Since coming on the scene in the 2010s, neobanks have challenged the traditional banking model by offering consumers tech-savvy, digital-only bank accounts, often with low (or no) fees and higher-than-average interest rates. Neobanks have also been early adopters of popular perks like early access to paychecks and fee-free overdraft protection.
But neobanks technically aren’t banks (they are financial technology companies) — they don’t typically have a bank charter permitting them, for example, to hold deposits and lend money. As a result, they don’t offer the same range of financial services you’d find at a traditional bank. And if you’re looking for a branch for in-person service, you won’t find one. Here’s a closer look at how neobanks and traditional banks compare.
Key Points
• Neobanks are a type of fintech company that offer banking services digitally.
• Neobanks often offer lower fees and higher interest rates than traditional banks, but they lack physical branches and tend to lack a comprehensive range of services.
• Neobanks are not licensed banks but may partner with chartered banks to provide FDIC insurance on deposits.
• Neobanks are not the same as online banks which usually have a banking charter.
• Neobanks emphasize technological innovation, offering advanced digital tools, while traditional banks may be slower to adopt new technologies.
What Are Neobanks?
Neobanks are financial technology (fintech) companies that offer banking services through mobile apps and online platforms. They operate entirely online and, due to reduced overhead, are generally able to offer consumers benefits like lower fees and higher interest rates on deposits.
Though they are called banks, neobanks do not have the required charters to meet the legal definition of a bank. Instead, they partner with chartered financial institutions to offer bank accounts, such as high-yield savings accounts and online checking accounts. Some also offer payment services, credit cards, and other financial services.
While neobanks offer online-only banking services, they are different from online banks. Generally, online banks have a bank charter and provide a broader range of services to their customers, including loans and investing services.
How Do Neobanks Work?
Neobanks operate by using technology to deliver banking services more efficiently and at a lower cost than traditional banks. They often enhance these services with digital features, such as real-time balance updates, spending trackers, and budgeting tools to help customers manage their finances effectively.
You can typically set up an account with a neobank by downloading an app, providing some personal information, and going through identity verification processes. Once your account is open, you manage it entirely online. Customer support is typically provided 24/7 via phone, online chat, in-app messaging, and email. Many neobanks partner with nationwide ATM networks to offer customers fee-free access to cash.
Though neobanks typically aren’t chartered, they will often partner with traditional banks to use their banking licenses, allowing them to offer insured deposit accounts and other regulated banking services. To make sure your deposits are insured by the Federal Deposit Insurance Corp. (FDIC), you’ll want to look for the FDIC logo. Keep in mind, however, that any funds you deposit in a neobank may not be protected while they are in transit to the insured bank account. The FDIC does not cover the failure or closing of a non-bank company or any money that has not been deposited in an FDIC-insured bank.
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What Are Traditional Banks?
Traditional banks are established financial institutions with physical branch networks that offer a wide range of banking services. These services generally include personal and business accounts, auto loans, mortgages, credit cards, and investment products. Traditional banks offer FDIC insurance on accounts, so you can’t lose your money (up to insured limits) even if the bank were to go out of business.
Traditional banks cater to a wide range of customers, from individuals to large corporations. They often have long-standing reputations and a history of customer trust, which makes them a popular choice for many consumers who prefer in-person banking experiences or require access to specialized financial services.
How Do Traditional Banks Work?
Traditional banks operate through a network of physical branches, ATMs, and online banking platforms. Customers can visit a branch for services like opening accounts, depositing checks, applying for loans, or speaking with a financial advisor. Traditional banks also offer online and mobile banking.
In addition to providing basic banking services, traditional banks offer specialized services like wealth management, foreign currency exchange, and business loans. Banks in the U.S. are regulated on either the federal or state level, depending on how they are chartered. Some are regulated by both.
Recommended: Traditional vs. Online Banks
Neobanks vs. Traditional Banks
| Neobanks | Traditional Banks | |
|---|---|---|
| Physical branches | No physical branches (online only) | Physical branches and ATMs |
| Fees/rates | Lower or no fees for basic services; higher rates on deposits | Fees for services like account maintenance; lower rates on deposits |
| Products/Services | Limited services; may not offer loans/mortgages | Offers comprehensive banking services |
| Customer Service | Virtual support only (chat, email, phone) | In-person, phone, and online support |
| Tech Features | Advanced technology, innovative tools | Slower adoption of new technologies |
| FDIC Insurance | Available if partnered with an FDIC-insured bank | FDIC insured |
| Target Audience | Tech-savvy users, younger demographics | Broader audience including businesses |
How Neobanks and Traditional Banks Are Different
Neobanks and traditional banks differ in several key ways, including their business models, services, and fee structures. Here are some of the main differences:
• Physical presence: Neobanks operate exclusively online with no physical branches, while traditional banks have physical branches where customers can conduct transactions in person.
• Fees/rates: Due to lower overhead, neobanks may often offer no- or lower-fee banking services and more competitive interest rates compared to traditional banks.
