Technology has changed the way the world banks in a big way. Opening a bank account is a vastly different process today from what it was just a decade ago.
Gone are the days of needing to visit a traditional brick-and-mortar bank branch with the right documentation between business hours.
Nowadays, most brick-and-mortar banks also offer digital banking services, including online and mobile banking, online transactions, and more. These technologies allow you to make use of traditional bank services whenever you need them without interacting with a human representative.
While traditional banks are still very much a part of the banking world, they do often provide loans based on banking relationships with representatives, credit scores, and other factors.
These banks also make money by investing your deposits into various portfolios and projects. Some of which are not environmentally or socially sustainable and charge fees for their banking services.
For decades, traditional banks were the only options available. But now, we have Neobanks and digital banks to consider. These new banking structures offer highly competitive interest rates and convenience for people who cannot or don’t want to visit physical bank branches.
Here’s everything you need to know about Neobanks and digital banks and which to choose as a beginner.
What is a Neobank?
A Neobank is a financial tech company or brand that offers non-licensed banking services by partnering with a widely reputable bank.
Neobanks are not actually banks and don’t make any money by charging you banking fees. Plus, they don’t have any physical premises and only offer their products and services online and via mobile.
These banks often specialize in specific services, like offering savings or checking accounts, rather than offering a whole range of different products like traditional banks. They also offer a smooth, simple customer experience that’s both quicker and more affordable than many alternatives. All Neobank accounts are insured through the brand’s partner bank.
Technology is an essential component of any Neobank as they can only operate via websites and apps. They often collect large volumes of consumer data and identify patterns in this information to help them decide what types of products, accounts, and services they should provide.
Neobanks first appeared in the 2010s and went mainstream around 2017. Since then, they’ve transformed the face of the financial industry in much the same way as Airbnb has transformed hospitality.
What is a Digital Bank?
Like Neobanks, digital banks operate within the digital space. However, the latter differs from Neobanks as they are true banks rather than single FinTech companies that partner with banks. Digital banks are often simply online divisions of the brick-and-mortar banks that we’re familiar with.
Digital banks offer a wide range of services and may offer as many products and services as their land-based counterparts, if not more. With that said, they do tend to offer higher interest rates on savings accounts, demand lower minimum account balances, and may charge fewer banking fees than land-based establishments. This, in part, is designed to encourage people to use digital banking services.
What’s the Difference Between a Neobank and a Digital Bank?
Although these two banking services are similar in many ways, they differ considerably in certain areas.
Neobanks are different from digital banks because they do not hold banking licenses. Instead, Neobanks offer non-licensed services through licensed partners. Digital or online banks, on the other hand, normally offer licensed services and products themselves.
Neobanks are technological platforms first and foremost and offer a limited range of services compared to many digital banks.
They make up for what they lack in products and services with advanced technology, multiple device compatibility, and excellent speed. Digital banks focus more heavily on providing a broader range of banking services, either online or in-house.
For instance, a Neobank may offer only a savings or checking account. But it may pair accounts with a functional and easy-to-use mobile app with on-the-go access.
A digital bank, in comparison, might offer money market accounts, retirement accounts, savings, and checking accounts, all from the same platforms.
Neobanks, also known as ‘challenger banks’, tend to focus on providing innovative and groundbreaking strategies and apps. Additionally, they may make their accounts more accessible to people whom digital banks consider a high credit risk.
When it comes to saving and growing your money, it’s important to note that many trusted Neobanks offer savings and combined accounts with higher annual percentage yields than their traditional and digital competitors.
For instance, Aspiration offers a 3% yearly percentage yield for its regular members, while Bluevine provides business checking accounts with 1.5% interest.
Others, like Chime, provide options for automatic saving and rebuilding your credit to make saving as seamless as possible.
Their lower fees on most products leave you with more money to put away at the end of every month.
Another perk of Neobanks is their AI-forward attitude and the many online-based services they offer. Some Neobanks make it easy to invest in stocks, while others facilitate cryptocurrency trading by providing access to exchange platforms.
Which is the Best for Beginners?
Neobanks and digital banks both have their advantages. So, the best choice for you as a beginner will depend on your specific needs.
Many people who want to do their banking online feel more comfortable using digital banks. These have the same look and feel as their legacy bank but provide lower fees, more banking products, and in-person assistance as required.
However, if you love using the latest technology and find a trusted Neobank that offers the account types and services you need, these banks are great options for beginners.
They provide top technology for online banking, and most of them facilitate instant peer-to-peer transactions.
Many are also more welcoming of customers with challenging or non-traditional financial situations than digital banks and offer extra tools to help you maximize your savings and annual percentage yields.
Ultimately, they’re both good choices. Neobanks and digital banks allow for early direct deposit withdrawals, offer reasonable minimum balance requirements on deposit accounts, and provide debit cards and cash withdrawal options from ATM machines. Moreover, both boast financial protection on all deposit accounts using FDIC insurance. Neobanks provide this insurance through their licensed partners, while online banks provide it themselves through their legacy bank’s license.
Digital banks and Neobanks have changed the face of the banking industry for the better. They’ve done so by offering a range of products and accounts conveniently accessible online and via mobile.
Both may make a great choice for beginners. However, many people choose to start with a digital bank affiliated with a brick-and-mortar bank that they already know and trust.
With that said, if you’re considered a credit risk by a traditional bank or want to focus on maximizing your savings and returns, using a Neobank may give you access to the financial functionality and freedom you need to build your future.