By Thomas Kostigen
Neobanks may sound like something straight out of The Matrix, but they are catching on in the here and now, especially among people who are looking for cheaper fees and have minimal financial services needs.
Neobanks are financial technology companies that operate online and via mobile apps, and they offer many of the same services as banks such as checking, savings and money transfer capabilities. But for a few exceptions, almost none of them are actually chartered banks. Instead, these companies form relationships with banking institutions to offer things like FDIC insurance for deposits and ATM access.
If neobanks pretty much just mirror traditional banks, why open a neobank account? For one, their online access and apps are considered better than a regular bank’s virtual offering. They typically offer online tools that are much more mobile app friendly and easier to operate on smartphones. Their fees are lower than the average bank fees, and they offer customers competitive interest rates for deposits. Another benefit is their account approval process is quicker and simpler. (They tend not to check banking histories.)
The proliferation of digital wallets and cashless payments, as well as auto debiting and the like have buttressed the acceptance of neobanks over online banks or web accessing a traditional bank’s services mostly because of the lower fees and, well, they aren’t banks.
There has been a big backlash against banking institutions, which are deemed by critics to cater more to wealthier people and discriminate against the more disenfranchised segments of society. Moreover, many banks have been caught in conflict of interest and other scandals that have caused consumers to take issue with them on a governance basis. As environmental, social and governance (ESG) managers place more capital with companies that abide by these protocols, neobanks may seem more attractive than actual banks.
To be sure, neobanks have their downsides, too. They may not offer as many financial services as a regular bank. Certificates of deposit or investments or loans are usually not offered by neobanks. They don’t readily accept cash or have the ability for wire transfers. And there have been complaints of poor customer service.
Still, neobanks are signing on millions of new customers and raking in millions of investment dollars from investors who see the future in digital banking.
According to FinTech Magazine, “For neobanks, the market is filled with both opportunity and competition. The latter has seen many businesses focus on greater innovation or customer-driven features such as better or no overdraft rates, minimal or no fees and other sign-up incentives, as they compete for the market.”
It notes that banks ought to take the competition seriously: “There is, it would appear, much for incumbent banks and financial organizations to be concerned about. While several are making inroads into the development of their own digital hubs or acquiring and entering partnerships with innovators, competition from neo and challenger banks will only increase.”
Neobanks are global. And many customers around the world see value in the lower banking fees and incentive offerings neobanks make (such as higher interest rates, no-fee banking cards, and the like).
Full-service financial services is something no neobank offers. So a good financial advisor can figure if a neobanking relationship is better for you than having a traditional banking relationship.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.