• Range of services: Traditional banks generally provide a wider range of offerings, including business accounts, loans, mortgages, and investment products. Neobanks tend to focus on basic banking services, such as online checking accounts, savings accounts, payment services, and secured credit cards.
• Customer service: Neobanks typically offer customer support through digital channels like chatbots and email, as well as by phone. Traditional banks offer the option of in-person customer service, which can be an advantage for those who prefer face-to-face interactions.
• FDIC insurance: While both types of institutions may offer FDIC insurance on deposits (up to the legal limit), neobanks do not provide this protection directly.
• Technological innovation: Neobanks often prioritize user experience and incorporate the latest fintech innovations, such as budgeting tools, spending analysis, and instant transfers. Traditional banks may lag behind in these areas due to legacy systems.
How Neobanks and Traditional Banks Are Similar
Despite their differences, neobanks and traditional banks share some common features:
• Account types: Both neobanks and traditional banks offer basic banking services like checking and savings accounts.
• Online and mobile banking: While neobanks operate solely online, traditional banks also offer online and mobile banking options for customers.
• Security: Both neobanks and traditional banks typically offer state-of-the-art security technologies, including encryption, two-factor authentication, and biometrics (such as fingerprint or facial recognition).
Note: Online banks combine some of the features of traditional banks and neobanks. Like traditional banks, they may be chartered and FDIC-insured banking institutions. Similar to neobanks, they may offer tech-forward online-only banking, low/no fees, and competitive rates on deposits.
Pros and Cons of Traditional Banking for Consumers
Traditional banking offers both advantages and disadvantages. Here are some to consider.
Pros
• Wide range of services: Traditional banks offer comprehensive financial services, including home and auto loans, credit cards, investment management services, commercial banking, and safe deposit boxes.
• Physical branch access: Customers can visit branches for in-person assistance, which can make it easier to handle complex transactions or receive personalized advice. Branch access also offers a convenient way to make cash deposits.
• Reputation and trust: Established banks have built customer trust over decades, providing a sense of security.
• FDIC insurance: Federally insured banks protect your deposits up to $250,000 per depositor.
Cons
• High fees: Traditional banks often charge fees for account maintenance, overdrafts, and other services.
• Low returns: Traditional banks typically pay lower yields on savings and other deposit products compared to neobanks and online banks.
• Limited technological innovation: Many traditional banks can be slow to adapt to new digital technology and may lack advanced features compared to neobanks.
• Inconvenience of physical visits: While traditional banks offer online banking services, there may still be times when you need to visit a branch in person, which can be time consuming.
Pros and Cons of Neobanking for Consumers
Neobanking also has both benefits and drawbacks. Here’s a closer look.
Pros
• Lower fees: Neobanks typically offer fee-free accounts or lower fees compared to traditional banks.
• Higher APYs: Neobanks typically pay more interest on deposits compared to traditional banks.
• User-friendly digital experience: Advanced mobile apps and digital tools provide customers with an easy, intuitive way to manage finances.
• Convenience: Fully online banking can be a major time-saver, allowing you to avoid waiting on lines to see a teller. Many neobanks offer round-the-clock customer service.
Cons
• Limited product range: Neobanks may not offer a full range of financial services, such as loans, mortgages, or investment products.
• No physical branches: The lack of in-person support can be a disadvantage for customers who prefer face-to-face interactions.
• Challenges with cash deposits: Unless the neobank is linked to ATMs that accept cash, you won’t be able to deposit cash into your account.
• Not FDIC-insured: Neobanks are typically not chartered banks and rely on partnerships with FDIC-insured banks.
The Takeaway
Neobanks and traditional banks both offer banking services, and each has benefits and drawbacks. Neobanks can work well for those seeking a low-cost, technology-driven banking experience, while traditional banks offer more comprehensive services and the convenience of physical branches.
The right choice for you will depend on your personal preferences, financial needs, and comfort with digital banking.
SoFi holds a national banking charter, an important point to consider as you think about your banking options.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How are neobanks and traditional banks different?
Neobanks are financial technology firms that offer digital banking services through apps and online platforms. They operate without physical branches and focus on low fees, streamlined services, and innovative financial tools. Neobanks are not technically banks, however, and must partner with chartered banks to offer FDIC-insured accounts.
Traditional banks have physical branches, providing in-person services alongside online banking. They are fully licensed, offer a broader range of financial products than neobanks, but tend to charge higher fees and offer lower yields on deposits.
What are the downsides of neobanks?
One potential downside of neobanks is that they’re online-only. As a result, there are no branches you can visit for in-person transactions or assistance. Neobanks also have a narrower range of financial products and services compared to traditional banks. In addition, neobanks technically aren’t banks and must partner with chartered and licensed institutions to offer Federal Deposit Insurance Corporation (FDIC) insurance.
What are some advantages of neobanks?
Neobanks offer a number of advantages, including competitive interest rates on deposits, low (or no) account fees, and 24/7 customer service. Many also offer in-app perks like real-time spending notifications and user-friendly budgeting tools.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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