FINANCIAL

5 Questions To Ask Before Trying A Neobank

By RobertBarba
Bankrate.com

WWR Article Summary (tl;dr) The most common definition of a neobank is an institution that provides some combination of checking accounts, savings accounts and debit cards via digital channels, primarily mobile, without any physical bank branches.

Bankrate.com

The explosion of mobile technology and people’s distrust for traditional banks following the economic crisis make this a fertile time for new financial firms.

Enter the neobanks, a collection of startups that make it easier for you to manage your money in this highly mobile age.

“Everything from the account-opening process to the customer service experience is unlike traditional banking, or at least not like the banking experience that has turned so many people off,” says JP Nicols, managing director of Fintech Forge, a banking innovation consultancy.

The first wave of neobanks came on the scene in the early 2010s, and they have seen varying degrees of success.

Today the landscape is shifting, with some neobanks acting more and more like traditional banks, even as traditional banks try to compete with the neobanks by launching stand-alone brands. In addition, fintech firms that operate in other sectors, primarily lending, are getting to the deposits business.

Below you’ll find answers to the five most frequently asked questions about neobanks.

What is a neobank? Is my money safe with one?
The most common definition of a neobank is an institution that provides some combination of checking accounts, savings accounts and debit cards via digital channels, primarily mobile, without any physical bank branches.

Neobank apps tend to be slick and simple, designed to help you better understand, and hopefully improve, your saving and spending habits.

It is important to know that neobanks are usually not banks: They do not have charters from the Office of the Comptroller of the Currency or state regulators, and they do not have coverage from Federal Deposit Insurance Corp. (FDIC).

Instead, they work with specialty banks that are chartered to gain FDIC coverage for deposits created at neobanks, and provide prepaid cards in place of conventional debit cards. In other words, they have gussied up the user experience, but your money is still in a bank. That’s a good thing, because it means your money is protected.

There are notable exceptions. For instance, GoBank is a brand of Green Dot Bank. Also, companies like Social Finance, or SoFi as it is commonly called, is launching SoFi Money and is plans to pursue a banking charter, as does Varo Money.

More will likely go this route to cut out the middleman and offer a broader range of checking and savings accounts. However, getting a charter is tough work and is rather expensive, as regulators expect chartered banks to maintain a significant amount of capital on hand.

In the meantime, make sure you see the FDIC logo before signing up.

How else do neobanks differ from traditional banks?

Jim Marous, co-publisher of The Financial Brand, says neobanks stand out because of these features:
– Low cost structure: no monthly fees, no withdrawal costs and low reloading fees.
– Large ATM networks with no fees.
– No overdraft fees because the checking products are prepaid, reloadable debit cards.
– A simple and engaging mobile experience, unlike banking on a phone with a traditional bank.
– Intuitive budgeting and money-tracking tools that allow you to determine whether or not you should buy an item.
– Real-time balances: The balance on your smartphone is the exact amount of money you have available.

Some neobanks also provide ways to use retail facilities for making deposits, reloading their accounts or paying bills. GoBank customers can put cash in their account at Wal-Mart or 7-Eleven. Neobanks like Chime work with Green Dot to make deposits possible at these locations, too.

Last year, Chase and Wells Fargo both announced that they would begin testing standalone brands that would function like neobanks but would include branch access, too.

The other main difference is the breadth of products they offer. Neobanks have been purely deposit focused, but experts say many are looking to expand beyond deposits as they evolve from startups backed by venture capitalists to viable and profitable companies.

This expansion is often referred to as the rebundling of banking. Neobanks wanted to disrupt the deposit side of banking, while fintech lenders like SoFi or Lending Club looked to change the lending business. They unbundled banking. But loans and deposits tend to go together, as do payments and wealth management, so these companies are now starting to put the pieces back together.

Who uses neobanks?
The initial audience targeted by neobanks is the almost 30 percent of consumers in the U.S. who don’t use the traditional banking system for a variety of reasons, Marous says.

“These people had been using prepaid cards, check-cashing services, consumer credit companies or no financial institution at all,” Marous says. “In some cases, the demographic favors young people, but many of the neobank customers have been disenfranchised by the current banking system for various reasons.”

Neobanks tend to do a good job giving users tools to understand their spending. Those features resonate particularly well with young adults. Indeed, recent data from Business Insider Intelligence found that 52 percent of those between the ages of 18 and 22 say a feature that would allow them to compare their spending to their peers would be important or extremely important in choosing a bank.

Also, if you’re struggling with overdrafts, a neobank is a good option because they typically don’t allow them. If you don’t have the money to cover a purchase, your card is declined.

What are the disadvantages of a neobank?
If you need bank branch access, a neobank won’t be a good fit. If you’re paid in cash, a neobank isn’t likely your first choice, either. While there are options to deposit cash via Green Dot sites, as mentioned above, sometimes the sites charge a fee.

Also, if you’re looking for a bank that will grow with you as your needs evolve, a neobank might not be the best choice. That is not to say neobanks themselves aren’t evolving, and this criticism might not be true within a few years. When you’re ready to buy a house, your neobank might be in the mortgage business, or when you inherit some money they might a wealth management product. However, they might not.

What is the future of neobanks?
As detailed earlier, existing neobanks will likely expand into new product lines and look to become chartered banking institutions. Traditional banks will look likely for ways to tap this market with new sub-brands like Wells Fargo’s Greenhouse or Chase’s Finn. And fintech players in other lines will look to get into the deposit business.

The other variable is the global landscape. Neobanks are known as “challenger banks” in Europe, and several of them have their eyes set on the U.S. market but are looking for more clarity on how they might navigate the American banking system, which is fairly complex given the national chartering structure, the state chartering structure and the laws surrounding delivering services without branches. As it stands now, many of those hurdles are enough to keep many on the other side of the Atlantic.

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