What is a neobank? 10 things to know

Not long ago, I visited the Clay County Saving Association in Liberty, Missouri. Now a historic site, it was the first bank robbed by Jesse James and his gang in 1866. Having written about Jesse James, I was less impressed by the exploits of the 18-year-old and more interested in how little has changed in banking in the last 150 years.

Aside from the lack of air conditioning, the lobby resembled that of a small bank where one might go to open a savings or checking account. A bank clerk stood behind a counter to assist customers, and money was stored in a safe nearby.

Next come online-only banks, followed by neobanks such as Acorns, Chime, Axos Bank, SoFi®, M1 Finance, and Varo Bank. Here are 10 facts you need to know about neobanks.

1. Online-only banks came first

It wasn’t until the late 20th century that the face of banking began to change with the advent of online-only banks. Gone were the days of waiting in line to speak to a teller or rushing to get to the bank before it closed.

Customers now had access to their accounts 24 hours a day and could complete transactions at any time that suited them. Online-only banks offered options for customers who might not have time to drive to their local bank to make a deposit or apply for a loan.

2. Neobanks are the brainchild of financial technology companies

The term “neobank” refers to banking services offered by financial technology (fintech) companies. Also known as digital banks or online-only banks, neobanks provide 100% of their banking services exclusively through digital platforms, such as websites and mobile apps.

3. Neobanks do not have physical points of sale

While many traditional banks and credit unions offer online services, neobanks don’t offer physical locations to visit. If you enjoy walking into your bank lobby and talking to someone face-to-face, a neobank may not be a good fit for you and you may want to stick with a more traditional bank or credit union.

4. Neobanks offer you a simplified experience

While your local bank may offer everything from checking accounts to safe deposit boxes, neobanks’ services typically include the basics, such as checking and savings accounts. Some neobanks are more like a traditional bank, offering payment and money transfer services, loan products, and financial management tools. It’s important to know exactly what a neobank offers before switching to one.

5. Many neobanks are not actually banks

Licensed by the Office of the Comptroller of the Currency, neobanks must partner with licensed banks to do two things: provide a wide range of products and services and ensure that deposits are covered by the Federal Deposit Insurance Corporation (FDIC).

In other words, some neobanks are fintech companies that offer banking-like services through a real, licensed bank. This isn’t something you need to worry about, though. As mentioned earlier, as long as the neobank is associated with a licensed bank, your deposits are covered by the FDIC.

6. Neobanks offer lower fees

Because they don’t have to bear the costs of maintaining physical locations, neobanks can offer accounts with lower fees and more competitive interest rates than traditional banks and credit unions. This can save you money when you borrow and pay a higher-than-average interest rate on your deposits.

7. Neobanks rely on transfer fees

Neobanks typically make most of their money through interchange fees, also known as transfer fees. Every time you use a neobank’s credit or debit card, retailers give the neobank a small cut.

8. Some neobanks offer interesting advantages

Neobanks are not only convenient, but they also allow customers to access payments sooner than expected. For example, some neobanks allow customers to access their salary deposits, government benefits, pensions, and tax refunds up to 48 hours in advance.

9. There are disadvantages

Because few things in this world are perfect, there are several things to consider if you’re considering switching to a neobank.

You May Not Be Guaranteed FDIC Protection

If a neobank doesn’t have a partnership with a licensed bank, the U.S. government can’t insure your money. The first thing to look for when shopping for a neobank is a bank that’s FDIC-protected, insuring your money up to at least $250,000 per depositor, per FDIC-insured bank, and per ownership category.

You may experience limited customer service

Since there is no physical branch to visit, there is no in-person customer service available. This can be especially frustrating if you have a serious question about your account.

There will probably be fewer products offered

Neobanks can streamline their services and keep their fees low by limiting the number of services they offer. For example, you may not be able to find a mortgage through a neobank or have access to an investment account.

10. The neobank is growing

According to Precedence Research, the global neobanking market was valued at $96.20 billion in 2023. By 2033, it is expected to reach around $3,799.25 billion.

It seems that neobanks are the way of the future – at least until the next major technological breakthrough appears in the banking world.