What You Need to Know About Neobanks

A neobank is not technically a bank. That’s because neobanks aren’t chartered with state or federal regulators as banks.

Neobanks don’t have to pay to maintain branches and can pass the savings along to their customers. That means neobanks have the ability to offer low- or no-fee products compared with traditional banks.

“Not surprisingly, if the bank does not have to support the high fixed costs of operating branches, it will be able to charge significantly lower fees for traditional banking services,” Chan says.

Low overhead costs – all transactions are tailored to online and mobile banking – can also produce higher interest rates on savings accounts. The digital-first setup is convenient for customers because the bank essentially never closes.

Neobanks may also provide money management tools for customers.

“Budgeting and spending tools such as the sequestering of funds for upcoming expenses and the capability to share funds with friends, associates or family members” may be some of the most useful features typical of neobanks, says Meredith Kelley Zidek, a Towson, Maryland, banking and finance consultant and equities and options trader.

Here are some neobanks and what they offer:

A neobank offers online banking services but is not the same as an online bank. The difference is that an online bank is usually FDIC-insured and provides a full range of products, from checking and savings accounts to CDs, investments and loans.

A neobank isn’t necessarily better than a traditional bank, it’s just different. If you prefer online banking and you automate most of your bill payments, you might want a neobank.

A neobank also has the advantage of low or no account fees and higher savings rates compared with traditional banks because of lower overhead costs.

“Neobanks are a threat to the traditional banking system,” Chan says. “This has been acknowledged by many of the major bank CEOs, including Jamie Dimon of Chase. He correctly points out that they are not subject to the many regulations and costs associated with running a big bank, which gives them an edge.”

But stick with a traditional bank if you value relationships at your branch and personal service. A traditional bank is also a better choice if you want one-stop shopping for products and services.

If you only need basic banking services, you may want to open an account with a neobank. A neobank may also suit you if your priorities are digital-only services, low account fees and high rates on deposit accounts.

You could also keep your traditional bank account and open a new account with a neobank.

“Neobanks strive to keep transactions and services no-fee or low-fee, whereas traditional banks are known for an assortment of fees and complicated structures required for the avoidance of fees, like substantial minimum balances or regular direct deposits and ATM fees,” Zidek says. “People comfortable with technology who prefer the most streamlined banking experience using the minimum of physical instruments such as cards, cash or checks will enjoy the responsive interfaces of a neobank and related payment-related apps.”