through mobile apps and websites, allowing customers to manage their finances anywhere with internet access. Traditional banks have physical branches where customers can conduct in-person transactions, meet with bank representatives, and access various banking services. They also offer online banking, but their physical presence is a distinguishing feature.
Branches
Neobanks typically have lower overhead costs since they don't maintain physical branches. This often leads to reduced service fees, higher interest rates on savings accounts, and more competitive foreign exchange rates. In contrast, traditional banks have higher operating costs due to their physical infrastructure. As a result, they may charge higher fees for various services and offer lower interest rates on savings accounts.
Cost structure and fees
Neobanks prioritize user-friendly digital interfaces and modern technology. They often provide intuitive mobile apps, personalized financial management tools, and quick account setup processes. Traditional banks might have more complex and less user-friendly interfaces. While many traditional banks have invested in online banking platforms, their technology might not be as advanced or streamlined as those of neobanks.
Customer experience and technology
Opening an account with a neobank can often be done entirely online, with customers providing necessary documentation and information digitally. Account approval and setup are usually faster and more automated. At the same time, traditional banks might require customers to visit a physical branch to open an account, provide identification documents, and complete paperwork. This process can be more time-consuming.
Operating hours
Neobanks offer 24/7 access to accounts and services through online channels. Customers can perform transactions, check balances, and contact customer support anytime. Traditional banks have operating hours for their branches, and while they offer online banking, some services might be limited during non-business hours.
Availability and accessibility
Neobanks often leverage data analytics and AI to provide personalized recommendations and insights to customers. They are more agile in adopting new technologies and innovations in the financial sector. However, traditional banks might have legacy systems that make it harder to adopt cutting-edge technologies quickly. Personalization might be less advanced compared to neobanks.
Regulation and security
Neobanks and traditional banks are all subject to regulatory oversight to ensure customer protection, security, and compliance with financial regulations. However, their specific regulations can vary depending on the country and jurisdiction.
Pros
- Competitive cash back rates. Not all banks offer cash back on debit card purchases, and with active accounts at Upgrade qualifying for 2% back on subscriptions, bills, groceries, and more, they rival even credit card companies in this area.
- Easy-to-use mobile app. Upgrade’s user experience is excellent, whether you’re banking on their website or on-the-go using their iOS or Android app.
- No monthly fees. Unlike some online banking institutions that charge a $5 monthly fee, your Upgrade account won’t cost you a penny in maintenance fees.
Cons
- No physical branches. Not everyone needs access to an in-person banking option, but when you do, Upgrade won’t be there for you.
- No cash deposits. Not being able to deposit cash at all into your Upgrade Checking account may cause problems for some customers.
- Out-of-network ATM fees. While Upgrade offers the Allpoint network of ATMs for your ATM needs, if you aren’t able to find a conveniently located Allpoint ATM, you’ll be paying $2.50 plus any additional ATM fees to withdraw cash.
How to choose a neobank?
Choosing a neobank involves carefully considering various factors to ensure that the bank aligns with your financial needs and preferences. Here's a step-by-step guide to help you choose the right neobank:
- Identify your needs. Determine what banking services you require. Do you need a savings account, checking account, payment options, international transactions, investment opportunities, or loans?
- Research neobanks. Look into the neobanks available in your region. Research their offerings, features, fees, and benefits. Compare them against traditional banks to understand the benefits of going digital.
- Evaluate services. Review the range of services offered by each neobank. Ensure they provide the banking services you need, such as digital accounts, debit cards, savings features, and specialized financial products.
- Compare fees and charges. Be aware of hidden fees, transaction charges, and maintenance costs that might affect your banking experience.
- Compare interest rates. If you're interested in earning interest on savings, compare the interest rates different neobanks offer on their savings accounts. Higher interest rates can help your money grow over time.
- Review the mobile app and user experience. Evaluate the usability of the neobank's mobile app or online platform. A well-designed, intuitive interface will make managing your finances more convenient.
- Review security and privacy measures. Look for features like two-factor authentication (2FA), encryption, and fraud prevention.
- Check customer support. Neobanks should offer various channels for assistance, such as live chat, email, and phone support.
- Read reviews. Read online reviews and customer feedback about the neobank. This can provide insights into the experiences of other users and help you assess the bank's reliability and customer satisfaction.
- Check for compatibility. If you use other financial tools or services, ensure the neobank's platform integrates well with them. Compatibility with accounting software, budgeting apps, or investment platforms might be important.
- Consider international accessibility. If you make international transactions or travel frequently, consider a neobank that offers favorable foreign exchange rates and low fees for cross-border transactions.
Related: Best Online Banks – Our Top Picks
Better banking is here.
- No account fees
- Earn up to 4.50% APY
- Up to 2-day-early-paycheck
- No-fee Overdraft Coverage.
- Do it all in one app.
- Up to $2M of additional FDIC insurance through a network of participating banks.
FAQs
How many neobanks are there in US?
There are more than 60 neobanks in the United States. Some of the top neobanks include Chime, Ally Bank, Aspiration, and Simple.
Is a neobank cheaper than a traditional bank?
Neobanks are often perceived as more cost-effective than traditional banks due to their streamlined operational model and lower overhead costs. It has lower operational fees, no monthly account fees and no overdraft fees.
Is there a disadvantage of a neobank?
The biggest disadvantage of a neobank is that it does not have a physical branch and as a result, offers limited services.
The bottom line
It's worth noting that the term "neobank" is relatively new and might encompass various types of digital banking models. Some neobanks operate as standalone entities, while others partner with or operate as subsidiaries of traditional banks. The landscape of neobanks is continuously evolving, with new players entering the market and existing ones expanding their services over time.
It's important to note that the distinction between neobanks and traditional banks can sometimes blur as traditional banks invest in improving their digital offerings and neobanks expand their services. The choice between the two often depends on individual preferences, banking needs, and the level of convenience and innovation a customer seeks.
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