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FINANCE

What is a Neobank? How do they work and are they safe?

Neobanks, which are fully digital banking options, are popping up. How do these institutions differ from traditional banks? Are they safe?

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Neobanks are a new trend in the financial sector and describe institutions that offer some services of a traditional bank but through a fully digital platform. Most neobanks, like Chime and Revolut, that operate in the US, are FDIC-insured, meaning that depositors can receive up to $250,000 if the bank fails. This makes the banks as safe as traditional options, but with limited services and no physical branches, neobanks may not meet the financial needs of all those who require banking services.

How do neobanks generate revenue?

Neobanks are a new trend in the financial sector and describe institutions that offer some services of a traditional bank but through a fully digital platform. To entice potential customers, neobanks will tout exciting offers, such as no overdraft fees or an interest-free credit card, but these perks often come with strings attached. Traditional banks often use these fees as a revenue source. Fees are a source of income for traditional banks, but many neobanks rely on fees paid by merchants when their bank cards are used to make a purchase.

What services do neobanks offer?

Take the San Fransisco-based Chime, which, with 21.6 million account holders, is the largest neobank operating in the US. Chime’s offer to new customers centers on three benefits: no overdraft fees, no account minimums, and a feature that makes one’s paycheck available up to two days early.

Compared to traditional banks like Chase and Bank of America, which require account holders to deposit at least $25 or $100 per month, respectively, to avoid a monthly account fee, Chime does not have a minimum deposit requirement. As for overdraft fees, when you read the small print, fees are charged if the account is overdrafted by $20 or more (for some members, this limit is $200). Chime also advertises that its members are not charged ATM fees. Nevertheless, fees can still be applied like other banks if an ATM outside Chime’s network is used.

Chime and banks like it may be acceptable for people with straightforward banking needs. Keep in mind that these banks do not allow for wire transfers to be made. Nerd Wallet published a helpful video that discusses the bank difference between traditional and neobanks that can help consumers as they navigate their financial needs.

How do neobanks compare to traditional banks?

A fully digital banking option may sound great, but when issues arise, contacting a representative who can help work through the problem can be challenging. The Consumer Financial Protection Bureau compiles complaints from customers, and over the last year, those submitted by Chime members have increased by forty-eight percent, with those relating to money transfer, virtual currency, or money service more than doubling.

Nevertheless, compared to traditional banks, companies like Chime aren’t doing so bad...

Over the last year, the CFBP has received around 14,000 complaints from Bank of America’s sixty-eight million individual and small business customers. If Chime customers made complaints at the same rate as Bank of America account holders, the digital bank would have seen around 4,440 complaints filed. In reality, only 1,742 complaints from Chime customers were received.