What is a Neobank?

What is a Neobank?

If traditional banks and credit unions seem a bit stodgy and out of date for your banking needs, consider opening an account with the latest star of the fintech industry: neobanks.

These digitally-savvy darlings of the tech world have much to offer…but they’re not banks as you have known them. Let’s look closer at how a neobank could be the solution to the financial services you seek for your business.

What is the Meaning of Neobank?

Neobanks (also referred to as challenger banks) offer online business bank account services, personal accounts, or both. They do not have physical branches like a traditional bank does, and all transactions are done online.

How Neobanks Work

Neobanks offer digital banking services, usually a personal or business checking account. Some also offer personal or business savings account services, and some even offer small business loans.

Unlike a physical bank, neobanks don’t allow you to deposit cash, since all services are online. You can transfer money between accounts, use a debit card, and send payments. 

What is the Benefit of a Neobank?

When it comes to financial services, fees are the biggest pain point for many businesses. A $25 a month fee can add up for smaller businesses. But, thanks to financial technology, neobank providers are able to offer services at lower fees or even eliminate them altogether.

Pros and Cons of Neobanks

While there are plenty of perks to financial products offered by a neobank, there are a few drawbacks to consider as well.

Pros

When it comes to small business budgeting, neobanks fit the bill. Many don’t charge any monthly fees (they make their money through merchant services and fees to use out-of-network ATMs). You can even find free business checking account options!

For those that offer savings accounts (like Bluevine), interest rates may be higher than what traditional banks charge. Given the low overhead of running an online-only bank, the neobank can pass those savings on to customers.

Neobanks offer the financial services you’re used to having, like direct deposit, debit cards, and bill pay, so they’re familiar and easy to use. Many let you use ATMs all over the country at no charge.

Finally, neobanks are incredibly easy to open an account with. There are no requirements for how long your business has to have been in operation, so startups can qualify. (Learn how to open a business bank account here.)

Cons

If you’re looking for a one-stop financial shop, neobanks may not deliver. Unlike traditional banks, most neobanks are not lenders (though some are), nor do they offer the comprehensive list of services you find with traditional banks.

Be aware that not all neobanks carry FDIC insurance, meaning if things go south with the bank, you aren’t guaranteed to get your money back. There is some inherent risk involved.

If you need to make cash deposits, this isn’t the bank for you. You’d be better off with a traditional bank or credit union with a local branch.

What is the Best Neobank?

If a neobank fits the bill for your business, know that the best business checking account is the one that has everything you need. Here are a few of the neobank financial institutions we recommend.

Some neobanks, including Monzo and Starling, cater to other countries like the UK. Here are some of your options here in the U.S.

Chime

Chime offers several fee-free personal accounts, including a Spending account and a Savings account. There’s also an account to help you build credit if your credit scores are low.

The account offers fee-free overdraft protection, a debit card, and an award-winning mobile app.

Revolut

Revolut offers both business and personal accounts, as well as budgeting and analytics tools. Revolut also offers cashback rewards from brands you love.

Its business services include global money transfers, recurring payment management, and bookkeeping.

Varo

Varo offers both personal checking and savings accounts with no credit check or monthly fees.

The neobank also offers cash advances up to $100 and a credit-building secured account. Varo also offers up to 15% cash back on select purchases.

Bluevine

I’ve already mentioned Bluevine’s high interest account (you can earn 1% on your business checking balance). The neobank also offers business loans, including invoice factoring and lines of credit.

Who is a Neobank Good for?

If you’re comfortable using technology, including a mobile app to manage your finances, a neobank could be a good fit.

If you’re okay with having fewer features than you would get with a traditional bank (with the perk of low or no monthly fees), look into them.

On the other hand, if you need to make cash deposits for your business or have complex business banking needs, you may be better off with a traditional bank or credit union.

Why are NeoBanks so Popular in India?

In India, online banks like Niyo and Open are seeing a quick rise in popularity for both business and personal finance. Why is that?

The banking industry there is heavily influenced by bureaucrats and has its share of corruption. Neobanks have stepped in to make it easier for businesses to have a place to safely keep their money, open business credit cards, and get business loans.

India is a top adopter of fintech services, and typically the rest of the world follows, so we can expect more neobanks to sprout up here in the U.S. in the near future.

Nav’s Verdict: Neobanks

If online banking services appeal to you and you like leveraging technology, a neobank could serve your business (and maybe even personal) banking needs.

This article was originally written on October 25, 2021.

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