Banks are typically associated with physical locations and in-person transactions. Even though the majority of financial institutions provide strong online services, an increasing number of businesses are eschewing physical presence entirely.
Compared to traditional banks, neobanks offer digital-only banking with more affordable costs and attractive interest rates. Grand View Research data projects that these fintech (financial technology) companies will bring in over $2 trillion in revenue by 2030, up from over $96 billion in 2023.
CNBC Select delves at the emergence of neobanks, including information on well-known platforms, determining if utilizing one is a good idea, and more.
What is a neobank?
A neobank is a fintech business that offers cash advances, checking and savings accounts, budgeting tools, and other financial services via a website or mobile app. Customers seeking ease, flexibility, and transparency in their banking are generally drawn to them.
Neobanks can provide less fees and better interest rates on savings accounts because they don’t have to pay for the upkeep of physical premises. Additionally, their websites and apps typically offer a smoother, more user-friendly experience for their customers and are more intuitive.
Since the Office of the Comptroller of the Currency hasn’t granted most neobanks a bank charter, they must collaborate with chartered banks to facilitate the provision of goods and services and ensure that deposits are protected by the Federal Deposit Insurance Corporation (FDIC).
Examples of popular neobanks
Even though the neobanking sector is still relatively young, some platforms are starting to gain popularity.
Chime
Among the biggest neobanks available, Chime is projected to have 21.6 million users by 2023. Chime collaborates with Stride Bank and Bancorp Bank to offer banking services and guarantee that money is FDIC insured.
Checking accounts offer free access to more than 60,000 ATMs around the country, as well as no monthly service fees or overdraft fees. Funds can be accessed by customers who use direct deposit up to two days early.
Varo
Varo, in contrast to Chime, was granted a national bank charter in 2020, making it a legally recognized bank with FDIC-insured accounts. To start an account, there is no credit check required, no minimum balance requirement, and no monthly maintenance fees or fees for transfers or overdrafts.
Furthermore, Varo and Zelle have teamed to enable users to send money online to friends and family.
Current
Customers of Current can build “saving pods” with up to 4% annual percentage yields (APY). Current gives early access to direct deposit payments and does not impose yearly fees or minimum balance requirements, similar to other neobanks.
The business works with Cross River Bank and Choice Financial Group to guarantee that its deposits are covered by the FDIC.
Pros and cons of using a neobank
Neobanks have disadvantages but also provide greater flexibility than conventional banks. Determining whether they will meet your financial demands is crucial.
Pros
Lower fees:
Neobanks are online financial institutions that can pass savings on to their customers by lowering or doing away with standard banking fees.
Higher rates:
Neobanks typically offer savings accounts with greater interest rates due to their decreased costs.
Early access to direct deposits:
Fintechs usually provide payments, such as pensions, tax refunds, government benefits, and payroll deposits, up to two days ahead of schedule.
Convenience:
Users can make deposits and transfers anywhere at any time, with 24/7 online customer assistance.
More financial tools:
Neobanks provide real-time expenditure insights and in-app budgeting capabilities that traditional financial institutions might lack or might charge extra for.
Cons
Limited customer service:
With no actual branches, there’s no in-person customer help available.
Fewer product offerings:
Neobanks often offer a more limited range of services, so you’ll likely need to visit a physical bank if you’re searching for a mortgage or an investing account.
No guarantee of FDIC protection:
Funds are not FDIC-insured unless neobanks have paired with a regular financial institution, as they are not registered banks.
Who uses neobanks?
According to a 2023 research from PYMNTS and Treasury Prime, 25% of consumers have used a neobank, digital bank, or FinTech with bank-like services in the previous 12 months, while just 10% of respondents stated their primary bank accounts were with digital banks.
Neobanks are obviously popular with younger generations that grew up with the Internet: according to the PYMNTS survey, over 55% of Millennials and 45% of Gen Z consumers were highly interested in digital banks, compared to only approximately 13% of Baby Boomers. (Approximately 39% of Gen X participants expressed a high level of interest.)
How are neobanks regulated?
The majority of neobanks are unable to function independently and lack a bank charter or license. To make sure deposits are FDIC-insured, they usually collaborate with a financial institution that actually possesses a charter.
What do neobanks offer?
Neobanks can provide you with the most of regular banking services, however they might not be able to provide you with loans, cash deposits, or investment opportunities. We’ll locate an expert that is the ideal fit for your requirements. It is simple, quick, and free to get started.
How do neobanks make money?
Interchange fees, sometimes called swipe fees, are one of the most popular ways neobanks generate revenue. Retailers pay these fees each time they process a credit or debit card transaction. The majority of Chime’s revenue comes from this: Visa takes a merchant’s swipe fee and gives Chime a share of it.
Neobanks may also profit from fees for transactions, subscription services, and interest.
What are the services provided by neo banks?
Customers are able to deposit and withdraw funds from them. They provide investment facilities, debit cards, and other services. Even loan and credit services are offered by them. To offer financial services, the majority of neobanks collaborate with banks that hold banking licenses, as they are unable to function alone.