Understanding Neobanks: The Future of Digital Banking
In today’s fast-paced digital world, the concept of a neobank might sound like something out of a science fiction movie. However, neobanks are very much a reality and are revolutionizing the way we handle our finances. These digital-focused providers of banking services are giving traditional banks a run for their money by offering a range of financial products and services through websites and mobile apps, without the need for physical branches.
What Is a Neobank?
Neobanks are designed to cater to customers who are dissatisfied with traditional banks, those who are unbanked, or those who prefer a digital-only banking experience. They attract customers with promises of convenience, higher interest rates on deposits, and low or no fees. Some of the most well-known neobanks include Aspiration, Chime, and Current.
The cornerstone of neobanks is their heavy reliance on technology. Unlike traditional banks, neobanks operate without a network of brick-and-mortar locations. Instead, they offer their services digitally through apps and websites. It’s important to note that most neobanks are not licensed or chartered banks. Instead, they partner with traditional banks to provide their products and services. For example, MetaBank and Wells Fargo are among the traditional banks that support neobanks.
Neobanks offer a variety of products and services, including:
- Debit cards
- ATM access
- Online bill payment
- Cash back credit cards
- Credit-building credit cards
- Tools for reducing debt and managing money
- Short-term, low-interest cash advances
- Loans
- Small business tools
As of May 2022, consulting firm Simon-Kucher & Partners estimated that 85 neobanks were operating in the U.S. A forecast by market researcher Insider Intelligence in 2021 predicted that 14% of the U.S. population would hold accounts at neobanks by 2025.
Pros and Cons of Neobanks
Whether a neobank is right for you depends on your financial needs and preferences. Here are some of the benefits and drawbacks to consider:
Pros
- Lower fees and higher interest rates: Neobanks can offer lower fees and higher interest rates because they don’t have the overhead costs associated with physical branches.
- New tech features: Neobanks often have an edge over traditional banks when it comes to adding or upgrading technology, such as mobile apps and financial management tools.
- Emphasis on customer engagement: Neobanks engage customers by providing user-generated content, personal finance tools, discounts, and other appealing features.
- Early access to paychecks: Many neobanks offer customers access to direct-deposited paychecks up to two days in advance of the actual payday.
- 24/7 customer support: Some neobanks offer around-the-clock customer service via phone or chat.
Cons
- No FDIC insurance: Most neobanks are not licensed or chartered as banks and therefore do not have direct access to FDIC insurance. However, deposits at partner banks of neobanks are generally covered by the FDIC.
- No branches: Neobanks do not operate physical branches, so if you prefer in-person customer service, a traditional bank may be a better option.
- Lack of some products and services: Neobanks may not offer the same range of products and services as traditional banks, such as mortgages and car loans.
- Limited ATM access: Neobanks do not operate their own ATMs, but they often provide access to ATM networks controlled by traditional banks and other companies.
- Different regulations: Neobanks are typically not overseen by state or federal banking regulators and must team up with government-regulated banks to provide products and services.
- Financial pressures: Many neobanks are startups backed by venture capital and may face periodic financial challenges that can disrupt business operations.
Are Neobanks Safe?
Generally, neobanks are considered to be as safe as traditional banks, provided they partner with banks that offer FDIC insurance on deposits. Since neobanks are not licensed or chartered as banks, they cannot directly access FDIC insurance. To ensure your deposits are federally insured, check the neobank’s website for information about their banking partners and FDIC coverage.
For example, the Acorns neobank clearly states on its website that its checking accounts are insured by the FDIC up to at least $250,000 per depositor, per ownership category, thanks to its banking partners, Lincoln Savings Bank and NBKC Bank. You can also use the FDIC’s BankFind tool to verify whether a neobank’s partner bank is an FDIC member.
How to Choose a Neobank
If you’re considering a neobank, here are some questions to help you make an informed decision:
- Does it charge fees, and if so, what fees does it charge?
- How do the neobank’s interest rates compare with those offered by traditional banks?
- Does it provide access (ideally fee-free) to an ATM network?
- What kinds of products and services does the neobank offer? Do these products and services meet your needs?
- How good is its customer service? Check online reviews and rankings to get an idea of how you’d be treated as a customer.
- How is the neobank’s reputation when it comes to tech additions and upgrades? Are they ahead of or behind the tech curve?
The Bottom Line
A neobank can be an excellent choice if you are comfortable with a financial institution that is not a chartered bank and are seeking attractive interest rates on deposits, low or no banking fees, and an abundance of tech-savvy features. However, if you prefer in-person banking or need a wider range of financial products, a traditional bank might be a better fit.
At O1ne Mortgage, we understand that choosing the right financial institution is crucial for your financial well-being. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate the complexities of the mortgage process and find the best solutions for your unique situation.
Ready to take the next step? Contact O1ne Mortgage today and let us help you achieve your financial goals!
