Should neobanking be the main way you deal with your money in the future? Here is what you need to know.
When you think of banking, a physical location with a friendly teller, ATM and staff likely come to mind. But as technology has evolved, so has the way we manage our money.
If you still use a bank with a brick and mortar location, there’s likely a corresponding app that allows you to make digital deposits and transfers – which means you’re already visiting the bank less than you once may have.
Neobanking takes virtual banking a step further – offering the same financial products like checking and savings accounts that a traditional bank would, but without the storefront.
Here’s what you need to know about neobanking: what it is, how it differs from traditional banking models, and how it can save you money.
What is a neobank?
“Neobanking is banking services provided by a tech company through an app or website instead of a traditional financial institution,” explains Phil Strazzulla, founder and CEO of selectsoftwarereviews.com. “Many neobanks often partner with traditionally FDIC insured banks, but generally provide a more customer-service and socially-connected banking experience.”
All of your banking needs can be accessed and serviced virtually through the app, eliminating the need to visit a physical bank location. And because FDIC-insured banks back them, you can rest assured that your money is safe and secure.
When did neobanking become popular?
Neobanks, known as “challenger banks” in the U.K., began to gain popularity after the 2007-2009 financial crisis. According to a recent study, neobanks received nearly 3.6 billion in venture capital funding in 2020. Additionally, it’s estimated that by 2024, neobanks will have over 145 million customers across the U.S. and Europe.
According to Strazzulla, you’re likely familiar with at least one early model of a neobank: Paypal. “PayPal was never designed to be a true bank, but instead a way for people to engage with their finances in a more technical way,” he says.
What are the benefits of neobanking?
Because neobanks aren’t tied to brick and mortar locations, they can offer benefits that traditional model banks can’t. “[Neobanks] tend to have fewer fees, great app interfaces, and provide social-banking services a lot easier than even online banks,” Strazzulla explains.
Many neobanks also specific benefits that aim to help a younger user base manage finances. “For example, Dave, one of the newest neobanks, has credit-building features, while Chime has a ‘spot me’ feature that makes it easy to send another Chime user $5,” Strazzulla says. “Tools like these aren’t just designed to help younger consumers grow their financial capital; it helps gamify finances.”
Neobank apps also provide a better user experience than mobile banking platforms. “One of the most significant features of neobanks is their app presence,” says Strazzulla. “Generally, they’re more feature-packed and modern looking than those from traditional banks, making it easy for users to check their account, pay with their phone, and even share money with their friends. These apps are designed to be simple and enjoyable to use, without the pages of disclosure documents or noise that a traditional banking app has.”
Can neobanks save you money?
Compared to a traditional bank, the short answer is yes. “Most neobanks have low or no fee agreements, meaning you don’t have to worry about overdrafts,” Strazzulla explains. “They also can help customers build credit so that they can get better interest rates on loans.”
However, there are some disadvantages to using a neobank versus a traditional banking model. “Most neobanks don’t have interest-building accounts like CDs,” says Strazzulla. “They also don’t usually have loan offices, which means you can’t get a low-interest loan to combine with your account.”
How to get started with neobanking
Ready to get started with neobanking? Before you do, Strazzulla says it’s important to know that not all neobanks are created equal. “If you want to open a neobank account, the important thing is to look at reviews of the most popular options out there,” he says.
One of the most popular (and longest-standing) options is Chime, a neobank with over 12 million users. This neobank offers early access to direct deposit payments and offers a competitive (APY) savings feature. It also waives the typical fees associated with a traditional bank, which saves money.
As Strazzula notes, choosing a neobank with a proven track record is more likely a safe bet. “Many of these companies have great selling points, but they can be risky,” Strazzulla cautions. “It seems like a new neobank is popping up every few months. Make sure to do your research before signing up for one.”