Banking Banking Basics What Are Neobanks? Neobanks Explained in Less Than 5 Minutes By Justin Pritchard Justin Pritchard Facebook Twitter Website Justin Pritchard, CFP, is a fee-only advisor and an expert on personal finance. He covers banking, loans, investing, mortgages, and more for The Balance. He has an MBA from the University of Colorado, and has worked for credit unions and large financial firms, in addition to writing about personal finance for more than two decades. learn about our editorial policies Updated on January 29, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article Definition and Example of Neobank How Neobanks Work Pros and Cons of Neobanks Definition Neobanks are online-only financial institutions that are similar to banks. The offerings of a neobank are usually limited compared to traditional banks—sometimes no more than a simple checking and savings account. The slimmed-down model often allows neobank customers to enjoy fewer fees and higher-than-average interest rates. Photo: d3sign / Getty Images Definition and Example of Neobank Neobanks are financial technology firms that offer internet-only financial services and lack physical branches. They appeal to tech-savvy consumers who don't mind doing most of their money management through a mobile app. Neobanks don't integrate new technology solely for the sake of being cutting-edge. By getting rid of physical branches and moving everything online, neobanks often save on the costs of banking, allowing them to cut fees and expand services to the underbanked. Neobanks aren't identical in their offerings or structure, but they typically differ from credit unions and traditional banks (including online banks) in that they: Aren't chartered with state or federal regulators as banks Provide a streamlined process designed mainly for mobile devices Partner with traditional banks to federally insure customer deposits Don't extend credit (such as overdrafts) How Neobanks Work From a customer’s perspective, a neobank might amount to nothing more than an app you use to manage your money and make decisions. For those who are comfortable with technology, neobank accounts are easy to set up. You can often establish a relationship with a neobank and start using its services without signing any physical paperwork; just sign up for an account and download the app. Note Neobanks don't replace traditional banks for all customers. Some neobanks allow you to link your traditional bank accounts to them so you can enjoy the best of both worlds. Neobanks' offerings are similar to those at traditional banks and credit unions, albeit more limited. They generally include: Checking and savings accounts. Payment and money transfer services. Financial education tools, including budgeting help. Most neobanks offer limited or no credit to limit their risk, which helps them keep costs down. However, some neobanks offer loans for individuals and businesses through partner banks and credit unions. Others were lenders before they offered neobank features, and therefore they can offer both loans and deposit accounts. Some neobanks are startups that go through the rigorous process of becoming chartered banks, but those are in the minority. It's a significant undertaking to become a chartered bank, so many neobanks form alliances with existing banks, allowing them to offer FDIC insurance on the money you hold with the service. For example, Chime is a neobank that partners with The Bancorp Bank and Stride Bank to insure customer deposits. Note Neobanks are as secure than traditional banks and credit unions, but customers should check for federal insurance. If your neobank doesn't offer federally insured deposit accounts, it introduces unnecessary risk to your deposited cash. Big banks have recognized the demand for neobanking products and have begun rolling out similar offerings in order to compete. These products are meant to appeal to a mobile, tech-savvy consumer base, as well as underbanked populations. Bank of America, for example, offers an artificial intelligence-driven virtual financial assistant dubbed "Erica" in its mobile app. Pros and Cons of Neobanks Pros Low costs Convenient Quick processing time Cons Requires comfort with technology Less regulated than traditional banks No physical bank branches Pros Explained Low costs: Fewer regulations and the absence of credit risk allows neobanks to keep their costs low. Products are typically inexpensive, with no monthly maintenance fees. Convenient: Neobanks allow you to do the majority (if not the entirety) of your banking through a smartphone app. In addition to basic banking tasks, you should be able to manage your finances and predict activity in your accounts to prevent problems. Quick processing time: These tech-savvy institutions allow customers to quickly set up accounts and process requests. Neobanks that offer loans may skip the rigid and time-consuming loan-application processes in favor of innovative strategies for evaluating your credit and speeding up the process. For example, SoFi lets you pre-qualify for a loan and see your interest rate within minutes. Cons Explained Requires comfort with technology: If you don't like keeping up with technology trends, you might want to avoid banking with cutting-edge institutions like neobanks. You won't be able to take full advantage of the offerings if you aren't comfortable tapping and swiping your way through brand-new apps. Some people enjoy exploring new technology, but if you don't, then neobanks might not be right for you. Less regulated than traditional banks: Since neobanks aren't legally considered banks, you might not have any legal recourse or well-defined processes to follow if there’s a problem with an app, services, or non-regulated third-party service providers. There may be confusion as to who will be responsible for potential fraud and errors. Customers are also on the hook for ensuring that their neobank offers some sort of deposit insurance, such as through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF). No physical bank branches: It’s becoming increasingly easy to do everything online, and neobanks often maintain partnerships with ATM networks, but some people want the ability to visit a branch and bank in person, especially when it comes to complex transactions. While many neobanks offer robust customer service tools, some customers may prefer to ask questions in person. Key Takeaways Neobanks are online-only financial institutions.Neobanks usually offer fewer products and services than traditional banks, which helps them reduce both institutional risk and customer costs.While some neobanks are chartered banks in and of themselves, many of them partner with larger, chartered financial institutions to insure deposit accounts. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Sutardja Center for Entrepreneurship & Technology at the University of California, Berkeley. "Applied Innovation Review Issue 1," Page 32. Accessed Dec. 29, 2021. SoFi. "SoFi Announces Availability of SoFi Money and Invest Products to Help You Get Your Money Right." Accessed Dec. 29, 2021. Chime. "What Type of Account Is My Chime Account?" Accessed Dec. 29, 2021. Bank of America. "Bank of America Delivers First Widely Available AI–Driven Virtual Financial Assistant." Accessed Dec. 29, 2021. SoFi. "How to Get Approved for a Personal Loan." Accessed Dec. 29, 2021.