What Is a Neobank and How Does It Work?

Neobanks are a new form of banking which eschew brick-and-mortar bank buildings for online-only services. The word neo derives from the Greek and means ‘new’ when translated into English. When prefixed to the word bank, it implies a new form of banking. While many of the same fundamental banking principals are the same, neobanks can only exist to relatively recent technological advances.

The management, products and business practices which neobanks carry out are done so exclusively using the Internet. Different countries have their own neobank businesses, often providing alternatives which meet the specific needs of a given citizenship. Some neobanks are transnational, but some of the most popular operating in the US include the following:

• Alliant Credit Union
• Current
• Acorns
• Primis Bank
• Revolut
• Quontic Bank

These new banking formats claim to have a more transparent approach than traditional banks. They have modern management applications and products which are easily accesible by the digitally literate. Anyone with sufficient knowledge to be fluent in the Internet and its basic practices can easily enjoy the advantages of being a client of a neobank.

The essential function of banking is to store and transfer money. Neobanks carry out the same basic functions, but they do it in a different way. They also offer some options of how money can be stored or transferred which traditional banks do not.

Not all neobanks will offer the same banking services. Some have the same essential functionality as most traditional banks, with the exception of a branch in which to do business. Others will have a focus on alternative forms of currency such as cryptocurrency. They may have a wallet to store crypto or trading systems built in to their applications.

The most important thing for customers is to ensure you are well informed about any potential neobank you wish to join. This will require some research on your own part by looking at third-party reviews and to better ensure reliability. We also recommend you keep a traditional bank account to carry out certain transactions such as cash deposits or invoicing with certain companies. Not all services will allow you to use a neobank account.

All services offered by a neobank are covered by law. This means they should have the same basic reliability as a traditional bank. However, you must take into account an important aspect when choosing a specific neobank. If you are looking for a fully functional bank and not an electronic money financial institution, you will need to check that the neobank that interests you the most has this license.

Transparency is one of the great hallmarks of a neobank, so you won't have any difficulty in finding out which ones act as licensed banking entities and which neobanks operate only as electronic money entities. It's important to keep this in mind. Although the customer always has certain guarantees, neobanks are also governed by different rules.

Take a look at our related article to find out if cryptocurrency is profitable in Spain.

Neobanks have very attractive advantages for those people who move most of their money in a completely digital way. They usually offer more facilities to make movements in the blockchain world and have fewer barriers to operate in the cryptocurrency market. In addition, they often offer lower rates compared to traditional banking. With this in mind, we look at some of the pros of neobanks:

• Cost efficiency: as neobanks do not operate brick-and-mortar branches, they can often save money in terms of operational costs. These savings are passed on to the customer.
• Interest rates: these savings mean they can offer higher interest rates on savings accounts and lower rates on loans.
• Transfers: have extensive coverage for international transfers and allow payments to be made in different currencies at no additional cost.
• Offers: their acquisition campaigns are usually quite attractive. Especially since they are in their infancy, neobanking needs to prove its value to the customer. For this reason, they often offer very good rates, especially when it comes to international transfers.
• Accessibility: since they are designed to be operated exclusively online, they are intuitive to use and have all the features you need at your fingertips.
• Special services: many neobanks integrate cryptocurrency trading and management options which are not available with traditional banks.

In particular, many younger people are interested in the relative freedom offered by neobanks. The failures and financial crises experienced with certain traditional banking services means they feel ripped off. In addition to the above advantages, there is also an intangible desire for many users to look for a fresh alternative.

We have looked at the pros of neobanks, now let's investigate the cons. Some of these disadvantages are the flipside of the coin to the pros. They include:

• No tellers: while 100% online commerce is a plus for many of us, not being able to speak to a banker directly can be frustrating for many of us. This is exacerbated when the information online is not easily accessible or if we are unsure of how this type of banking works. It can be very frustrating to rely on emails or chatbots, especially if you have a complex banking issue.
• No ATMs: ATM transactions are also not possible at most neobanks. To make deposits with physical money, you must make the deposit into a traditional account. From said account, you can then make a transfer to the account of the neobank in question.
• Reliance on technology: the fully digital nature of neobanks makes them vulnerable to apps not working or even cyberattacks. This is not ideal for individuals without reliable internet access or familiarity with technology.
• Limited services: while many neobanks offer services that traditional banks do not, they are also often limited by what they can provide. The standardized nature of traditional banks means they can help in areas neobanks cannot. For example, getting a mortgage may be impossible with most neobanks. Even some basic services such as direct debits for invoices may not yet be accepted by certain service providers.
• Insurance: there are some regulatory concerns with neobanks. This is because they may operate as financial technologies, rather than fully licensed banks. They may not insure customer funds in the same way.

As we can see, there are various pros and cons that you will need to weigh up if deciding whether to join a neobank. We can also see that they are not a complete replacement of traditional banks, but they can be used in conjunction so that you have the best of both worlds.

Learn about one specific new type of neobank with our article asking what is Revolut and how does it work?

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