If you walk around any major city’s downtown or financial district, you’ll notice that the biggest buildings around tend to be bank offices. The skyline doesn’t tell the whole story, though: since 2009, a whole new genre of banks has been opting to leave physical infrastructure behind and go fully digital. You may have heard them described as “neobank” or “challenger banks,” which are basically identical except in terms of licenses (neobanks use other banks’ licenses, challenger banks get their own). Whatever you call them, though, this new generation of digital banks is giving new generations of digital natives something they want: a user-friendly, cheap, flexible way to manage money.
The anatomy of a neobank
If you’re a little confused about how exactly a neobank is different from a traditional bank, here’s a quick breakdown:
- Digital/mobile-only: Neobanks tend to be mobile-only—no brick-and-mortar branches whatsoever. Some might give you an interface you can access via a web browser, but most are exclusively available on iOS or Android mobile apps.
- No banking license: In the US, a banking license is required to get federal deposit insurance, and most countries have similar laws. Getting one isn’t cheap, quick, or easy, though, so most neobanks partner up with an already-licensed bank, offering separate financial services under the same regulatory umbrella. Some neobanks, termed “challenger banks,” are looking to get their own banking licenses.
- Cheap/low-fee products: Neobanks don’t need to maintain physical overhead and they don’t really advertise, so they can operate on pretty modest budgets. As a result, users often pay nothing to open the account and have very few fees to worry about.
- Simple: A big selling point for these banks (one of them actually is named “Simple”) is their user-friendly interface and intuitive financial management tools. Signing up is fast and easy, and the apps help you quickly track what your money is doing.
- Niche: While some neobanks aspire to be complete financial solutions for their users, most neobanks focus on a specific market need, like money management, saving, or foreign travel.
What neobanks have to offer
In their current form, you won’t find the average neobank offering much more than a checking account and maybe a savings account. That said, there are some that offer more, and they might be a glimpse into a future with a wider range of neobank products. Here are a few examples that sum up the current landscape fairly well.
- Revolut: As of 2018, Revolut (UK) has actually expanded, offering international money transfers, cryptocurrency purchases, travel insurance, and rewards cards in addition to basic checking and savings. Many of the extra services require users to pay a subscription fee, but the base products are free. None of the accounts are interest-bearing, though.
- Moven: This US neobank is a more typical example, coming with a single (no interest) account, a card, and some analytics tools to track your spending in the app. It doesn’t cost anything to open and use your account, but there are some fees here and there.
- Chime: This neobank’s free sign-up gets you a spending account, an optional savings account, and a debit card. There are no fees (even outside the US), except for out-of-network ATMs. Chime savings accounts are interest-bearing, but only get you .01% APY, which isn’t much.
- WeBank: This is a neobank in the sense that it’s an app-only operation, but since it’s part of China’s WeChat “super app,” it’s not exactly a scrappy start-up. Like many Asian neobanks (Kakaobank, MYbank, etc), it’s less about disruption and simplification and more about integration into existing systems.
- Banco Original: Latin American countries tend to have a low rate of bank account ownership, so neobanks have been able to grow very rapidly here, offering a lot more product diversity. Banco Original, from Brazil, has everything from basic checking and savings accounts to loans and investment services.
Pros and cons of a neobank
- Pro: They’re cheap—most neobanks have no fees, even internationally. Some even give you multi-currency accounts, refund ATM fees, offer rewards, et cetera.
- Con: They often pay little to no interest, even on savings accounts. Some neobanks (like Beam) are specifically designed to deliver higher-than-average interest rates, but in general, don’t expect much of an APY from a neobank.
- Pro: They’ve got great apps and user-friendly features. Banking and finance can often feel overwhelming, so the simple products and easily accessible services can feel quite relaxing.
- Con: Neobanks don’t have any branches, so if you like physical locations, these aren’t for you. If you don’t like remote support or you need more than just a checking account, neobanks probably will feel more confining than relaxing.
- Pro: Fast and easy to sign up for and use. If you’re comfortable with mobile technologies, it should only take you a few minutes to get an account and get going.
- Con: If you’re not comfortable with mobile technologies, you’ll probably find the experience frustrating.
- Pro: Neobanks are tech-savvy, flexible, and open to change. If you’re looking for a bank that will be willing to try cryptocurrencies, blockchains, AI, P2P lending, and all those other futuristic fintech trends, a neobank is your best bet.
- Con: They have the will, but possibly not the capital: innovation can be expensive and hard to get right, so neobanks will probably remain rather bare-bones for a while.
The future of neobanks
If you’ve done some looking around, you’ve probably noticed a pattern in most neobanks: since most of them are fairly new and not really profitable yet, their interest rates tend to range between “low” and “non-existent,” and they don’t have many complex products on offer. There’s a very real demand for transparent, cheap, simple-to-use accounts that fit into a modern lifestyle and a millennial mindset, though, so these disadvantages haven’t really slowed the neobanks down all that much.
Big banks are trying to jump into this market too, though, and if they can match the flexibility and convenience of a neobank with the reputation of an established bank, they could take a chunk out of the fledgling industry. Regardless of who runs them, though, this format of bank is probably here to stay, and they’ll probably change a few things about the way we manage money.