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What’s a Neobank? Defining These Fintechs

What’s a Neobank? Defining These Fintechs

Jenius Bank Team3/7/2024 • Updated 4/4/2024
Woman researching neobanks on her laptop.

Neobanks are financial technology companies offering bank-like services.

These days, banking looks different than it used to. People are no longer reliant on brick-and-mortar bank branches to manage their finances, deposit checks, and take care of other routine tasks. Digital tools and smart devices have made staying connected to your accounts easy and have allowed new banks, and bank-like companies, to take center stage.

Neobanks are one option gaining popularity as an alternative to traditional banks. But there’s more to these so-called challenger banks than meets the eye.

Key Takeaways

  • Neobanks are a type of financial technology company that offers basic banking services like checking and savings accounts.

  • Most neobanks are not FDIC-insured, so your money may be at risk if the company goes under.

  • They typically offer fewer services than traditional or digital banks, which could make taking care of all your financial needs at the same place more difficult.

Neobank: A Definition

Neobanks aren’t banks in the traditional sense. Instead, they’re a type of financial technology (fintech) company that leverages modern money management tools to provide users with services similar to ones you’d find at a traditional bank. Unlike traditional banks and digital banks, neobanks lack a banking charter, which we’ll discuss more in a moment.

Neobank customers access their accounts online since neobanks don’t typically have branches, and the most common products are checking and savings accounts. The lack of physical branches means neobanks have less overhead and attract customers by offering lower fees and higher rates on savings accounts than traditional banks.1

Many neobanks seek to differentiate themselves from traditional banks through the digital tools they offer customers. These tools may help customers monitor their accounts, review transactions and upcoming bills, and help them set and reach their financial goals .

Understanding Bank Charters

A banking charter is essentially a license from a state or federal government that is required for a bank to offer financial services. Charters are granted after an approval process from bank regulators where banks must show that they have enough money for operations, growth, and potential risks.

Banks must also submit a strategic plan that includes specific goals for different products, back-up plans for potential problems, and projections on how and when the bank becomes profitable. Most states require banks to show a plan for profitability within five to ten years, to prove that the business is viable and able to serve customers consistently.

Chartered institutions are required to conduct periodic audits and adhere to strict regulations, which help ensure the bank’s stability and protects customers.2

According to S&P Global, only four new banking charters were approved in 2022.3 It often takes a company three to five years to go through the intense chartering process.

A charter gives banks multiple benefits, including a lower cost to do business because they use deposits to fund lending products. Even more importantly, a charter means that the bank can provide FDIC protection on deposit accounts, like checking and savings accounts.

Unchartered financial companies, like neobanks, don’t have direct access to FDIC insurance, meaning you may not be able to get your money back if they go under.

How Do Neobanks Work?

As we mentioned earlier, neobanks aren’t true banks because they lack their own banking charter. Instead, they’re fintech companies, meaning they differ from chartered institutions in a few key ways.

  • Neobanks rarely hold their own banking charter, which means their deposits may not be protected by FDIC insurance.

  • They often partner with chartered institutions to expand their services.

  • They’re not directly regulated or audited by bank examiners, which could put your funds at risk.

Neobanks, like many fintech companies, are often venture-capital backed. This means they need to grow rapidly if they want to continue receiving funding from their backers. And that growth may come at the cost of customer satisfaction.4 In 2022 J.D. Power reported that less than half of neobank customers felt it was convenient to reach a customer service representative when they needed assistance.5

Neobanks and Partner Banks

Many neobanks partner with chartered institutions to offer certain benefits, such as FDIC insurance. These partnerships may cause confusion for customers because they think they’re opening an account with the neobank, but sometime during the application process they learn that their money is kept with a different, chartered, institution.

These partnerships leave the neobank acting as an intermediary for its customers and may cause a disjointed customer experience, for example when an account holder receives statements from both the neobank and partner bank.

The Pros and Cons of Neobanks

Neobanks are popular for a reason. They offer a convenient alternative to traditional banking and let customers access and manage their money and track their expenses from their computer, smartphone, or tablet 24/7. They also tend to keep fees to a minimum and offer higher rates on deposit products.

But there are a few drawbacks to keep in mind as well. Neobanks tend to have limited products and aren’t FDIC-insured on their own (some may offer FDIC insurance through a partner bank). Additionally, many customers have reported difficulty reaching customer service representatives at neobanks, making it tough to get answers to questions or resolve problems in a timely manner.6

When choosing where to keep your money, do your due diligence and make sure you’re working with a bank that puts your interests first.

Neobanks vs Digital Banks

Digital banks, like Jenius Bank, share some traits with neobanks. Both prioritize the digital experience, tend to offer money management tools, and don't usually have physical branches. Despite these similarities, neobanks and digital banks are far from the same thing .

Digital banks have a charter (or may be a division of a chartered bank) and offer FDIC insurance to protect your money even if the bank goes under. Neobanks don’t if they are not partnered with an insured bank. That puts you at risk of losing your money if the fintech firm fails. Digital banks also tend to offer a wider range of products than neobanks.7

Considering a Neobank?

Considering moving your money to a neobank? Neobanks offer some compelling reasons to switch but we have news for you – Jenius Bank offers the same benefits with almost none of the downsides.

Like neobanks we’re online-only, have no fees and offer market leading rates on our savings accounts and you’re able to access your account whenever you need. And we’re building sophisticated, industry-leading tools to personalize your banking experience.

A couple added bonuses that set us apart from neobanks: as a division of a California state-charted bank, our deposit accounts are FDIC-insured up to the maximum allowed by law,8 so your money is safe. We also have a robust product expansion plan to grow with your financial needs. Plus, our customer service team is available 24/7 to help with your account when you need it.

Final Thoughts

Both neobanks and digital banks are strong options for banking online. But neobanks typically lack the same deposit protection that digital and traditional banks offer.

If you’re looking for the convenience of a neobank with the protection and services offered through a more traditional bank, opening an account with a digital bank is likely a better choice.

If you’re ready to take your banking experience into the future, open a savings account with Jenius Bank today.

Banking 101Money Management