Traditionally, banking services were offered by a few large financial institutions with dozens of services, from checking accounts to car loans and mortgages. This presented a challenge for some consumers who don't live in an area with physical banks, which often includes those in low-income or rural areas.
As technology has changed, so has the way we bank. In recent years, smaller, digital-only banks have increased competition in the banking industry. These banks, called neobanks or fintech banks, serve customers in new ways by reducing fees, providing early access to paychecks, and offering services almost entirely online—where the average consumer spends seven hours of their day.
Neobanks quickly gained popularity. Recently, neobank Chime was named one of the top 10 banks in the US with more than 13 million customers. As neobanks continue to grow, it's important to understand what they are and how they impact the overall financial landscape.
What is a neobank?
A neobank is a digital-first financial company that offers banking services, like checking accounts and debit cards, but does not have a physical location. The term neobank is often used interchangeably with fintech bank. Neobanks aim to streamline the banking process by delivering financial services in a customer-centric, digital-only format.
Neobanks have become a key part of the financial ecosystem in recent years due to their ease of use, lower fees, and alternative methods for analyzing credit. They often allow formerly unbanked consumers to access credit cards, checking accounts, and tools to improve their financial health.
→ Want to know how SoFi helps members save, spend, and invest smarter? Watch the Powered by Plaid story to learn how SoFi helps customers reach their financial goals.
How do neobanks work?
Neobanks work by providing money management and financial services through an online platform. They should not be confused with traditional banks that provide a wide range of services both online and in-person. Rather, neobanks often offer just a few, core digital banking services, so consumers usually use them strictly for savings and making payments.
Traditional banks, however, typically offer a multitude of financial services including checking and savings accounts, car loans, mortgages, credit cards, and investment accounts. Neobanks differentiate themselves from traditional banks by offering their services with low or no fees and providing tools to protect financial health, such as overdraft protection at no cost.
Different neobanks offer a wide range of financial services, including:
High-yield savings accounts
Free peer-to-peer money transfers
Early access to paychecks
Alternative ways to build credit
Financial education tools
Neobanks are driving innovation in the financial industry with lower fees, advance payment options, and by expanding access to credit to those who historically lacked access in new and innovative ways.
→ Need a faster account opening and onboarding flow? Plaid Auth provides account authentication in as little as seven seconds when users connect with their bank account credentials.
Plaid's 2022 Fintech Effect Survey: Stability, impact, and building for the future
Download our free fintech report for insights on building the future of digital finance.
Are neobanks safe?
Neobanks offer similar safety features to traditional banks. Most neobanks are FDIC-insured, meaning deposits up to $250,000 are protected, either through their own charter or by working with a larger bank. Most neobanks partner with a traditional bank that has a bank charter, follows all the required regulations, and is FDIC insured. However, some neobanks are banks in their own right. For example, in 2020, Varo became a nationally chartered bank with its own FDIC insurance.
Obtaining a banking charter can take several years, which is why almost all neobanks choose to partner with a traditional bank. The bigger bank is in charge of insurance and regulations, while the neobank handles customer service and online access.
Consumers considering a neobank should make sure it is FDIC insured or works with a partner bank that has a bank charter and is FDIC insured—indicating the bank follows federal regulations to ensure deposits are protected.
Note that some neobanks also offer investments, such as stocks and cryptocurrency. These types of investments are not insured the same way deposits are.
The top neobanks and their explosive growth
Neobank usage is exploding. In 2020, neobanks had 14.4 million US account holders. By 2024, an estimated 40 million Americans will have at least one neobank account. Between 2022 and 2030, the industry is expected to grow at a compounded annual growth rate (CAGR) of 53.4%. This significant increase suggests users will continue to seek digital banking solutions to meet their financial needs.
The top three neobanks by users include Chime, Varo, and Revolut.
In 2019, consumers paid an estimated $15.47 billion in overdraft fees. Chime is aiming to change that. Founded in 2012, Chime is an FDIC-insured banking service that prioritizes financial health. It offers mobile-first checking accounts, savings accounts, and a Chime Visa Debit Card. Account holders also enjoy a competitive APY and no overdraft fees.
Chime also gives users early access to their money by delivering direct deposits two days earlier than traditional banks. Additionally, users have access to SpotMe, which allows consumers to access $200 in credit via overdraft without incurring any fees.
By protecting against overdraft fees, Chime doesn't just save its users cash; it helps consumers that may not qualify for a credit card to access a small credit line, which can prevent credit card debt and reduce the need for high-interest payday loans.
