When we think of banks, we often think of them as the traditional financial institutions with which we maintain our bank accounts. But there are a growing number of emerging fintech companies focused on challenging the traditional banking model and streamlining financial services. We will explore neobanks, also known as challenger banks, in more detail to better understand what a neobank is.
What are neobanks used for?
Neobanks are 100% online banks used for personal finance and corporate finance. Using fintech or financial technology, neobanks offer a wide variety of services like many traditional banks, including:
- Bank accounts such as a checking account with a physical debit card
- Savings accounts
- Credit card
- Offer loans such as personal loans and business loans
How do neobanks work?
Neobanks use technological platforms such as a mobile application to provide customers with financial products similar to those of a traditional bank. For example, they can provide banking services like bank account like savings accounts, direct deposit options, cash account, etc.
Neobanks mainly collect funds from investors, interchange fees between traders and consumers and other innovative strategies. In addition, because they do not have a physical presence such as a physical branch, neobanks save a lot of money on overhead and rent.
Neobanks vs. Digital banks vs. Traditional banks
The first thing to note is that neobanks and digital banks are interchangeable terms and they are great examples of fintech. Digital banks are commonly referred to as digital banks. Neobanks and traditional banks offer similar services such as savings and checking accounts and other financial products.
However, the main difference between neobanks and digital banks and traditional banks is that they do not have physical branches. Instead, neobanks are online banking and provide digital banking services through mobile apps. They may also have a partner bank that provides additional services as needed.
Traditional banks may have a digital presence, but they also have physical branches through which they provide financial services. Neobanks are also subject to fewer regulations compared to a traditional bank, as they partner with other banks and vendors to provide services.
Benefits of neobanks
Using a Neobank can be very beneficial for various reasons; we’ll look at some of the main ones below:
Compared to traditional banks, neobanks tend to have lower fees, especially for customer deposits. With a neobank account, there are usually less costs such as a reduced monthly maintenance fee or none in some cases and are generally inexpensive to set up and use.
Like traditional banks, neobanks offer FDIC insurance for customers. Important steps are taken to protect customers’ deposits and keep their money safe. Through the Federal Deposit Insurance Corporation, neobanks are financial institutions insured by the FDIC for deposit accounts and more.
Competitive interest rates
One of the biggest trends in fintech is rising interest rates, and that applies to many neobanks as well. It will depend on the type of savings account and will generally offer a wider range of financial products to clients. However, even though the interest rates are not as high, lower fees mean customers can save money using neobanks compared to traditional banks.
Ease of use
Easily accessible via a smartphone app, neobanks ensure that customers can access money wherever they are. In addition, a neobank is simple and easy to set up and access compared to traditional financial institutions. Moreover, they are more tech savvy with their features and offer services even for those who may have higher credit risk.
Disadvantages of neobanks
Although neobanks are definitely innovative, there are some drawbacks to using them for a master account:
Customer service is difficult
Since there is no in-person assistance, it is often difficult for clients to get the attention and care they need. All neobank customer service is done by phone and chat, and it can be difficult to get timely help when issues arise.
Potentially less services
Since many neobanks partner with other banks to provide their financial services, they might not offer as much as a traditional bank. As a result, neobanks may be limited in types of loans and products compared to large banks and may not have as much variety comparatively.
A new innovation
Neobanks is a new player in the financial field, which can lead many to be wary of it. While neobanks offer similar services to a traditional bank, there may be some reluctance to fully embrace this new type of fintech-based bank as we learn more about it, which could potentially lead to more regulations.
Popular neobanks to consider
There are many large emerging neobanks that can be used for corporate finance and personal finance, among the most important:
- Carillon: By far one of the most popular neobanks, Chime has partnered with Stride Bank and Bancorp Bank to provide clients with a wide range of financial products. Features include direct deposits, debit cards, and automatic savings accounts.
- Arrival: Arriving is a good option for business finance for small businesses and the self-employed. The main features include different types of accounts, accounting software, loans, invoicing and many other features which will be available soon.
- Running: Another growing neobank, Current is ideal if you are looking for little or no free types of banks. They offer accounts for different age groups and include features like savings capsules and an advance paycheck if you use direct deposit.
- Wise: One of the pioneers of neobanks, Wise is a very good option for business and personal finance. It has many banking features, including savings and checking accounts, multi-currency accounts, and offers competitive exchange rates when transferring money abroad.
- Dough : A new player in the field of neobanks, Dough supports its clients in financial and banking management. It has features like invoice management, expense reports and ways to invest as well.
- Sofi: For a variety of financial services, Sofi is one of the best neobanks on the market. Customers can access hybrid checking and savings accounts, cash back rewards, automated investments and more.
Decide if a neobank is right for your business Financial services
Neobanks are an innovative way to access financial services and can be a fantastic choice for personal and business finance. Especially for those with lower credit scores, neobanks can be a way to start rebuilding credit while taking more control of financial management.
With neobanks, you can gain access to traditional bank accounts, investment opportunities, lower fees, and better financial oversight. A neobank is the right option for you if you are less concerned with physical locations and prefer a wide range of banking services that can be accessed quickly via smartphones.