What is a Neobank? How It Works, Examples, Pros & Cons

Not all banks are created equal. Gone are the days of preparing paperwork and going through complexities with bank for years.

In today's digital world, neobanks have become one of the most popular platforms for users and businesses worldwide. With its intuitive interface, ease of use, and user experience that took away the hassle of opening a bank account, neobanks check many boxes for what we seek in the future of banking.

With neobanks, you save more time on managing your finances, gain more savings, and you finally get the 24/7 support you always yearn for from traditional banks. But are there any caveats to this innovative way of banking?

Let's get to know what a neobank really is, how it works, the way it generates profits, some examples of neobanks, and the benefits and drawbacks it may have before considering to get one.

What is a Neobank?

The term "neobank" refers to an online banking platform developed by fintech (financial technology) firms or startups, whose products are offered in specialized areas of finance, including checking or saving accounts, and streamlined software such as a mobile application or a website.

These banks operate entirely online without a physical location compared to traditional financial institutions.

How Do Neobanks Work?

Neobanks work by providing their customers with low to no fees and charges in their products/services they provide. This is because neobanks don't have to spend any maintenance costs in hiring people, or opening branches.

A survey conducted by Statista shows that over 23 million people in the US hold neobank account during 2022, and it will likely increase to 35 million by 2026. Most neobanks also offer a better and more convenient way for people to access their funds with better features like early deposits, high interest rates, and more.

This digital-first experience offers customers with flexible options, intuitiveness, and transparency compared to traditional banks.

Looking for the most popular neobanks? Check out our top 19 neobanks list 🔍

How Neobanks Make Money

How neobanks make money are different from how traditional banks do. Given the organization's sizes and business model structure, neobanks have the edge over interchange percentages compared to traditional banks.

There are two primary ways in which neobanks make money:

• Collecting out-of-network ATM fees and;
• Collecting interchange fees

Neobanks make money through additional fees when you use other ATMs that are not from your bank. For instance, if you're using a debit card provided by Bank ABC, but you withdraw money from Bank XYZ's ATM you could be charged with additional out-of-networks fees.

The other way in which neobanks make money is through collecting interchange fees, which are considered as charges in a transaction when a purchase is made online or in a store with a credit or debit card of a particular neobank. These fees are charged through the card by the business.

Neobanks vs Online Banks

While neobanks are online banking institutions or financial technology firms constructed on a different business model than that of traditional banks, online banks are slightly different as they offer a similar set of digital experiences through online banking platforms.

However, the biggest difference is that the majority of neobanks don't have a bank charter, whereas online banks do. This makes it difficult for neobanks to provide a broad range of services that online banks do, including loans, savings accounts with deposit interest rates, or credit cards.

📖 Read more: Neobanks vs. Challenger Banks

Example of Neobanks

Let's take a look at some examples of top neobanks and find out what they offer.

1. Statrys

Statrys is a fintech, digital payment services platform that offers a multi-currency business account in Hong Kong and is ideal for SMEs across the world.

With 24/7 customer support plus "real people" as account managers, Statrys is one of the most dependent neobank platforms that offers dedicated services that are transparent and affordable to every customer who seeks a reliable alternative to traditional banks.

2. Chime

Chime is a neobank based in the US that focused on one of the most valuable components in banking - interest rates. It partners with the Bancorp Bank and Stride Bank to ensure better returns on customers' savings compared to traditional banks.

However, Chime does not offer loans or other financial products that may be similar to what a financial institution offer.

3. Varo

Varo is another mobile-first neobank for those who look to manage their personal finances, and more importantly gain a higher yield on savings.

This neobank also offers customers with both checking and savings accounts, along with early paycheck deposits, with no monthly fee.

Pros and Cons of Neobanks

Before you consider opening a neobank account, see if neobanks are ideal for your business, let's look at the pros and cons.

Should You Consider Using a Neobank?

Neobanks are great if you're into a 100% digital banking experience that provides a seamless online banking experience. These banks also hold flexibility and transparency as their top priorities.

But it's also crucial that you take the time to consider the options by weighing out the pros and cons of neobanks, services it offers, and other components related to how you manage your personal finance or business.

By understanding if a neobank will be the best option for you to move forward with in your financial needs, it will help determine your decisions for choosing the banking options, whether it is for business or personal use.