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What Are Neobanks And Should I Use One?

Popping up on the financial scene over five years ago, neobanks are a new type of digital banks: they don’t have physical branches. They exist in the cyber world of mobile devices, laptops and desktop computers.

What Do Neobanks Do?

Neobanks provide limited online banking services through checking and savings accounts, prepaid cards, and debit cards. They also serve customers who have a separate account with a major bank. Neobanks connect those customers with a user-friendly interface, which some smaller local banks don’t offer online.

Neobanks, then, sit on a totally digital and mobile platform—no physical branches—but the neobanking digital system relies on a completely new interface. That interface has departed from the cumbersome technological challenges big banks face as they adapt a front-end experience for their customers.

Are Neobanks Protected by the FDIC?

As previously mentioned, neobanks provide a limited combination of checking, savings, and debit card services, but they typically are not banks in the traditional sense. Most do not have charters from federal and state regulators and are not covered by the Federal Deposit Insurance Corporation. 

However, neobanks often partner with specialty banks, who have all the certifications and insurance. So, neobanks can provide prepaid credit cards as an alternative to the more conventional debit card. The bottom line, then, is that users get a slicker experience while keeping their money protected in a bank.

What Neobanks are Protected by the FDIC?

There are neobanks who are chartered and whose funds are guaranteed by the FDIC. One big player is GoBank, a cyber service of Green Dot Bank. As other startups head towards protected neobanking, they will face the complicated and expensive tasks of chartering and raising the capital they have to keep on hand. Their goal will be to cut out the middleman banks to expand the range of checking and savings services they offer.  

6 Top Advantages of Neobanks

Neobanks differ from regular banking services by offering:

  • Lower costs—no monthly charges, no charges for withdrawal, and low reloading fees
  • Large ATM networks with no charges for withdrawals within their network
  • Reloadable debit cards, which prevent overdrafts; so, no overdraft charges
  • A simpler and more user-friendly mobile experience, as opposed to the complicated big-bank front ends shrunk to fit mobile devices
  • Money and cost tracking tools that lead to intuitive budgeting and purchasing decisions (Want to buy that snazzy electronic gizmo? Maybe it’s a budget buster.)
  • Balance statements that are real-time and reflect the exact amount in the user’s account

Should You Use a Neobank?

If you are among the nearly 30 percent of consumers in the U.S. who don’t go to a bank or credit union for whatever reason, you are the audience targeted by neobanks. You are using prepaid cards and check-cashing services. You rely on consumer credit companies or do not patronize any financial institution. In short, you may be part of the younger generation that has for a variety of reasons felt disenfranchised by the current banking system.

Younger adults appreciate the neobanking tools that help users understand their spending. Many younger customers struggle with overdrafts, and neobanks do not allow purchases from a zero-balance debit card.

When Neobanks Are Not the Answer

On the other hand, if you need eye-to-eye services from a person at a branch bank, a neobank won’t help. Also, neobanks won’t give you the financial services you need as you mature. By their nature, they are not designed to evolve. 

So as disrupters (or challengers) neobanks have their eyes on the vast U.S. market. Look for traditional U.S. banks to tap into the neobanking products and offer sub-brands for tech-savvy, younger customers.