What is a Neobank? How fintech is transforming banking

Traditional financial institutions have long dominated the financial market. However, they weren't always accessible for consumers residing in areas without physical banks, particularly those in low-income or rural regions.

Enter neobanks or fintech banks – innovative digital-only financial institutions that are disrupting the banking industry. These neobanks deliver services entirely online, which allows them to offer consumers benefits like reduced fees, faster loan approvals, and even early access to their paychecks. 

In addition to offering online services, neobanks are revolutionizing the financial world. In 2021, neobank Chime was named one of the top 10 banks in the US with more than 13 million customers. Today, it has more than 21 million users. As neobanks continue to grow, it's important to understand what they are and their impact on the global 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, challenger bank, or digital bank. Neobanks aim to streamline the banking process by delivering financial services in a customer-centric, digital-only format. 

Why are neobanks popular? 

Neobanks have become a key part of the financial ecosystem 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. Many neobanks also use technology to provide a streamlined user experience, which reduces customer turnover and friction. 

Today, more Gen Zers and Millennials call an online bank their primary checking account provider than a community bank or a credit union.

How do neobanks work?

Neobanks work by providing money management and financial services through an online platform or mobile app. Unlike traditional banks, which provide a wide range of financial services both online and in-person, neobanks often only offer core banking services such as checking and savings accounts. However, as they've increased their market share, the number of services offered by neobanks has increased. 

Traditional banks 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 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: 

• Checking accounts

• High-yield savings accounts

• Free peer-to-peer money transfers

• Early access to paychecks 

• Overdraft protection

• Alternative ways to build credit

• Financial education tools  

→ Did you know Plaid powers digital banking solutions for neobanks and fintechs alike? Learn how.

Are neobanks FDIC insured?

Many consumers wonder if their money is safe at a neobank—for example, are there regulations to protect consumer deposits? Most neobanks partner with a traditional bank that has a bank charter, follows all the required regulations, and is FDIC insured. Whether funds in a neobank account are eligible for FDIC insurance depends upon how the accounts are opened and where funds are held.

However, some neobanks are banks in their own right. For example, in 2020, Varo became a nationally chartered bank with its own FDIC insurance. Neobanks with FDIC insurance coverage can lend money, protect deposits, and offer the same types of financial services as other banks. 

Why aren't more neobanks FDIC insured? Obtaining a banking charter can take several years, which is why most neobanks choose to partner with a traditional bank. The traditional 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—and that funds in the neobank account will be eligible for FDIC insurance.

Note that some neobanks also offer investments, such as stocks and cryptocurrency. These types of investments are not insured the same way deposits are.

How do neobanks make money? 

Neobanks generate most of their revenue through interchange fees and charging interest on loans and credit cards. Varo, for example, generates 98% of its revenue from interchange fees.

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.

Other ways neobanks make money include: 

• Transaction fees: While most neobanks don't charge fees for accounts, many do charge a small fee for bank transfers, ATM withdrawals, or money transfers.

• Subscription fees: Some neobanks, like Chime and Revolut, offer premium services in exchange for a monthly subscription fee. 

• Loan interest: Some neobanks offer loans and credit cards. The interest charged on these products contributes to their overall revenue. 

It's worth noting that different neobanks use different revenue models, so fees vary from bank to bank. Neobanks require a smaller revenue stream to succeed due to their lower overhead.

The top neobanks by consumer accounts

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 2023 and 2030, the industry is expected to grow at a compound annual growth rate (CAGR) of 54.8%. This significant increase shows users will continue to seek out digital banks in the coming years. 

The top neobanks consumers use include Revolut, Chime, Varo, and SoFi.

Revolut

Founded in 2015, Revolut has more than 18 million customers and generates more than $1 billion in revenue, 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. 

Chime

Chime is aiming to change how much consumers pay in overdraft fees. Founded in 2012, Chime is a neobank that partners with an FDIC-insured bank and prioritizes financial health over profits. 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 helping users avoid overdraft fees, Chime doesn't just save its customers' cash; it also helps consumers that may not qualify for a credit card to access a small credit line. This can prevent credit card debt and reduce reliance on high-interest payday loans. 

Varo

Varo Bank is the first 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. 

SoFi 

SoFi is a neobank founded in 2011 by Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady as a way to help students get financial help to pay for college. In the years since, SoFi has become a giant in the neobank world with more than 5.7 million users. 

The digital bank offers a range of services including, checking and savings accounts, loans, credit cards, investment accounts, and student loan refinancing. Unlike traditional banks and student loan providers, SoFi aims to set its customers up for success at home, work, and school. 

→ 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.  

Online banks vs traditional banks: How neobanks stack up

The main difference between neobanks and traditional banks is where they offer services. Neobanks are digital-first, meaning they offer services entirely online, while traditional banks provide in-person services and digital services, often through a mobile banking app.  

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.

Services 

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, mortgages, and peer-to-peer payments. 

Traditional banks tend to offer a wider range of services, such as mortgages, credit cards, savings accounts, and investment accounts. 

By offering 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 formerly bank-averse consumers. The growth of neobanks has led to many offering a wider range of services while maintaining the same user-first experience. 

Neobanks are driving change in 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.

Neobanks: From disruptors to financial world leaders 

Neobanks are no longer just challengers to traditional banks. As more consumers choose digital banks, neobanks are expanding their offerings and driving change in the financial world. Many traditional banks are now improving online access, eliminating overdraft fees, and increasing financial service access. 

But these changes are just the beginning. Due to their digital and mobile-first infrastructure, neobanks are helping unbanked customers on a global scale. 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 continues to mature, consumers are flocking to enjoy the rewards of innovation in the form of a deeper understanding of their financial health and expanded financial access.