Neobanks, like a lot of other tech-savvy financial services, has risen in popularity over the past two years—and that trend seems primed to continue.
By some estimates, nearly 40 million Americans will be using a Neobank within the next few years.
If you're one of those customers, you're part of a rapidly growing trend of innovation and disruption.
But as with any new technology, particularly one that deals with precious financial data, there is the question: just how secure is my Neobank account?
The short answer is yes. But you must consider each Neobank carefully before signing up and handing over your hard-earned cash and precious personal details.
What is a Neobank?
There are a lot of digital financial services out there, and Neobanks are their own category.
Also referred to as "challenger" banks, they are companies that bring tech solutions to traditional banking.
That's where the "challenge" comes from—they are trying to provide services with more ease and less cost than your typical bank.
Neobanks is different from online banks, and that can be both a plus and a minus.
They tend to offer fewer services, focusing primarily on checking and savings accounts. Most importantly, they are fully digital.
Neobanks give you many of the same products as a typical bank—checking and savings accounts, as well as payment features.
These services are all provided within a completely virtual environment.
Neobanks set themselves apart with their apps and platforms.
You will do all of your banking via your computer, tablet, or phone.
And many users like the built-in tech advantages of Neobanks.
For example, many platforms have built-in bill pay reminders and free access to your credit score, providing more a personalized experience than banks "in real life."
Many Neobanks also provide access to financial tools to customers dismayed by the pace of traditional banking.
Because Neobanks aren't subject to the same regulations as traditional banks, they can offer quicker account creation and faster transaction times.
But it's that lack of regulation and the relative youth of the Neobank that concerns many.
First, with the bank existing only in a digital form, are deposits safe?
Second, will my money still be available if I join a startup Neobank that fails?
And as with any online venture, there are concerns about data safety.
Those concerns aren't without merit. In early 2021, one "older" Neobank, Simple, closed its virtual doors, and customers had to move to another service.
And most famously, in 2020, the challenger bank called Dave was hacked.
But incidents like this are few and far between.
Neobanks are susceptible to the same forces as other banks and any company that has information online.
Digital-only banks maybe even more secure, as their livelihood depends on their security measures.
Without brick-and-mortar institutions to fall back on, Neobanks spend more time and resources securing your money and personal information.
And digital security is one area where it helps to be young—traditional banks may have older security systems.
In contrast, the "new players" have to arrive on the market with up-to-date and innovative security measures.
But before you choose Neobanking, there are two key questions to ask about their security.
How to Choose a Secure Neobank
There are two research questions you should always ask of your prospective Neobank:
- Does it have FDIC insurance?
- Does it have a negative security profile or reviews?
Federal Deposit Insurance Corporation (FDIC) insurance keeps your money safe, even if your bank goes out of business.
For most banks—including your prospective Neobank—that means your deposits are insured up to $250,000.
To find out if any bank, neo- or otherwise, is insured, go to the FDIC BankFind Suite at: https://www.fdic.gov/resources/deposit-insurance/.
You can discover negative security situations or reviews by simply conducting an online search on the Neobank you're considering.
Most Neobanks are secure—just don't let the speed and ease of signing up keep you from doing your due diligence.
With that question answered, what are the advantages and disadvantages of choosing Neobanking?
Advantages of a Neobank Account
Neobanks advantages all tend to spring from its digital-only footprint. A good Neobank will give you:
- Lower fees & higher interest rates
- Better apps and digital tools
- Ease of use
- Innovative services
Lower fees and Higher interest rates
Neobanks don't have to spend money maintaining a physical presence.
Building and maintaining brick-and-mortar branches isn't cheap.
So Neobanks try to disrupt traditional institutions by passing on those savings to your account with lower fees and higher interest rates.
For example, the Neobank savings rate in one database is four times that of some "big bank" averages.
Better apps and digital tools
Neobanks are only digital, so they have to put a lot of ingenuity and resources into making their apps stand out.
You'll tend to find the best and most forward tech in the online-only world. For tech-savvy customers, this is a huge selling point.
Ease of use
if you're looking to trade time traveling and waiting in line with instant access to financial transactions, Neobanks are much faster and more efficient than any trip to a bank branch.
Some Neobanks utilize their digital power to offer services that banks do not, such as "payday" loans and other no- or low-cost advantages.
Disadvantages of a Neobank Account
There's another side to the all-digital coin, of course.
There are some areas where Neobanks fall short:
- Unstable fees
- Difficulty accessing funds "in the real world"
- Lack of face-to-face interaction
- Fewer services
Most Neobanks make their money by charging merchants transaction fees.
But they may also have fees for customers.
Factor in that most Neobanks are new to the market, they will often be experimenting and trying new business models that help them grow.
This would result in likely fluctuating pricing not just among different Neobanks, but also throughout your experience in a single Neobank as it tries new methods to do business.
So make sure to read all of the costs associated with your account before signing up.
Difficulty accessing funds
Digital-only banks do not have ATMs.
But the best Neobanks have some form of ATM access.
Research where and how you can access your funds—and how much getting cash will cost.
Lack of face-to-face interaction
For some, bank visit and human interaction are essential.
If you're one of those customers, Neobanks offer online support, but that's all.
Most Neobanks stick to the basics like savings and checking accounts.
They tend not to offer mortgages, loans, and other more "traditional" services.
Neobanks are secure—as secure as any institution in our online world.
But no banking solution is perfect for everyone.
But if you know your own particular banking needs and research Neobanks carefully, you may find they are the ideal solution for you.
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What is neobank?
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How to choose a secure neobank?