For many of us the term neobank is unfamiliar, but mention online only banking and “fintech” and the picture begins to get clearer. A neobank is a is a type of bank that operates exclusively online without physical branch networks. Some neobanks operate in partnership with a traditional bank and others are financial technology companies that offer bank like services. The latter is important to understand.
As technology continues to broaden and face-to-face banking becomes more of a preference than a need, the pros and cons of using a neobank for managing money are still developing. What follows are some things to think about when deciding to plunge into an all-online financial institution or to stick with a brick and mortar, more traditional bank.
One of the most important considerations in opening a financial account is risk. This is true for neobanks as well as traditional banks and credit unions. As mentioned above, some neobanks operate with a bank partner. Banks and credit unions have insurance on deposit accounts up to $250,000. If something should happen to the financial institution, there is a way for you to make a claim and have your money returned to you. If a neobank is not affiliated with a bank or credit union, you could lose any money on deposit and there may be no remedy available for you to get that money back.
While most banks and credit unions offer online applications to manage your money, review your accounts and even apply for loans, you also usually have the option of going into a branch. This may be important for complex transactions or when you have questions about your accounts.
Neobanks are strictly online financial institutions. This online only presence is one of the reasons that fees at neobanks are typically very low or non-existent. It is also one of the reasons that they may pay higher interest rates on savings accounts.
Being online only also means that resolving an issue with accounts may take much longer when communication can only be done via chat, email or phone. If fraud or an error occurs, funds could be tied up while communication travels between you and the neobank.
Banks are highly regulated institutions. There are built in safeguards for issues such as fraud or accounting errors. Neobanks may not be considered a bank which means the traditional legal options and processes for problems with services may not exist. Be sure to understand what safeguards the neobank offers and who is responsible for issues, such as fraud, if they arise.
Another consideration for using a neobank is your level of comfort with technology. As mentioned above, all transactions occur online. This helps to keep costs down limiting the credit risk to the neobank. For instance, most neobanks do not offer overdraft protection.
Neobanks also offer quick service in terms of setting up an account. All account transactions are managed through an application on your phone. Many also offer tools for budgeting and may have advanced ways for connecting you to additional products, such as loans or investment options.
The Bottom Line
Selecting a neobank is just like choosing a traditional bank account.
Review your needs and consider how you use an account (mainly online, prefer face-to-face, a little bit of both),
Learn about the services offered,
Ask how accounts are insured,
Determine how disputes are handled, and
Understand the fees.
To learn more about choosing a bank or for questions about budgeting and credit, visit our website. There you can contact a counselor, peruse our blog or participate in one of our online classes.