What Is A Neobank?

A neobank is any bank that operates online without a network of physical branches. For this reason, neobanks are also known as online banks, virtual banks, or digital banks.
A neobank does not use technology to attract customers per se. Nevertheless, the technology appeals to savvier consumers who prefer to do their banking in a mobile app. Most neobanks partner with traditional banks to insure customer funds and do not tend to offer credit as a general rule.
Popular neobanks in the United States include Chime, Varo Bank, and MoneyLion. All three sell various products designed to help consumers improve their financial literacy and reduce fees.

Introduction

A neobank is any bank that operates online without a network of physical branches. For this reason, neobanks are also known as online banks, virtual banks, or digital banks.

The earliest neobanks emerged from the ashes of the 2008 Global Financial Crisis as consumer confidence in the banking sector plummeted to historically low levels. Neobanks capitalized on the resentment felt toward traditional banks by offering a seamless online experience under a no or low-fee service model.

Today, neobanks are transforming the sector in a way not dissimilar to Airbnb in accommodation and Uber in personal transportation. Recent data shows that 6% of all American adults have a digital bank account, which equates to around 15.56 million people. This number is expected to increase to just over 39 million by 2025.

Common characteristics of a neobank

In fundamental terms, a neobank is a fintech company offering a banking service to tech-savvy consumers who prefer to do their banking in a mobile app.

It should also be noted that neobanks do not use technology to attract customers per se. Instead, the technology is used to streamline processes, reduce fees, and then pass those savings on to customers.

The vast majority of neobanks also differ from traditional banks in the following ways:

They are not chartered as banks. In other words, their operations are not governed by bank-specific state or federal regulations. Having said that, neobanks do partner with traditional banks to insure customer deposits.
Neobanks do not extend traditional forms of credit to consumers such as an account overdraft. Their products may be more limited as a result and be restricted to checking and savings accounts, money transfer and payment services, and educative tools that increase financial literacy such as budget or investment trackers.
They use everything from big data to artificial intelligence to help consumers manage their money. This may include alerting the customer to unused subscriptions or unusually high bills. Some neobanks even help their users switch to cheaper electricity providers.

Popular neobanks

Lastly, let’s take a look at some of the most popular neobanks on the market today:

Chime

The most popular in the United States with over 13 million customers and a valuation of $25 billion. True to type, Chime eliminates many of the fees associated with traditional banks and also provides consumers with an opportunity to build their credit.

Varo Bank

Varo was founded as a neobank but also received a full-service national charter in July 2020 to allow it to operate as a traditional bank. Varo boasts no minimum balance, no monthly fees, no credit checks for new customers, no overdraft fees, and a network of over 55,000 fee-free ATMs.

MoneyLion

This neobank was founded in 2013 to serve more than 70% of American consumers who have less than $2,000 in savings and are living from paycheque to paycheque. The platform has a strong focus on helping its community of customers gain financial literacy.