NeoBanks are also called “Challenger Banks” because they have pushed ahead and challenged traditional financial norms by providing options in a whole new paradigm that is changing the modern face of banking.
Traditionally, banking services are the purview of brick and mortar facilities, which handle daily banking services, provide debit, credit, and loan options as well as a multitude of others.
Now, however, they have competition.
NeoBanks are financial tech (FinTech) applications that provide banking services, but have no physical address, existing only as an online entity.
These apps, while not actually banks themselves, have partnered with FDIC approved banks to offer the same protection and to ensure transactions are covered appropriately.
Why Would I Want to Use a NeoBank?
There are actually quite a few reasons why you may want to explore this new frontier in banking.
The advantages far outweigh any disadvantages.
Here are some of the features that make NeoBanks a great option:
- Easy Access - The FinTech’s app makes it really easy to access your account, switch money among different services, send money, and pay bills . . . all of this, right at your fingertips. Plus, as they provide you with debit cards or, in some cases, credit cards, it’s very easy to use your money when you need it.
- No Credit Check - If you’re having issues because of bad credit, you don’t have to worry about it with a majority of NeoBanks. In fact, some of them, such as Chime, offer secured credit-builder accounts which can help you to get your credit back where you want it.
- Fantastic Features - There is a NeoBank for a wide variety of services and many of them offer several themselves. Options such as savings accounts, checking accounts, credit-builder accounts, cashback options, discount/coupon features, overdraft offers, financial and savings organizing options, and more!
- Competitive Interest - Some NeoBanks such as Chime and Varo offer savings accounts that are competitive with traditional banks. Chime offers a 0.5% interest rate and provides immediate access to transfer funds about as you wish, while Varo’s original interest rate is less, but with a few monthly requirements actually climbs to an impressive 3% APR!
- Low To No Fees - Without the need to maintain physical facilities, these digital banking services pass those savings on to you. In most cases, there is no maintenance fee, no service fee, no start-up fee, no minimum balance.
Disadvantages of NeoBanks
Inevitably, brick-and-mortar banks are going to have a few advantages over NeoBanks. Here are some of the drawbacks to using FinTech for your finances:
- Fewer Service Options - As NeoBanks are specialized services, they usually choose focus areas and provide services in those categories. For example, their loan and investment options are typically limited, while physical banks offer a wider variety of services all in one place.
- Shorter History - As NeoBanks have not been around for nearly as long as banks, they don’t have a long track record. This means that there’s a greater potential that the service could fail and shut down. This is not really a great concern for you as a user as long as the app is FDIC insured, and most of them are. Just certify this before engaging in serious service usage.
- Cash Options - As they are a digital service, it can be difficult to handle actual physical money with your NeoBank account. Not impossible, just less convenient than a trip to your bank can be. While there are typically ways to make cash deposits and withdrawals, it’s not as convenient as stopping by your personal bank. There are a wide variety of ATMs available for use with these FinTech apps, but you’ll have to discover which ones will allow you to access your funds free and which will cost you.
How Do NeoBanks Make Money?
You may be a bit skeptical about using FinTech if they’re offering so many of their services free to use.
After all, how are they making money?
As a different type of service than traditional banks, they have a different business model.
They actually made a good amount of their money behind the scenes from merchants when you use their debit card to make a purchase.
As smaller agencies than banks, NeoBanks are allowed greater percentages through interchange, which is the money a merchant pays as a service fee when you use a card.
This is why you will see that some businesses require a minimum of $5 dollars to use a card; it’s to ensure they are making a profit and not succumbing to those fees on smaller transactions.
Some of the NeoBanks make money off ATM transactions as well.
While they typically offer a high number of free ATM options (65,000+ for example), they do make a profit if you use one that is out of their network.
Still others offer tiered banking services, the higher levels of which provide you with greater or new options, but with a subscription fee of some sort.
Should I Switch to a NeoBank?
NeoBanks are so easy to use that it is tempting to use them as your sole banking experience.
While you can certainly use them for the majority of your banking needs, remember that they do have limited service options and there are services that are easier to manage with a physical banking account.
Perhaps the ideal usage is a marriage of the two.
A personal bank account to handle specific services and your NeoBank or more) to deal with others, providing you unparalleled versatility.
How Do I Open a NeoBank Account?
Opening a NeoBank account is incredibly easy.
You can have one up and going within minutes!
- Shop Around
Decide which of the services fit your needs the best.
You can even consider multiple options as each has different benefits and rewards options.
Some of the most popular are Chime, Varo Bank, and Current, but there are many others that specialize in different services.
Read some reviews and do a bit of research to find one that will make you happy.
- Download the App
Download the app for your chosen NeoBank(s).
- Sign Up
You will need to create an account, which can be done in a matter of minutes.
First, you will be asked for some personal information such as your name and address, and you will need to provide your phone number, email, and social security number for ID verification.
You will typically be sent a code through both phone and email to verify that that information is correct.
Once that is accomplished, you will be given customization options which you can typically choose to do later if you want.
Then they will offer to help you set up a direct deposit and offer to let you deposit money into your account if you want; this is also something that is not required at startup and can be done whenever you want.
After completing the setup, they will use your address to ship you a debit card immediately and many of them allow you to use a virtual card that you can activate immediately so you can be using your new account within minutes!
Once the card arrives, activate it, and you are ready to enjoy your simple NeoBanking services with a variety of rewards and options!
How can I open a Neobank Account?
What is a Neobank?
Are Neobanks banks?