Here’s What You Need to Know About Neobanks

Neobanks are financial institutions that give consumers a low-cost alternative to traditional banks. They are geared toward consumers who do not need the bells and whistles of standard banks and are comfortable with fewer options such as only having a savings and checking account.

“A young person that doesn’t ever want to use a physical bank location and wants to conduct all their banking services on their smartphone is best suited for a neobank,” says Anthony Chan, former chief economist at JPMorgan Chase & Co.

Neobanks have no physical branches, the same as online-only banks; offer stripped-down services, such as just savings and checking; and do not have a bank charter. Instead, neobanks such as Chime, Current and Varo will partner with another bank that has a federal charter so that deposits are insured for up to $250,000. Federal Deposit Insurance Corp. protection is made possible by alliances with a traditional bank – Chime with The Bancorp Bank and Stride Bank, One Finance with Coastal Community Bank, and Current with Choice Financial Group and Metropolitan Commercial Bank.

The stripped-down nature of their services typically also applies to their fees.

“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.

While they do not have their own ATMs, neobanks will generally partner with a network that has tens of thousands of ATMs. Chime customers, for example, can access more than 60,000 fee-free ATMs, many located in pharmacies and convenience stores.

Neobanks have been available to consumers for nearly a decade and are backed by private investors. The catch is that because they are fintechs and not banks, they are not regulated by the federal government like brick-and-mortar banks. Consumers have to file complaints via the Consumer Financial Protection Bureau and Better Business Bureau if their accounts are closed suddenly and they can’t access their cash.

“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 in the form of folders or subaccounts within the user’s account may be one of the most useful features typical of neobanks,” says Meredith Kelley Zidek, a Towson, Maryland-based banking and finance consultant and equities and options trader.

Neobanks are similar to online-only banks because they both do not have physical branches, but online-only banks typically offer a full range of banking services, including auto and personal loans as well as mortgages. Some of them, like Ally Bank, have an investing arm so that you can link your accounts and transfer money back and forth easily. These banks are also FDIC-insured via their own bank charter.

A neobank can offer higher savings rates because it can save costs on not having physical branches. Neobanks typically charge no fees or just nominal ones to maintain a checking account.

Unlike traditional banks, they do not offer a wide range of financial products, such as credit or investing, or consumer services such as a notary.

“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.”

Consumers who are just seeking basic banking services such as having a debit card to make purchases, who do not want to maintain a minimum account balance and who prefer to keep a savings account with money for emergencies are more likely to prefer a neobank.

An account with a neobank can be in addition to accounts with a traditional bank that offers services such as investing.

“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.”