What is a Neobank? Examples, pros & cons + an alternative!

Neobanks are also known as challenger banks - they’re modern alternatives to traditional banks.

Neobanks typically have no physical branches, but offer a broad range of banking services including bank accounts, personal loans, debit cards and credit cards. Many neobanks offer FDIC insurance just like traditional financial institutions, meaning they’re safe places to access the banking products and services you need.

With lower overheads compared to traditional banks, you’ll also often get cheaper fees and better interest rates.

This guide walks through all you need to know about challenger banks, covering pros, cons and some good examples to check out.

We’ll also introduce Wise. Sign up for a Wise multi-currency account and try the world’s most international account for free. Hold 50 currency balances, get local bank details to receive payments in a range of currencies, set up direct debits, and get a debit card for any currency. Plus, send money abroad and save up to 7x compared to other providers.

📝 Table of contents
How do neobanks work? Pros & cons of Neobanks Popular Neobanks Neobanks vs. Online Banks Should you switch to a Neobank?

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How do Neobanks work?

Neobanks are financial technology companies which offer a range of financial services.

They’ll usually work in partnership with a regular bank that’s part of the Federal Deposit Insurance Corp. (FDIC), which means your money is kept just as safe as it would be in a traditional bank.

Neobanks usually offer their services through a website or mobile app - although you’ll often also be able to get customer service support on the phone, too.

💡 Some neobanks have niche services - specializing in loans or international payments, for example. Others have a broader range of options including tools for budgeting, investing or financial education.

Pros & cons of Neobanks

Neobanks can offer a flexible way to access some or all of the financial products and services you need. However, like anything, there are upsides and downsides. Here are some to consider.

Pros

• Neobank fees are often lower than traditional banks
• 24/7 service online and through the mobile app
• Sign up and manage your account digitally - no waiting in line in a physical branch
• Your money is just as safe as it would be in a regular bank

Cons

• Customer service is via chat, email or phone - no face to face option available
• Not all neobanks offer the same range of services you might expect from a traditional bank
• Neobanks are a newer way of managing money without the track history of regular banks

Popular Neobanks

Let’s look at some of the most popular Neobanks in the US and around the world.

Varo

Varo¹ offers a checking account, savings account - and will soon start offering Varo Believe² which is a card that allows people with low credit scores to build credit more easily. With Varo you can also get an instant cash advance of up to 100 USD, for up to a month. You’ll have to pay a fee for amounts over 20 USD, but there’s no interest charge as long as it’s all repaid within 30 days³. Here are some other key points about Varo:

• No credit check
• No minimum balance
• No monthly fees
• No overdraft fees
• Use your ATM card in 55,000+ ATMs for free

Interested? Check out a full Varo bank review here.

N26

You can sign up for an N26⁴ account in just minutes, and you’ll get a linked card for payments and ATM withdrawals. N26 accounts also offer tools to help you save, cashback on card purchases, and smart tools to help you analyze your spending and build a better budget. N26 cards are compatible with Google Pay and Apple Pay for easy mobile payments. Here are some of the features of N26 accounts:

• No minimum balance
• No monthly fees
• No overdraft fees
• No foreign transaction fees
• Use your ATM card in 55,000+ ATMs for free, and get 2 free out-of-network withdrawals a month

Get your full review of N26 right here

Chime

Chime⁵ has spending accounts, saving accounts - and the credit builder account⁶, which comes with ways to help you grow your credit history and score safely. You can choose to save more quickly by rounding up purchase costs and having the extra added into your savings account, or you can choose to automatically have a percentage of your salary transferred into your savings. Your N26 card is accepted anywhere you see the Visa sign, and cards are compatible with Google Pay and Apple Pay for easy mobile payments. Check out these top features of Chime accounts:

• No minimum balance
• No monthly fees
• No overdraft fees
• Get paid early with direct deposit
• Use your ATM card in 60,000+ ATMs for free⁷

To learn more, get the full guide to Chime here.

Monzo

Monzo isn’t yet available in the US, but you can sign up to join the waitlist to be among the first to access an account. UK based Monzo is actually one of the older challenger banks, having been founded in 2015. There are now over 4 million Monzo account holders, with products available including checking accounts, joint accounts, youth accounts, savings accounts, loans and overdrafts. Check out the product development page on the Monzo US website⁸ to learn more about signing up - here are some of the features promised for the release of the US product:

• No minimum balance
• No monthly fees
• No overdraft fees
• No foreign transaction fees or exchange rate markup
• Use your ATM card in 38,000+ ATMs for free

Neobanks vs. Online Banks

It’s worth noting that neobanks aren’t necessarily the same as online banks. In fact, some aren’t technically banks at all - they’re financial technology companies.

The difference between a neobank and an online bank is largely about how they access FDIC insurance, and who the parent company is. Many traditional banks also have online services which may include digital only bank accounts, or an entire different bank division which operates online only. This type of online bank will likely be FDIC insured in it’s own right.

Neobanks, on the other hand, access FDIC cover for their clients by working in partnership with a regular bank which is part of the scheme. The end effect for the customer is the same - your money is insured to 250,000 USD in the event that the bank or neobank gets into trouble.

Should you switch to a Neobank?

Neobanks are a great option for customers looking for simple account services, online and mobile access and low fees.

You could switch entirely to a neobank or open a specific account to access some of the benefits we’ve set out above - as accounts typically have no monthly fees or fall-below costs, there’s likely no upfront investment to get started.

💡 Neobanks are probably not for you if you prefer face to face service or if you need more complex or sophisticated financial products. Do your research carefully to check your preferred neobank offers all you need.

Besides, there are also other alternatives, and now we'll take a look at one specific example.

An alternative: Wise - The world’s most international account

If you travel often or love to shop online with international retailers, you could benefit from the Wise multi-currency account - a great alternative to neobanks. Add money to your balance in dollars and then switch to whatever currency you need. You’ll be able to spend any currency you hold for free using your linked card - and currency conversion uses the real mid-market exchange rate with just a low transparent fee.

• Cheap, easy and instant to convert currencies. Convert currencies in seconds, with the mid-market rate and low cost conversion fees
• Fast and simple ways to save when you send money: Send to over 60 countries, 7x cheaper than other providers.
• Convenience of one account for all your international banking needs - 50+ currency balances, local bank details for major countries and currencies, and option to set up direct debits
• Get your linked debit card to pay on and offline in any currency
• Easy to open account: Quick easy online setup, no appointment and no wait time

Open a free Wise account in minutes

The emergence of neobanks gives customers even more choice when it comes to managing money. If you’re put off by traditional bank fees, or want the convenience of accessing your funds 24/7 using your smartphone, a neobank might be right for you. Check out a range of options to make sure you get the very best deal for your needs - and don’t forget, Wise as a smart and simple way to manage your money across currencies.

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Sources:

1]Varo Bank - Main Website
2]Varo Bank: Credit Builder
3]Varo Money: Cash Advance
4]N26 - Main Webiste
5]Chime - Main Website
6]Chime - Credit Builder
7]Chime - No Fees
8]Monzo - Main Website

All sources checked on 10 August 2021