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What is a Neobank?: A look into alternative banking
Swen Keller
In the crypto world Swen has consistently found success through his effective communication skills and the unique ability to navigate the details.
A Neobank is a fintech company that offers online banking services designed to be an alternative to traditional banks. You can access financial services such as debit cards and savings accounts. Online banks don’t have physical branches and operate through mobile apps or websites in the same vein as online banks. This technological advancement became necessary as traditional financial institutions couldn’t keep up with today’s tech-savvy customers.
Neobanks have experienced popularity in the financial ecosystem due to their lower costs, efficient user experience, and alternative credit analysis methods. This article will guide you through the answer to the question: ‘What is a Neobank.’ We will discuss how this financial service operates together with all its pros and cons.
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Neobank: An Alternative Banking Services
Most people not a part of the fintech world will ask themselves what a Neobank is. Neobanks are financial technology companies that are primarily targeted at individuals who are unbanked, dissatisfied with traditional banks, or just looking for digital services. Customers are attracted by the better interest rates, lower fees, and more convenient experience.
Offering their financial services through apps and websites instead of physical branches, online banks let you e-transfer funds, carry a debit card, and hold savings and checking accounts.
Many Neobanks assist with budgeting, protection from overdraft fees, and free peer-to-peer payments. These alternative banking services are also referred to by some as challenger banks. They allow customers to make deposits by collaborating with FDIC-insured traditional banks. Some of these banks with FDIC insurance include MetaBank and Wells Fargo.
How Neobanks Make Money
Traditional banks mostly make money from loan and credit card interest rates, monthly or overdraft fees, ATM fees, and annual yield. Neobanks typically make money in two ways: through out-of-network ATM fees and interchange fees. This is the cost merchants charge when customers swipe a credit or debit card. As Neobanks don’t have physical facilities, they have reduced overhead costs, allowing them to run more effectively and rely on interchange fees for most of their revenue.
Pros of Neobank
The Neobank business model focuses on tech enthusiasts looking for a cheaper and more accessible money management solution. Most Neobanks come with incentives such as budgeting tools or financial education. However, more long-term benefits come with this approach.
Simplified Access
Neobank provides customers with online banking services through the ease of their mobile or computer. They eliminate the need to visit a branch, as with brick-and-mortar banks. The same as an online bank, Neobank’s online banking services are available 24/7 to customers. Furthermore, opening an account at Neobank can be more accessible when compared to a traditional bank. Many conventional banks check histories, which isn’t done at online banks. You will likely get approval for a new account, even with a previously closed one.
Lower Fees with Competitive Rates
Since a Neobank doesn’t have to deal with overhead costs such as branch space and staff like a traditional bank, they have a more efficient business model. This model allows them to offer competitive interest rates with much lower fees. They also don’t provide credit, which limits risk while further reducing costs.
These accounts also come with little or no monthly charges compared to traditional banks. You also don’t have to meet any minimum requirements. However, some Neobanks are known to charge fees for more premium services or ask you to make a certain number of monthly transactions for more competitive rates.
Better User Experience
Neobanks offer efficiency that you can’t get from traditional banks. It takes far less time to create a Neobank account. The user-friendly and straightforward interface on apps and websites makes navigation and performing tasks easier for customers. Neobanks are also more transparent regarding their fees and terms of service. Providing information allows users to make better-informed decisions. Additionally, Neobanks collect data regarding spending and goals to offer specific financial advice.
Cons of Neobanks
Every technological advancement comes with some challenges, and this new banking approach might not be the right fit for everyone. Users face many issues, from customer service to regulations. Let’s look at some significant cons of Neobanks.
Lack of Customer Service
Not being traditional banks has some downsides for these financial technology setups. The lack of physical locations to visit takes away the opportunity for face-to-face interactions. You need to be able to bring up concerns with someone from your bank. This in-person communication lets you cultivate trust that is difficult to replicate.
Availability of Services
Neobanks provide some financial services, but many do not offer broader banking alternatives. These include the capacity to execute wire transfers or accept cash deposits conveniently. Furthermore, they may provide fewer accounts. A Neobank may give a checking account, but it may not offer certificates of deposit, investment possibilities, or loans.
Technology and Security
Neobanks rely mainly on technology, and any disruption or outage in their systems can cause discomfort or hinder their customers’ access to funds. Moreover, while Neobanks use strong security precautions, the digital nature of their services makes them vulnerable to hackers. Customers must be diligent in safeguarding their login passwords and personal information.
Neobanks and FDIC Insurance
The question of safety often comes up with Neobanks. Customers want to know about the presence of regulations that can keep their deposits safe. Most Neobanks will partner up with conventional banks that have a bank charter. This charter follows the regulatory requirements and is insured by the FDIC. There are some Neobanks that are considered chartered banks in their own right, such as Varo. These banks can offer loans, safeguard deposits, and offer most financial services traditional banks do.
