Neobanks Explained: Why It's Not a Bank | NerdWallet

Summary

Neobanks are mobile-first financial services that operate like traditional banks but partner with chartered banks to provide FDIC insurance. They excel in technology, offering streamlined apps, innovative features like sub-accounts and early direct deposit, and often cater to niche communities such as Black, LGBTQ+, or environmentally conscious users. Traditional banks provide in-person branches, long-standing customer relationships, and a broader range of financial products, though they tend to have lower interest rates and less user-friendly apps. Choosing between the two depends on your lifestyle, tech comfort, and financial needs, with research being key to finding the best fit.

Takeaways

• 😀 Neobanks are online-only, mobile-first financial services that operate without physical branches.
• 😀 Neobanks partner with chartered banks to offer FDIC insurance, as they are not banks themselves.
• 😀 Neobanks offer easy-to-use services like checking and savings accounts, money transfers, and cash-back features.
• 😀 Neobanks often cater to specific communities, like the Black, LGBTQ+, and disabled communities, offering tailored services.
• 😀 Some neobanks, like Daylight, allow customers to bank under their chosen name, which is important for trans individuals.
• 😀 Neobanks often pass on savings to customers by offering higher interest rates and lower fees, due to the lack of physical branches.
• 😀 Neobanks offer features like early direct deposit, streamlined mobile apps, and low-cost lines of credit.
• 😀 Neobanks tend to have great remote customer service, including online chat, social media outreach, and extended call center hours.
• 😀 One risk of neobanks is their newness; for example, Simple was acquired and lost many of its unique features.
• 😀 Traditional banks still offer in-person services, long customer relationships, and additional products like mortgages, auto loans, and CDs.
• 😀 Traditional banks may have lower interest rates and less user-friendly apps, as they have more overhead costs and more services.

Q & A

What is a neobank, and how does it differ from a traditional bank?

A neobank is an online-only, mobile-first financial service provider that offers banking-like services such as checking and savings accounts, money transfers, and payments. Unlike traditional banks, neobanks are not banks themselves but partner with chartered banks to provide FDIC insurance for customer accounts.

What are some examples of popular neobanks?

Examples of popular neobanks include Vero and Chime, which provide a range of financial services through their mobile apps.

What advantages do neobanks have over traditional banks?

Neobanks offer several advantages, including technological ease, streamlined mobile apps, higher interest rates due to lower operational costs, and unique features like cash-back rewards or customizable accounts. They also cater to specific communities, such as the LGBTQ+ community or Black Americans, providing tailored financial services.

How do neobanks manage FDIC insurance despite not being official banks?

Neobanks partner with chartered banks that are FDIC-insured, allowing them to offer FDIC insurance to their customers' accounts without going through the lengthy and expensive process of becoming an official bank themselves.

Why are neobanks able to offer higher interest rates compared to traditional banks?

Neobanks can offer higher interest rates because they do not operate physical branches, thus saving on the costs associated with staffing and maintaining brick-and-mortar locations. These savings are passed on to customers in the form of better rates.

Can neobanks cater to specific communities?

Yes, many neobanks are designed to serve specific communities. For instance, Boulevard caters to Black Americans by focusing on building generational wealth, while Daylight serves the LGBTQ+ community by allowing customers to bank under their chosen name.

What are some potential risks of using neobanks?

One of the main risks of using neobanks is their relative newness, which brings uncertainty. Neobanks are often acquired by larger financial institutions, which can lead to the loss of the features that originally made them attractive, as seen with Simple, a popular neobank that was acquired by BBVA.

What are some key advantages of traditional banks over neobanks?

Traditional banks offer the advantage of physical branches, which can be more convenient for in-person banking. They also often have a long history with customers, making it easier to access loans, credit cards, and mortgages. Traditional banks may also provide products like certificates of deposit (CDs) that some neobanks don't.

How do traditional banks' mobile apps compare to neobanks' apps?

Traditional banks typically have more complicated and less streamlined apps, as they offer a wider range of services. These apps may have more menus and a more cluttered user interface. In contrast, neobanks tend to have simpler, more user-friendly apps focused on essential banking features.

What does the growing search interest in neobanks over traditional banks signify?

The growing interest in neobanks, as indicated by increased search queries, suggests that more people are considering neobanks as a viable alternative to traditional banks. This may be due to their convenience, technology-forward features, and better financial offers.