Since coming on the scene in the 2010s, neobanks have challenged the traditional banking model by offering consumers tech-savvy, digital-only bank accounts, often with low (or no) fees and higher-than-average interest rates. Neobanks have also been early adopters of popular perks like early access to paychecks and fee-free overdraft protection.
But neobanks technically aren’t banks (they are financial technology companies) — they don’t typically have a bank charter permitting them, for example, to hold deposits and lend money. As a result, they don’t offer the same range of financial services you’d find at a traditional bank. And if you’re looking for a branch for in-person service, you won’t find one. Here’s a closer look at how neobanks and traditional banks compare.
Key Points
• Neobanks are a type of fintech company that offer banking services digitally.
• Neobanks often offer lower fees and higher interest rates than traditional banks, but they lack physical branches and tend to lack a comprehensive range of services.
• Neobanks are not licensed banks but may partner with chartered banks to provide FDIC insurance on deposits.
• Neobanks are not the same as online banks which usually have a banking charter.
• Neobanks emphasize technological innovation, offering advanced digital tools, while traditional banks may be slower to adopt new technologies.
What Are Neobanks?
Neobanks are financial technology (fintech) companies that offer banking services through mobile apps and online platforms. They operate entirely online and, due to reduced overhead, are generally able to offer consumers benefits like lower fees and higher interest rates on deposits.
Though they are called banks, neobanks do not have the required charters to meet the legal definition of a bank. Instead, they partner with chartered financial institutions to offer bank accounts, such as high-yield savings accounts and online checking accounts. Some also offer payment services, credit cards, and other financial services.
While neobanks offer online-only banking services, they are different from online banks. Generally, online banks have a bank charter and provide a broader range of services to their customers, including loans and investing services.
How Do Neobanks Work?
Neobanks operate by using technology to deliver banking services more efficiently and at a lower cost than traditional banks. They often enhance these services with digital features, such as real-time balance updates, spending trackers, and budgeting tools to help customers manage their finances effectively.
You can typically set up an account with a neobank by downloading an app, providing some personal information, and going through identity verification processes. Once your account is open, you manage it entirely online. Customer support is typically provided 24/7 via phone, online chat, in-app messaging, and email. Many neobanks partner with nationwide ATM networks to offer customers fee-free access to cash.
Though neobanks typically aren’t chartered, they will often partner with traditional banks to use their banking licenses, allowing them to offer insured deposit accounts and other regulated banking services. To make sure your deposits are insured by the Federal Deposit Insurance Corp. (FDIC), you’ll want to look for the FDIC logo. Keep in mind, however, that any funds you deposit in a neobank may not be protected while they are in transit to the insured bank account. The FDIC does not cover the failure or closing of a non-bank company or any money that has not been deposited in an FDIC-insured bank.
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What Are Traditional Banks?
Traditional banks are established financial institutions with physical branch networks that offer a wide range of banking services. These services generally include personal and business accounts, auto loans, mortgages, credit cards, and investment products. Traditional banks offer FDIC insurance on accounts, so you can’t lose your money (up to insured limits) even if the bank were to go out of business.
Traditional banks cater to a wide range of customers, from individuals to large corporations. They often have long-standing reputations and a history of customer trust, which makes them a popular choice for many consumers who prefer in-person banking experiences or require access to specialized financial services.
How Do Traditional Banks Work?
Traditional banks operate through a network of physical branches, ATMs, and online banking platforms. Customers can visit a branch for services like opening accounts, depositing checks, applying for loans, or speaking with a financial advisor. Traditional banks also offer online and mobile banking.
In addition to providing basic banking services, traditional banks offer specialized services like wealth management, foreign currency exchange, and business loans. Banks in the U.S. are regulated on either the federal or state level, depending on how they are chartered. Some are regulated by both.
Recommended: Traditional vs. Online Banks
Neobanks vs. Traditional Banks
| Neobanks | Traditional Banks | |
|---|---|---|
| Physical branches | No physical branches (online only) | Physical branches and ATMs |
| Fees/rates | Lower or no fees for basic services; higher rates on deposits | Fees for services like account maintenance; lower rates on deposits |
| Products/Services | Limited services; may not offer loans/mortgages | Offers comprehensive banking services |
| Customer Service | Virtual support only (chat, email, phone) | In-person, phone, and online support |
| Tech Features | Advanced technology, innovative tools | Slower adoption of new technologies |
| FDIC Insurance | Available if partnered with an FDIC-insured bank | FDIC insured |
| Target Audience | Tech-savvy users, younger demographics | Broader audience including businesses |
How Neobanks and Traditional Banks Are Different
Neobanks and traditional banks differ in several key ways, including their business models, services, and fee structures. Here are some of the main differences:
• Physical presence: Neobanks operate exclusively online with no physical branches, while traditional banks have physical branches where customers can conduct transactions in person.
• Fees/rates: Due to lower overhead, neobanks may often offer no- or lower-fee banking services and more competitive interest rates compared to traditional banks.
