What Is a Neobank? (Plus: Why They’re So Popular)

Neobanks are a modern take on traditional banking methods. See how they work.
Last updated Sep 8, 2021 | By Ben Walker | Edited By Jess Ullrich
Man banking on smartphone

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Fintech (financial technology) has been changing how financial services are provided and used for many years now. But did you know that fintech “banks” exist as well? These fintech companies, or neobanks, are attempting to change the banking industry by making banking more convenient and accessible.

But is a neobank right for you? Here’s everything you need to know about neobanks, including their benefits and drawbacks, as well as a few popular examples you may have heard of.

In this article

What is a neobank?

A neobank is typically a fintech company that offers financial services you might expect from a traditional bank. These could include checking accounts, savings accounts, credit cards, and more.

Neobanks are sometimes referred to as “challenger banks” because they challenge the traditional banking industry. In some cases, traditional banks such as Chase and Citibank can trace their histories back for centuries. But neobanks are often startup companies that haven’t been around for many years and don’t tend to have in-person locations.

Rather, these digital banks gravitate toward offering online-only services, typically through web browsers and mobile apps. In comparison, many traditional financial institutions offer a hybrid business model with both in-person and online services. This hybrid model might seem more beneficial at first glance because it can appeal to a wide variety of individuals, but having in-person branches can also come with big overhead fees.

Neobanks typically don’t have many of the costs associated with in-person lenders, such as upkeep and maintenance costs, as well as hiring employees. Given this, the appeal of these new challenger banks is the offer of better rates, lower fees, and more convenience. In addition, focusing on online services could help these digital banks resonate with tech-savvy millennials and Gen-Zers.

What are some examples of neobanks?

Although you may not think you know of any neobanks, it’s possible you might have heard of a few. Many of the most popular neobanks, such as Current, Aspiration, and Varo, have millions of customers. Surprisingly, none of these companies are even 10 years old, which goes to show how successful and disruptive neobanks can be in a short period of time.

Here are some of the top neobanks:

Current

Current was founded in 2015 and offers banking services in partnership with Choice Financial Group and Metropolitan Commercial Bank. Current offers a personal checking account and debit card that can be accessed through its mobile app on iOS or Android devices.

Current offers loads of perks and benefits, including getting your direct deposit up to two days early and the opportunity to open teen checking accounts. Your deposits are FDIC-insured up to $250,000, and you also have minimal fees, such as fee-free overdrafts on up to $100, no minimum balance fees, no bank transfer fees, and fee-free ATM withdrawals from more than 40,000 ATMs in the Allpoint network. In addition, your debit card offers cash back from more than 14,000 participating merchants.

For more details, check out our Current review.

Current Benefits

  • No Overdraft Fees
  • Direct Deposit Up To Two Days Faster
  • No Minimum Balances or Hidden Fees
  • FDIC Insured Up To $250k

Aspiration

Aspiration was founded in 2013 and offers multiple financial services in partnership with banks like Coastal Community Bank and Beneficial State Bank. Cash deposits are FDIC-insured through partner banks.

This company’s flagship product, called the Aspiration Spend & Save Account, is a combination of two different accounts that form one cash management product. However, it’s possible to open an Aspiration Save Account, which is similar to a savings account, without opening an Aspiration Spend Account, which is similar to a checking account.

Aspiration also plans to offer the Aspiration Zero, a credit card that rewards you with cash back for going carbon neutral. This aligns with Aspiration’s general theme of protecting and preserving the climate. Aspiration services are available on its website and mobile app, which is available on iOS and Android devices.

For more details, check out our Aspiration review.

  • Earn cash back rewards - up to 10% - when you spend with your debit card
  • Get $150 bonus when you spend $1000 in the first 60 days
  • Up to 1.00% APY interest (up to 25 times higher than Big Banks)
  • Unlimited fee-free withdrawals at 55,000+ ATMs
  • Deposits are FDIC insured

Varo

Varo is slightly different from other neobanks on this list because it’s an actual bank and not a fintech company that partners with banks. However, that doesn’t mean it follows the vein of traditional banks. Varo focuses on online banking through its website and mobile app — available on iOS and Android devices — rather than brick-and-mortar locations.

Varo offers an online checking account that comes with a debit card and doesn’t have monthly fees or a minimum balance. There are also no foreign transaction fees, transfer fees, or ATM fees at more than 55,000 Allpoint ATMs. Other benefits include early direct deposit, contactless payments, FDIC.-insured bank deposits of up to $250,000.

