The idea of digital banking is not new, but the trend has grown rapidly in recent years. Banking on digital platforms is now part of the new normal. People are happier and more relaxed when banking on their computers and mobile phones, making far fewer trips to bank branches. Neobanks are digital-only banks that thrive in this environment. Together, let’s explore what they are, how they compare to challenger banks, and how they deal with fraud.
What is a Neobank?
Neobanks are fintech companies that use software to provide streamlined online and mobile banking. They specialize in offering particular financial products like savings accounts and checking accounts and, in some cases, provide tools that help with saving and budgeting.
How do Neobanks differ from other banks?
Most banks, including some younger challenger banks, have at least a few branches. Neobanks are exclusively online.
Although the physical presence of challenger banks is often limited, they require banking licenses to provide services, unlike neobanks. A banking license allows challenger banks to provide various financial services, including issuing loans and credit cards. Neobanks seeking to provide these services must partner with licensed financial institutions.
Neobanks often start out as fintech startups, but when their application for a banking license is approved, they transform into full-fledged challenger banks.
Examples of Neobanks
Chime is one of the most popular brands in the US neobanking world. Chime eliminates the most common fees associated with traditional banks and provides credit building opportunities.
Varo Bank started as a neobank but transformed into a challenger bank after receiving a national full-service banking charter from the Office of the Comptroller of the Currency (OCC). It offers similar benefits to Chime with no overdraft, monthly fees or minimum balance requirement.
Current is a popular neobank in the US that offers early access to your direct deposits and offers cash back on debit card transactions.
Revolut is a UK-based neobank that got its license in the EU and became a challenger bank. Initially, in 2015, it focused on travel cards that offered cheap exchange rates. The bank accepts over 150 currencies, has no standard exchange fees, and offers accounts for children aged seven to 17.
Dave is a US-based neobank providing personal accounts and debit cards. Plus, it offers up to $250 in cash advances and helps build credit history.
Advantages and disadvantages of neobanks
No credit checks and fewer rules
Use data to predict account activity, a great feature for budgeting and planning
Banking is done through apps
Most have crypto trading options
Apps can be confusing for people who aren’t tech savvy.
Customer service is via email, chat or phone – there is no face-to-face option
Neobanks are not legally identified as banks
No ATM networks; means depositing money can be hectic
How neobanks deal with fraud
Neobanks do not manage as many financial processes as traditional banks, but they still have to manage disputes and chargebacks. Additionally, they must comply with consumer protection laws, card network mandates, Regulation E (the Electronic Funds Transfer Act) and Regulation Z (the Truth in Lending Act).
Regulation E establishes the rules applicable to electronic funds transfers and offers guidelines for debit card issuers. According to this law, neobanks have ten days to decide on a dispute. However, the period can be extended to 90 days if interim credit is provided within the first ten days. Failure to comply results in a fine of $1,000 for each violation but not exceeding 1% of neobank assets.
Reg Z sets out rules for credit card issuers and merchants, and it also details consumers’ responsibility to dispute transactions within 60 days of reporting. After this period, a neobank can reject the dispute. But for this rule to be in effect, neobanks must have an appropriate process that consumers can use to dispute transactions.
Should I switch to a neobank?
With the ease of access, lower fees, and often higher interest rates for consumer deposits, it’s easy to see the appeal of neobanks. However, their minimal financial services mean they are not for everyone. Before switching, consider financial products offered, accessibility to ATMs, interest rates on accounts, budgeting features and fees, and fine print regarding overdrafts
This article does not necessarily reflect the views of the editors or management of EconoTimes