• Range of services: Traditional banks generally provide a wider range of offerings, including business accounts, loans, mortgages, and investment products. Neobanks tend to focus on basic banking services, such as online checking accounts, savings accounts, payment services, and secured credit cards.
• Customer service: Neobanks typically offer customer support through digital channels like chatbots and email, as well as by phone. Traditional banks offer the option of in-person customer service, which can be an advantage for those who prefer face-to-face interactions.
• FDIC insurance: While both types of institutions may offer FDIC insurance on deposits (up to the legal limit), neobanks do not provide this protection directly.
• Technological innovation: Neobanks often prioritize user experience and incorporate the latest fintech innovations, such as budgeting tools, spending analysis, and instant transfers. Traditional banks may lag behind in these areas due to legacy systems.
How Neobanks and Traditional Banks Are Similar
Despite their differences, neobanks and traditional banks share some common features:
• Account types: Both neobanks and traditional banks offer basic banking services like checking and savings accounts.
• Online and mobile banking: While neobanks operate solely online, traditional banks also offer online and mobile banking options for customers.
• Security: Both neobanks and traditional banks typically offer state-of-the-art security technologies, including encryption, two-factor authentication, and biometrics (such as fingerprint or facial recognition).
Note: Online banks combine some of the features of traditional banks and neobanks. Like traditional banks, they may be chartered and FDIC-insured banking institutions. Similar to neobanks, they may offer tech-forward online-only banking, low/no fees, and competitive rates on deposits.
Pros and Cons of Traditional Banking for Consumers
Traditional banking offers both advantages and disadvantages. Here are some to consider.
Pros
• Wide range of services: Traditional banks offer comprehensive financial services, including home and auto loans, credit cards, investment management services, commercial banking, and safe deposit boxes.
• Physical branch access: Customers can visit branches for in-person assistance, which can make it easier to handle complex transactions or receive personalized advice. Branch access also offers a convenient way to make cash deposits.
• Reputation and trust: Established banks have built customer trust over decades, providing a sense of security.
• FDIC insurance: Federally insured banks protect your deposits up to $250,000 per depositor.
Cons
• High fees: Traditional banks often charge fees for account maintenance, overdrafts, and other services.
• Low returns: Traditional banks typically pay lower yields on savings and other deposit products compared to neobanks and online banks.
• Limited technological innovation: Many traditional banks can be slow to adapt to new digital technology and may lack advanced features compared to neobanks.
• Inconvenience of physical visits: While traditional banks offer online banking services, there may still be times when you need to visit a branch in person, which can be time consuming.
Pros and Cons of Neobanking for Consumers
Neobanking also has both benefits and drawbacks. Here’s a closer look.
Pros
• Lower fees: Neobanks typically offer fee-free accounts or lower fees compared to traditional banks.
• Higher APYs: Neobanks typically pay more interest on deposits compared to traditional banks.
• User-friendly digital experience: Advanced mobile apps and digital tools provide customers with an easy, intuitive way to manage finances.
• Convenience: Fully online banking can be a major time-saver, allowing you to avoid waiting on lines to see a teller. Many neobanks offer round-the-clock customer service.
Cons
• Limited product range: Neobanks may not offer a full range of financial services, such as loans, mortgages, or investment products.
• No physical branches: The lack of in-person support can be a disadvantage for customers who prefer face-to-face interactions.
• Challenges with cash deposits: Unless the neobank is linked to ATMs that accept cash, you won’t be able to deposit cash into your account.
• Not FDIC-insured: Neobanks are typically not chartered banks and rely on partnerships with FDIC-insured banks.
The Takeaway
Neobanks and traditional banks both offer banking services, and each has benefits and drawbacks. Neobanks can work well for those seeking a low-cost, technology-driven banking experience, while traditional banks offer more comprehensive services and the convenience of physical branches.
The right choice for you will depend on your personal preferences, financial needs, and comfort with digital banking.
SoFi holds a national banking charter, an important point to consider as you think about your banking options.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How are neobanks and traditional banks different?
Neobanks are financial technology firms that offer digital banking services through apps and online platforms. They operate without physical branches and focus on low fees, streamlined services, and innovative financial tools. Neobanks are not technically banks, however, and must partner with chartered banks to offer FDIC-insured accounts.
Traditional banks have physical branches, providing in-person services alongside online banking. They are fully licensed, offer a broader range of financial products than neobanks, but tend to charge higher fees and offer lower yields on deposits.
What are the downsides of neobanks?
One potential downside of neobanks is that they’re online-only. As a result, there are no branches you can visit for in-person transactions or assistance. Neobanks also have a narrower range of financial products and services compared to traditional banks. In addition, neobanks technically aren’t banks and must partner with chartered and licensed institutions to offer Federal Deposit Insurance Corporation (FDIC) insurance.
What are some advantages of neobanks?
Neobanks offer a number of advantages, including competitive interest rates on deposits, low (or no) account fees, and 24/7 customer service. Many also offer in-app perks like real-time spending notifications and user-friendly budgeting tools.
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