For more details, check out our Varo review.

Varo Benefits

  • No monthly maintenance fees
  • Get paid up to two days early with direct deposit
  • Save more with a high-yield Varo savings account
  • Deposits are FDIC insured to at least $250,000

Pros of neobanks

Does it make sense to consider opening an account with a neobank? Here are some neobank benefits that could sway your decision:

  • Low fees: With low overhead costs due to the lack of physical branches, neobanks can typically afford to charge fewer fees for their services. This is in contrast to traditional banks that are known for charging a wide range of fees.
  • Competitive interest rates: In addition to low or no fees, neobanks might often offer more competitive rates than traditional banks. For example, the national rate for savings accounts is currently 0.06% (as of Sept. 3, 2021), but an Aspiration Save Account offers up to 1.00% annual percentage yield (APY) (as of Sept. 3, 2021) on the first $10,000 in your account. If you’re interested in how this APY stacks up, check out our list of the best savings accounts.
  • Convenience: Neobanks focus on providing services that can be accessed from anywhere, including your phone and other devices. Mobile apps are popular ways to access neobank accounts.
  • Focused services: Most neobanks don’t offer a wide range of services, which means the services they do offer are typically more refined. For example, Current offers only a checking account, but it comes with loads of benefits, such as cashback earning potential and no hidden fees.

Cons of neobanks

Neobanks might not be for everyone. Here are a few drawbacks to look out for:

  • Not a bank: Most of the time, neobanks aren’t actual banking institutions. This means they have to partner with banks to provide services, including bank accounts that offer FDIC insurance. This can feel a bit confusing for some people, especially if you’re used to being a customer at traditional banks.
  • No physical locations: Most neobanks don’t have physical locations. This isn’t an issue for many people, but it could be frustrating if you like doing your banking business in person or getting in-person customer support.
  • Fewer services: Neobanks are typically focused on a few, select digital banking services, which is often different from most traditional banks. You expect traditional banks to offer a wide variety of financial products and services, including loans, bank accounts, credit cards, and more. But with a neobank, you might get only a few choices.

FAQs

Are neobanks legit?

Neobanks are legitimate fintech companies that typically provide services you might see offered from a traditional bank, such as checking accounts or savings accounts. However, a neobank, despite its name, is not usually an actual bank. Generally, neobanks have partner banks that provide these services and offer consumers protection, such as FDIC insurance on certain accounts.

What's the best neobank?

The best neobank is the one that provides financial services that align with your goals and lifestyle. With many popular neobanks to choose from, such as Current, Aspiration, and Varo, it shouldn’t be hard to find one that makes sense for your financial situation.

If comparing neobanks, consider the different services they offer and what unique benefits they might have. For example, you might want faster direct deposit times, which one neobank may provide, whereas another doesn’t.

Is a neobank the same as a fintech company?

The best neobank is the one that provides financial services that align with your goals and lifestyle. With many popular neobanks to choose from, such as Current, Aspiration, and Varo, it shouldn’t be hard to find one that makes sense for your financial situation.

If comparing neobanks, consider the different services they offer and what unique benefits they might have. For example, you might want faster direct deposit times, which one neobank may provide, whereas another doesn’t.

Bottom line

Neobanks are trending, but it’s a trend that’s not likely to disappear. With millions of customers in a short span of years, neobanks are filling in the gaps where traditional banks have typically faltered — specifically with accessibility issues and unreasonable fees — and people are taking note.

However, this doesn’t mean a neobank would be the right fit for everyone. You might prefer going to your local bank or credit union branch and chatting with a banker in place of an online bank or navigating an app on your phone. For some, the convenience of technology isn’t convenient at all. But if you’re not averse to technology and don’t have anything concrete tying you to traditional banks, going with a neobank could be right for your personal finance needs.

For more details, check out our list of the best banks, which includes multiple neobanking options.

  • Earn cash back rewards - up to 10% - when you spend with your debit card
  • Get $150 bonus when you spend $1000 in the first 60 days
  • Up to 1.00% APY interest (up to 25 times higher than Big Banks)
  • Unlimited fee-free withdrawals at 55,000+ ATMs
  • Deposits are FDIC insured

Author Details

Ben Walker Ben Walker is a credit cards and travel writer at FinanceBuzz who loves helping others achieve their travel goals through financially-sound decisions. For nearly a decade, he has been using credit card points and miles for the sole purpose of traveling the world. Ben has been featured in The Washington Post, MSN, Debt.com, and Finder.com.