How Does Neobanking Work?

Offering internet banking services, neobanks are created by partnerships between financial tech firms and banks to offer federally insured bank accounts. They can be a valuable way to store your money while benefitting from more competitive interest rates and lower fees. If you are considering making the switch to internet banking, this is what you need to know about how neobanking works and how it can benefit you.

To understand how the right neobanking accounts play into your bigger financial picture, you may want to work with a financial advisor.

What Is a Neobank?

A neobank is a financial technology company that offers services similar to that of a traditional bank. However, unlike traditional banks, it is usually digital and comes at a lower cost.

Because a neobank operates almost entirely online, they save money by not having physical locations and front-line staff. Then they pass those savings on to their customers by offering better interest rates and lower fees.

While neobanks often function primarily online, they’re not exactly the same thing as an online bank. Instead, neobanks are considered fintech companies that partner with traditional banks to offer banking services while complying with financial regulations and qualifying for Federal Deposit Insurance Corporation (FDIC) protections.

How Do Neobanks Work?

Neobanks work in much the same way as regular banks. They offer basic banking services, including the following:

Some neobanks have products and missions that serve a special purpose. Those include helping the unbanked or helping their customers build credit.

With a neobank, you’ll be doing all or almost all of your banking through their mobile app or website. You’ll likely be able to call a customer service number for help with your thornier questions. And you’ll usually have ATM access, depending on the neobank.

However, most of your banking interactions will take place digitally. To help you manage your money, neobanks also often offer budgeting and savings features. This will help you automate and track your spending with algorithms, analytics and other tools.

Examples of neobanks are Chime, Aspiration, Varo and Current.

How Is a Neobank Different from a Regular Bank?

Traditional banks must adhere to strict regulations and are covered by the FDIC, meaning up to $250,000 of your money is insured. Many neobanks carry that same protection for their depositors, as well. Just be sure any neobank you consider has FDIC-insured accounts for your peace of mind.

It is important to note that neobanks are not subject to many of the same regulations as traditional banks. However, regulators have shown interest in addressing the gaps in regulation to better oversee neobanks and other fintech firms.

Compared to traditional banks, neobanks usually offer lower fees or no fees and competitive interest rates. Since the money they save on physical real estate and staffing goes into their products, neobanks often have features such as no overdraft fees or cash back on some debit card purchases.

Of course, the downside of no physical branches is that there’s nowhere to go if you want in-person help. While many neobanks offer chat lines or 24/7 customer service by phone, it may be a problem if you perform a lot of cash transactions or value in-person service..

Finally, neobanks usually don’t offer the full range of services you find at a traditional bank. Most traditional banks offer multiple types of savings and checking accounts, certificates of deposits (CDs), money market accounts, various types of loans and credit cards. Instead, neobanks will often offer a limited selection, such as one checking option, one savings option and a debit card.

How to Compare Neobanks

When deciding between neobanks, it’s important to evaluate how their features align with your financial habits. Start by reviewing account types, interest rates and monthly fees. Some neobanks may offer early direct deposit, round-up savings tools or credit-building features—others may focus more on spending insights or zero-fee overdraft protection.

Also, check how easily you can access your money. Consider the size of the ATM network, whether mobile check deposit is available and how the neobank handles cash deposits. Some partner with retail chains to let you deposit cash at the register for a fee.

Lastly, compare mobile app functionality and customer service responsiveness. Since all banking is done digitally, the quality and reliability of the app are essential. Read user reviews and confirm whether live chat or 24/7 support is available. Comparing these factors side by side can help you choose a neobank that fits your day-to-day needs.

Is a Neobank Right for You?

Before opening an account with a neobank, do not forget these considerations.

Can You Do All Your Banking Tasks Online?

If you’ve never been inside of your current bank’s physical branches, neobanking might be a good option for you.

However, if you really value having the option of face-to-face customer service or use cash frequently, you’re probably better off with a traditional bank.

Do You Need Only Relatively Simple Services?

If you only want a savings account and a checking account with debit card access, neobanking may be right up your alley. However, if you find yourself preferring to use a wide suite of banking products at your home bank—such as a checking account, a savings account, a money market account, a mortgage and a line of credit—you might be better off sticking with traditional banks.

Do You Need a Particular Service Neobanks Provide?

If you need to build credit or often overdraft your bank accounts, you might benefit from the specific services that many neobanks provide. Some neobanks even cut typical fees, like overdraft or monthly maintenance fees,. If you have a specific problem a neobank can solve, it might be worth making the switch.

Is Your Neobank of Choice FDIC-Insured and Well-Reviewed?

Make sure any neobank you consider is FDIC-insured. You don’t want to leave your deposits vulnerable if something goes wrong.

Take the time to research how customers who have used the neobank view it. You can check app ratings in the iOS or Android store. The Consumer Financial Protection Bureau also offers a fantastic resource with its customer complaint database.

Bottom Line

Neobanks can be a great choice if you do your research. That includes ensuring the neobank has good business practices and offers the right kind of financial products for you. While there are definitely pros and cons to doing most of your banking with a neobank, the ease of online access, competitive rates and minimal fees make compelling arguments for a switch.

You can always talk to a financial advisor, who can help you determine the right financial institution to handle your finances moving forward.

Tips for Opening a Checking Account

A financial advisor can help you work through your banking needs and put together a plan that works for your unique situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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