The reason most Neobanks don’t have a charter is the length of the process. It can take several years to get approved for a bank charter. Therefore, going with a partner becomes the more viable option. In this partnership, Neobank is responsible for customer service and online access, while the traditional bank handles regulations and insurance.
Leading Neobanks
Now that you have answers to what a Neobank is, we can move on to discussing some of its leading examples. In 2020, there were an estimated 14.4 million users of Neobanks but this number has already increased significantly. This number is expected to further rise to 40 million by 2024. Neobank examples include Varo, Chime, Revolut, and Sofi.
Varo
This self-chartered Neobank is the first of its kind. It aims to reduce financial burdens and provide the best banking services to customers at a fraction of the price. It was created in 2015 and received its national bank charter in 2020. Varo not only offers checking accounts but also provides high-yield savings accounts and cash advances available for free. In addition, it has no minimum balance requirements or credit checks.
It also offers a credit card with no fees in the form of Varo Believe. This card allows you to build credit without debt and gives cashback on every swipe. Varo assists individuals in building up low credit and improving their financial well-being.
Chime
Chime was founded in 2012 with the primary objective to change the amount users pay in overdraft fees. They work with insured banks to ensure that financial health is prioritized over profits. Chime offers its debit card along with checking and savings accounts. Holders of chime accounts experience competitive APY and zero overdraft fees.
Chime also delivers deposits two days quicker than old banks, giving its customer early access to their funds. Moreover, Chime provides its users with SpotMe, giving them access to $200 in credit through no-fee overdrafts. This account gives users who wouldn’t typically get approved a small credit line. They reduce the dependency on high-interest loans and can prevent credit card debt.
Revolut
Revolut is considered the most significant European Neobank, with $1 billion in revenue and 18 million customers. With its push into the US market, this bank is expected to become a global juggernaut. Revolut has a wide variety of services in its portfolio. These include everyday services along with currency exchange, cryptocurrency, stock trading, and peer-to-peer payments. With its support for more than 30 different currencies, Revolut can offer services to businesses and individuals. Revolut’s primary agenda is to make online banking available worldwide regardless of location or currency.
Sofi
Sofi was created in 2011 by founders Mike Cagney and Dan Macklin to give financial support to students paying for college. Since its inception, this Neobank has become a mainstay in the landscape with 5.7 million users. They have multiple services to offer, such as student loan refinancing, savings accounts, and investment services. Sofi aims to support the growth and success of its customers rather than creating lifelong debt.
How to Choose A Neobank
When comparing different Neobanks, you must evaluate a few key variables to determine if a certain neobank will fulfill your needs. Get on your phone and read Neobank app reviews on the app store. This is the most basic approach to learning about customer experience. Since most Neobanks keep things simple, your product options may be restricted to a standard savings or checking account. Explore the provider’s website to see whether their services fit your needs or whether you should continue your search for a bank that has more to offer.
Depending on the purpose of your account, you should investigate each bank’s fee structure and current interest rates to choose which Neobank can assist you in meeting your objectives. If you want to increase your savings, select a new bank that offers a competitive rate on a high-yield savings account. Suppose you intend to use this Neobank for everyday needs. In that case, selecting a Neobank that offers a no-fee checking account may be more suitable.
Considering every online bank isn’t FDIC-insured, you should double-check that the bank with which your Neobank is affiliated is an FDIC member. You can use the FDIC’s BankFind Suite to determine whether a bank is FDIC-insured, or you can call the FDIC to confirm that that particular bank is a member. Additionally, investigate each Neobank’s customer service alternatives, such as chat, phone, email, or text support, and their hours of operation. Suppose you find yourself in a situation where you need help or have questions about your account. In that case, you will want to know your choices for promptly resolving any difficulties.
Conclusion
Neobanks were created out of the opening left due to the inability of traditional financial institutions to catch up to the modern world. Neobanks aren’t just challengers to conventional institutions but a viable and sustainable banking strategy in their own right. The competition with established banks drives growth and development in the banking sector. A lot of traditional banks have started to improve online access, reduce overdraft fees, and provide more financial services.
Neobanks aren’t just for users looking for convenience and a primarily digital experience. Due to its online banking approach, Neobanks are a lifeline for unbanked individuals across the globe. Customers can quickly access services that were previously unavailable. As the neobanking world develops, more customers are moving towards this approach. They want to enjoy the benefits that come from this innovation and have a greater understanding of their financial health.
FAQ
Most frequent questions and answers
A Neobank is a bank that exclusively operates online and has no physical branches. It provides essential banking services, such as savings and checking accounts, via internet platforms and mobile apps. Neobanks frequently offer novel features, decrease fees, and prioritize security. Customers seeking convenient, online-only banking experiences are catered to.
Chime is an example of a Neobank. Chime is a digital bank established in the United States that operates entirely online, providing services like fee-free checking and savings accounts, as well as a variety of convenience features via their mobile app. It is well-known for its easy-to-use interface and emphasizing a seamless digital banking experience. Remember that there are numerous other Neobanks worldwide, each with its own distinct set of offerings and capabilities.
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