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

Digital transformation is a trend in almost every industry, and banking is no exception. The need for convenient, affordable, and easy-to-access financial services has introduced us to many modern alternatives to traditional banks, including neobanks. 

These digital-first banking alternatives typically offer financial products through user-friendly mobile apps, replacing long lines and paperwork with a simplified, accessible experience. A survey conducted by Statista shows that over 23 million people in the US hold a neobank account during 2022, and it will likely increase to 34.7 million by 2026. 

But are neobanks too good to be true? And should you use them?

Let’s get to know what a neobank really is and how it works in this article. If you’re thinking of opening an account with a neobank, we’ll also cover its pros and cons and some of the popular options in the market for you to consider. 

The term “neobank” refers to financial technology (fintech) companies that offer services exclusively online through their mobile apps or websites without any physical branches, providing financial solutions and customer experiences through technology. 

Neobanks typically specialize in particular financial products or customer groups, such as checking accounts, foreign currency accounts, and corporate accounts for startups. Some neobanks also offer software or tools to help with accounting, budgeting, and invoice management. 

Since neobanks are online platforms for finance-related services, they are often confused with the terms online banks and digital banks.

However, while both offer services online, neobanks may not hold a full banking license, unlike online banks, which are basically the digital platforms of traditional banks.

Additionally, neobanks are also referred to as challenger banks or digital banks. While these three terms can be used interchangeably, challenger banks and digital banks typically hold full banking licenses that allow them to offer a broader range of services and compete directly with banks. On the other hand, neobanks often hold specialized licenses and focus on specific services or markets.

The term “challenger bank” is also more common in the UK, while “neobank” is more prevalent in the US. Nevertheless, they are used globally and are generally known as digital banks. 

Typically, neobanks and fintech companies offer specialized financial products, including checking and savings accounts for individuals and businesses, debit cards, international money transfers, FX services, and various financial management tools.

These neobanks often develop their own platforms that allow users to sign up and access the service easily from mobile apps, web browsers, and sometimes desktop applications. These platforms are where customers can access their accounts, manage them, and get customer support.

Most neobanks partner with established traditional banks or financial institutions to access the underlying financial infrastructure and ensure regulatory compliance, including segregated accounts, to hold client funds. However, some neobanks can operate independently with their own banking license. 

Compared to traditional chartered banks, neobanks offer more affordable services, especially for start-ups and businesses. This includes cheaper or no monthly fees, competitive foreign exchange rates, and higher interest rates on savings accounts. 

Neobanks can offer lower fees while remaining profitable because they operate with a different business model than traditional banks, focussing on providing a digital banking experience and reducing costs associated with physical locations. 

These are the primary ways neobanks make money:

• Subscription fees: Many neobanks offer free accounts, but some also offer account plans or tiers with additional features for a fee.
• Transaction fees: Some neobanks charge fees for specific transactions like cross-border payments and ATM withdrawals outside their network.
• Interchange fees: Neobanks that offer debit or credit cards usually earn a percentage plus a small fixed fee on each card transaction.
• Commissions: Neobanks can also earn commissions through partnerships with other financial service providers to offer products like accounting or budgeting tools.

Let’s take a look at some examples of the popular neobanks and what they offer:

Chime is a US-based financial technology company headquartered in San Francisco, California. It specializes in providing checking accounts with no monthly fees, overdraft fees, and minimum balance requirements. 

Although Chime is not a licensed bank, funds held in its accounts are protected up to the standard maximum FDIC insurance through its partner banks, The Bancorp Bank and Stride Bank.  

Founded in 2015 and headquartered in San Francisco, Varo is a licensed national bank in the US. It offers online banking services, including checking accounts, high-yield savings accounts, loans, and Varo Believe credit cards. 

Varo also does not perform a credit check when you apply for an account.

Revolut is a London-based neobank that offers banking services for business and personal finances with free and paid account options. Revolut’s services are available in multiple countries and territories, including the UK, the US, Australia, Japan, Singapore, and Europe.

Revolut currently holds a banking license in the European Economic Area (EEA).

Before opening a neobank account, it’s important to weigh the pros and cons to see if they are really ideal for your business compared to traditional bank accounts. 

Neobanks are great if you prefer the convenience of managing your finances digitally from your mobile phone anywhere at any time.

They are also a cost-effective option for small businesses, as these fintech companies often have lower or no fees compared to traditional banks. 

But it's also crucial that you take the time to consider the options by weighing out the pros and cons, the services they offer, and your own preference when it comes to banking and money management. 

For example, if your business is considering expanding into Asia, you may want to consider regional fintech solutions in Hong Kong, like Statrys. 

Founded in 2019, Statrys is a payment service provider licensed as a Money Service Operator in Hong Kong. It offers a range of products to help SMEs grow in Asia, including multi-currency business accounts that support 11 major currencies.

Statrys’ services include:

• Multi-currency business accounts that can hold 11 currencies, including HKD, USD, EUR, GBP, and CNY, under a single account number. 
• International and local payments with real-time SWIFT tracking and MT-103 are available upon request.
• Virtual and physical business cards with a card management tool to manage transactions in the palm of your hand. 
• FX services with competitive exchange rates.
• Integration with Xero to save time and resources through automated accounting.
• A dedicated account manager for every client and personalized customer support through phone, email, live chat, WhatsApp, and WeChat. 
• Company registration services in Hong Kong and Singapore.

The custodian bank for Statrys is DBS Bank (Hong Kong).