Neobanking: What Is It and Where Did They Come From?

More than ten years after the 2008 financial crisis, a new wave of banks is offering consumers an all-digital alternative to the brick and mortar institutions relied on for decades. Neobanks — sometimes called challenger banks — aim to rewrite the rules for people’s financial life. For instance many Neobanks, like Chime and Varo, offer no-fee checking.

But is it right for you?

Finance and technology expert Penny Crosman, an editor at large for American Banker and the former editor of Bank Technology News, explains why it could be the right choice.

Q: What is a neobank?

A: Neobanks are startups that aim to beat banks at their own game. They use mobile apps to offer low-cost, consumer friendly banking services and can help with budgeting, savings and setting and keeping financial goals.

Q: Where did neobanks come from?

A:    Neobanks grew out of the 2008 financial crisis and often project and anti-traditional message to attract disillusioned customers — which seems to be working. MoneyLion, for example, says it’s opened two million financial accounts  serving three million people. Chime has more than a million users, and many traditional banks are developing their own neobank spinoffs.

Q: What kind of customers use neobanks?

A: Neobanks tend to attract millennials and younger, tech-savvy people who don’t have a traditional bank to go to. The challenger bank Chime, for instance, says 90% of its members are millennials.

Q: How does a neobank actually work?

A: Neobanks use mobile apps with a great-looking user interface and tools for managing money. Some — like Digit — have automated savings tools that automatically take some amount of money they determine the user can afford and sweep it into savings each month. Others, like Qapital and MoneyLion, try to monitor a user’s financial health and nudge them toward meeting specific financial goals.

Q: How are these banks different than my old brick and mortar bank?

A: Challenger and neobanks don’t have bank charters or FDIC insurance. But they do have bank partners that hold deposits in traditional, FDIC-insured accounts. The neobank is a front end and a pusher of payments, for which it gets interchange fees from merchants. But there’s always a “real-bank” in the background, at least so far.

Q: What kinds of services do neobanks offer?

A:  Neobanks typically offer savings accounts, debit cards, and a mobile app that lets users make deposits, track finances and manage their money.

Q: What if I need to talk to a real person?

A: Neobanks all have human customer service people who can be reached by phone or email when you need help.

Q: Are neobanks safe?

A:    Yes, because they’re backed by traditional banks, neobank accounts are protected.

Q: What are the benefits and advantages of neobanking?

A:   Lower costs and helpful tools like automated saving and financial goal monitoring designed to help customers save.

Q: If I join a neobank, do I still need my traditional bank?

A:   Probably. Currently, most neobanks offer only a limited range of services: Savings and deposit accounts, debit cards and financial management tools. If your customer needs include products like mortgages, credit cards and IRAs, you probably will still need a traditional bank.

Q: What questions should I ask when choosing a neobank?

A:    The same questions asked of a traditional bank. What type of products are offered, what are their rates and fees? You might also want to ask about the financial health of the company and make sure it offers 24/7 customer support.