What is a neobank and is it right for me?

Woman sitting on sofa drinking coffee, looking up neobanks on her digital tabletImage: Woman sitting on sofa drinking coffee, looking up neobanks on her digital tablet

In a Nutshell

Neobanks are online-only institutions that offer bank-like services. Since they have no physical branches to maintain, they may offer customers lower fees and higher interest-earning rates. But the trade-off may be fewer products and less regulatory oversight.
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

If you’ve ever used your financial institution’s online banking tools, you’ll already have an idea of how neobanks work — even if you don’t know exactly what they are.

Neobanks operate entirely online and offer bank-like products and services that you access through an app on your phone or computer. But while you may be able to make payments from or save money in a neobank account, neobanks aren’t really banks.

While the convenience and innovation of a neobank may appeal to you, it’s important to understand how these financial institutions generally work before you begin doing business with one. Let’s look at some information to help you weigh the pros and cons of neobanks.

What is a neobank?

Although “bank” is in the name, and they offer bank-like services, neobanks technically aren’t banks.

Instead, they’re financial technology companies that partner with traditional banks to put their own brand name on savings and checking accounts. These partnerships allow the neobank to provide customers with payment cards, investment services and FDIC insurance on their deposit accounts.

Neobanks have no physical branches and typically aim to serve people that many traditional banks historically haven’t, such as people with little or poor credit history.

How is a neobank different from a traditional bank?

Neobanks and traditional banks differ in several ways.

The most obvious difference is that neobanks don’t have a physical presence. With a traditional bank, you can go into your local branch to deposit a check and take money out of your account. But with a neobank, you do everything from your phone or computer.

With less overhead, neobanks often are able to offer higher interest rates and lower fees.

Neobanks are more likely to introduce innovative, forward-looking features like fronting you the money from your upcoming paycheck a few days early. But they might not offer the full slate of financial services you’d expect from a traditional bank.

What are some advantages of opening an account with a neobank?

Neobanks have several strengths.

They often have higher interest-earning rates and lower fees than traditional banks. Unlike banks that have to spend resources keeping their branches open, neobanks don’t have such overhead and can focus resources on offering you innovative financial products instead. Tech-savvy customers might also appreciate that neobanks are more convenient and easier to use because you can do all your banking online, without going into the bank. And you may find that a neobank is more likely to have services and features tailored to your needs and preferences.

What are some disadvantages of neobanks?

On the flip side, neobanks might offer fewer financial products than traditional banks.

So when you need an auto loan or a mortgage, your neobank isn’t likely to have those products, and you’ll have to deal with a traditional bank or credit union.

Like we mentioned, neobanks don’t offer branches. So if you enjoy going into your local bank, or have a complex question that you’d like a human to answer, you won’t be able to have in-person interactions with your neobank.

If you’re not tech-savvy, you also might feel overwhelmed trying to do all your banking online.

Is my money safe with a neobank?

You might wonder if neobanks are safe. After all, how can you trust a bank you can’t set foot in?

As fintech companies, neobanks might be regulated differently than the banks they partner with. But they’re still subject to general business and consumer compliance laws.

Just make sure to learn about how your neobank partners with a traditional bank to offer FDIC insurance. Typically, neobanks partner with traditional banks to provide you with up to $250,000 per account in FDIC coverage. FDIC insurance means that even if the bank were to go out of business, the government would reimburse you for your losses up to the coverage limit. You also might be concerned about online security. But many neobanks use the same security protocols that traditional banks use to protect your money. Be sure to look for security and safety information on a neobank’s website before opening an account with it.

Next steps: Decide if a neobank is right for you

Before you open a new account with any bank, it’s important to do your research.

We recommend you take a look at what other customers say about the bank, and see if it’s facing any legal action.

It can also be helpful to verify its status with the FDIC. If you want to double check that the bank actually offers FDIC insurance and isn’t making a fraudulent claim, you can search the government website to find the bank’s name on the list of covered banks. Keep in mind that if you’re dealing with a neobank, the name of its partner bank might be listed by the FDIC instead — so it’s a good idea to search for it under both names.

A neobank might be right for you if you’re comfortable banking from your phone and are excited about earning higher interest rates. But if you get flustered by technology or prefer to physically step into your bank, you might have a better experience with a traditional bank.

Consider a free checking account

A free checking account is a basic checking account that doesn’t charge any recurring fees, such as monthly maintenance fees. 

Do your research before signing up, since hidden costs can eat away at your savings. For example, you may have to pay out-of-network ATM charges, overdraft fees, foreign transaction fees and other charges or penalties. 

Some accounts may even have a minimum balance requirement, meaning you have to keep a certain amount of money in your account to avoid additional charges.

If you’re looking for a checking account that’s free to open, you might want to consider a Credit Karma Money™ Spend online checking account. It comes with no penalties, overdraft fees or minimum balance requirements.

And when you set up direct deposit with Credit Karma Money™ Spend, you can get access to your paycheck up to two days early and federal benefits up to five days early.

About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.