Varo Bank is a self-chartered neobank aiming to reduce financial stress and deliver premium banking services to everyone. Founded in 2015 as Varo Money, the organization became the first neobank to receive a national bank charter in 2020. Varo offers a checking account, high-yield savings accounts, and up to $100 in cash advances for free. Other benefits of Varo include no credit check, no minimum balance requirement, and no overdraft fees.
Varo Believe is a secured credit card with no fees that allows users to build credit while avoiding debt and interest. Users also earn cashback for each swipe, a benefit typically only available to credit card users.
By providing access to premium financial services, like cash advances and secured credit cards, Varo helps people with no or low credit scores build credit and improve their financial health.
Founded in 2015, Revolut has more than 16 million customers, making it one of the largest European neobanks. As the bank pushes into the US market, it is poised to become one of the largest neobanks worldwide.
It offers a range of financial services, including bank accounts, debit cards, currency exchange, stock trading, cryptocurrency, and peer-to-peer payments. Unlike most neobanks, it offers solutions to both individuals and businesses and supports more than 30 different currencies.
Revolut aims to grow the global economy by providing access to financial services no matter where users are located or what currency they use.
Online banks vs traditional banks: How neobanks stack up
The main difference between neobanks and traditional banks is that neobanks are digital-first, while traditional banks provide in-person services. Most traditional banks also offer a mobile app and digital banking, but many of their services occur in person.
This chart breaks down the core differences between how neobanks and traditional banks work.
There are several other, less apparent, differences between traditional banks and neobanks, including how they earn revenue and the services they offer.
Neobanks often provide ways for users to improve their financial health such as budgeting tools and early access to paychecks—alongside typical banking services. They may also provide access to cash advances and peer-to-peer payments.
Traditional banks offer a wider range of services, such as mortgages, credit cards, savings accounts, and investment accounts.
By offering basic financial services in a way that promotes financial health, neobanks serve people who have historically lacked access to financial services, such as the 13% of Americans who are considered underbanked. Now, unbanked and underbanked consumers can instantly download a neobank app on their phone and quickly open and fund a new account, all without paying a dime or having to worry about fees or minimum balance requirements.
Targets different consumers
Some consumers wonder whether neobanks or traditional banks are better. The reality is they serve different purposes and often target different markets. A consumer with a wide range of financial needs or with limited tech knowledge will likely prefer the in-person services of a traditional bank, while younger users or those with limited credit may prefer a neobank.
Neobanks also serve consumers that have stayed away from traditional financial institutions due to things like fees, minimum balance requirements, or lack of a physical branch nearby. One of the main reasons neobanks have grown so rapidly is their ability to serve these types of formerly bank-averse consumers.
Neobanks are modernizing the banking industry
Neobanks are driving digital transformation for traditional banks thanks to the increase in competition. Traditional banks are now improving their apps, integrating digital and in-person customer experiences, offering more services, and getting rid of overdraft fees.
This shift has benefits for consumers at all levels. More competition in banking encourages new and exciting innovation, improves online features and access, and increases financial inclusion by expanding access to a wider range of consumers. Traditionally underserved consumers— such as those with lower credit scores or fewer assets—are gaining access to financial services like budgeting apps and savings tools that help improve their financial health and build real wealth.
→ Want to help your customers improve their financial health? Plaid’s transactions API provides up to 24 months of categorized bank transaction history that helps guide users toward investment and savings goals.
How do neobanks make money?
Neobanks generally make money in two ways: collecting out-of-network ATM fees and through interchange fees—the fee merchants pay when consumers swipe a credit or debit card. The vast majority of neobanks generate revenue through interchange fees. Varo, for example, generates 98% of its revenue from interchange fees.
Traditional banks typically generate revenue from interest rates charged on loans and credit cards, low account balance fees, overdraft fees, ATM fees, and annual fees for credit cards. Neobanks operate without physical locations, resulting in lower overhead, which allows them to operate more efficiently and rely on interchange fees for the majority of their revenue.
Neobanks are bringing healthier banking to all
The increase in neobank usage is drastically changing the banking landscape. Competition from neobanks has encouraged traditional banks to improve online access, eliminate overdraft fees, and increase financial service access, but these changes are just the beginning.
Due to their digital and mobile-first infrastructure, neobanks have the opportunity to reach unbanked customers on a global scale. Thanks to neobank innovation, previously unbanked customers in expanding economies are quickly gaining access to the global financial system through their phones. In fact, 76% of adults worldwide had a bank or mobile depository account in 2021, up from just 51% in 2011.
As the neobank industry matures, consumers will continue to reap the rewards of innovation in the form of a deeper understanding of financial health and expanded financial access for formerly underserved populations.