What Is a Neobank? 10 Things You Need to Know

Not long ago, I visited the Clay County Saving Association in Liberty, Missouri. Now a historical site, in 1866, it was the first bank robbed by Jesse James and his gang. Having written about Jesse James, I was less impressed by the 18-year-old's exploits and more interested in how little banking has changed over the past 150 years or so.

Other than the lack of air conditioning, the lobby looked like any small-town bank lobby where you might go to open a savings or checking account. A bank employee stood behind a counter to help customers, and money was stored in a nearby safe.

Then came online-only banks, followed by neobanks with names like Acorns, Chime, Axos Bank, SoFi®, M1 Finance, and Varo Bank. Here are 10 facts worth knowing about neobanks.

1. Online-only banks came first

It wasn't until the late 20th century that the face of banking began to change with the birth of the online-only bank. Gone were the days of standing in a long line to speak with a teller or rushing to get to the bank before it closed.

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Instead, customers had access to their accounts 24 hours a day and could conduct business at any time that was convenient for them. Online-only banks offered options to customers who may not have the time to get into their cars and drive to their local bank to make a deposit or apply for a loan.

2. Neobanks are the brainchild of financial technology companies

The term "neobank" refers to banking capabilities offered by financial technology (fintech) companies. Also known as a digital bank or online-only bank, neobanks provide 100% of their banking services exclusively through digital platforms, like websites and mobile apps.

3. Neobanks have no brick-and-mortar locations

While many traditional banks and credit unions offer online services, neobanks offer no brick-and-mortar locations to visit. If you like to walk into your bank's lobby and speak with someone face to face, a neobank may not be a good fit for you, and you might want to stick with a more traditional bank or credit union.

4. Neobanks give you a streamlined experience

Although your local bank may offer everything from checking accounts to safety deposit boxes, neobank services typically include the basics, such as checking and savings accounts. Some neobanks feel more like a traditional bank by offering payment and money transfer services, lending products, and financial management tools. It's important to know precisely what a neobank offers before switching to one.

5. Many neobanks aren't actually banks at all

Chartered by the Office of the Comptroller of Currency, neobanks must partner with chartered banks to do two things: Deliver a wide range of products and services and ensure that deposits are covered by the Federal Deposit Insurance Corporation (FDIC).

In other words, some neobanks are financial technology companies that offer bank-like services through a true chartered bank. It's not something you need to worry about, though. As mentioned, as long as the neobank is partnered with a chartered bank, your deposits are covered by the FDIC.

6. Neobanks offer lower fees

Because they don't carry the costs of maintaining brick-and-mortar locations, neobanks can offer accounts with lower fees and more competitive interest rates than traditional banks and credit unions. That can save you money when you borrow and pay a higher-than-average interest rate on your deposits.

7. Neobanks count on swipe fees

Neobanks commonly make the bulk of their money through interchange fees, also known as swipe fees. Each time you swipe the credit card or debit card issued by a neobank, the retailers give a small portion to the neobank.

8. Some neobanks offer sweet perks

Not only are neobanks convenient, but they often make payments available to customers early. For example, some neobanks allow customers access to their payroll deposits, government benefits, pensions, and tax refunds up to 48 hours early.

9. There are drawbacks

Because few things in this world are perfect, there are several issues to consider if you're considering the jump to a neobank.

You may not be guaranteed FDIC protection

If a neobank has not partnered with a chartered bank, the U.S. government may not insure your money. The first thing to look for as you shop for a neobank is one with FDIC protection, insuring your money up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.

You may experience limited customer service

Since there is no physical branch to visit, there is no in-person customer service available. This can be especially frustrating if you have a serious question concerning your account.

There are likely to be fewer products offered

One way neobanks streamline their services and keep their fees low is by limiting the number of services they provide. For example, you may not find a mortgage through a neobank or have access to an investment account.

10. Neobanking is growing

According to Precedence Research, the global neobanking market was valued at $96.20 billion in 2023. By 2033, it's expected to reach around $3,799.25 billion.

It appears that neobanks are the way of the future -- at least until the next major technological breakthrough emerges in the world of banking.