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What are Neo-Banks? What role will they play to shape the future of finances?

What are Neo-Banks? What role will they play to shape the future of finances?
By Ajita Jha

Key Points

  • A neo bank only has a digital presence 
  • It offers a systematic process designed mainly for mobile devices
  • It comes with advanced features 
  • It primarily caters to tech-savvy users 
  • It comes with lesser regulations, credit risk and lower cost

 

What is Neo-Bank? 

In simple terms, a neo bank only has a digital presence and does not have any physical branches. It provides services such as credits, accounts, and payments. It is basically considered to be a more flexible version of traditional banking and has more digital-savvy followers. However, they are not completely autonomous, they depend upon brick and mortar banks for their licensed services whereas traditional banks rely on them for digital solutions for a specific group of consumers. Let’s find out in detail how neo banks operate and whether they are right for you.

 

Operations of Neo Banks

Neo-banks are different from traditional banks, online banks, and credit unions, and they offer a systematic process crafted mainly for mobile devices. They have their association with traditional banks only for federally insuring customer deposits. From a customer’s point of view, it is no more than a simple app that is used for managing money and making financial decisions. They are also user-friendly where you do not have to physically sign any paperwork before enjoying its services. 

 

Services and products of Neo-Bank 

The services and products of Neo-Banks are limited when compared to traditional banks and credit unions. They usually include:

  • Savings Account

  • Money Transfer Services

  • Budgeting & other services

 

Many Neo-Banks offer very limited to no credit services to avoid any risk albeit some of the banks offer loans to businesses and individuals through associated banks and credit unions. Also, they offer certain financial products that can add functionality and make the use of your traditional banks and credit union easy.

Using one of the neo bank apps, you can obtain a loan, get access to deposit accounts, you can also link your checking account, and transfer your money to a savings account. Although they cannot substitute traditional financial institutions, however, you can use their services more frequently and conveniently.

The most noteworthy neo-banks are fintech startups that exist with an objective to enhance your banking experience through advanced features like ceasing your debit card just with a single click in an app to avert unauthorized transactions without actually canceling your card.

 

Relationship with Financial Institutions 

Some of the neo-banks struggle as startups to eventually become chartered banks. Others get associated with prevailing banks, enable them to provide FDIC insurance on the money you possess with the service.

These days, larger banks also realize the demand for newer ways of doing business, and they are coming up with new offers and products to give competition to neo-banks to create a market among mobile-friendly customers and under-banked population. For example, Bank of America provides AI-equipped virtual financial assistant dubbed “Erica” in its mobile app.

How safe are Neo Banks? 

When the safety factor is taken into consideration, neo-banks are usually considered equally or even more safe in certain aspects than credit unions and traditional banks. However, one thing that cannot be overlooked is that your deposits are not usually federally insured at a neo-bank, which could be quite unsafe.

For instance, PayPal could be taken as an example of neo-bank. People usually link bank accounts and payment cards with PayPal to store money but it is not FDIC-insured unless you have taken distinctive steps to insure it. However, PayPal acts as a safer option for online shopping because it allows you to:

  • Stay away from providing credit card numbers and bank account details to unknown websites

  • Use PayPal’s unique features such as buyer protection if there is a problem

  • Select from various funding sources for making a payment with just one login

Note: while using neo-bank services, always use full security features to avoid exposing your bank account to any potential fraud or problem.

 

Advantages of Neo-Banks 

Following are some of the useful features of neo-banks: 

  • Lesser Cost: neo-banks come with lesser regulations and there is no credit risk involved which enables neo-banks to keep their costs low. Products and services are usually inexpensive with no maintenance fees on a monthly basis.

  • Clarity: expect fewer problems as there is a minimal chance of surprise charges and unreasonable overdraft penalties. You are required to spend only what you have.

  • Convenient: the absence of physical movement simply means convenience. All you need is a mobile device and you can qualify to perform basic banking tasks along with easy management of finances and activity prediction in your account to prevent problems.

  • Faster approval of loan: if you have a neo-bank app that offers loans then you can get loan easily and swiftly, without wasting your time over the time-consuming loan application process. It uses innovative ways to assess your credit to give you instant services.

 

Disadvantages of Neo-Banks 

There are certain challenges that come attached with neo-banks: 

  • Unsecured deposits: deposits at a neo-bank may or may not be insured by a government agency made to protect consumers against financial threats. Thus, if you entrust your money with a neo-bank, make sure that deposit insurance is there or take the responsibility of carrying out probable risk if you choose to go without it.

  • Lesser regulations: neo-banks are not officially considered as banks, so there is no systematic process to follow if you come across any problem related to app and with its services, functionality, or non-regulated third-party service providers. There is no direct accountability or responsibility.

  • No branches: though with a neo-bank you can manage various things online, but in case you want in-person assistance or advice especially when it comes to complex transactions, then there won’t be any help because it does not have any physical presence or bank branches.

 

 Are Neo-Banks worth your time? 

As far as the importance of neo-banks is concerned, they certainly have left a positive impact on financial management and can optimally manage your finances through a host of conventional as well as novel features, products, and services. They in particular cater to tech-savvy users who want to do banking in a mobile-friendly framework. However, there are certain setbacks that come with this evolving institution.

With the changing times, as the world is moving towards digitization not only for convenience purposes but for safety reasons too, neo-banks are definitely worth considering. Nevertheless, to arrive at the best decision, compare the advantages and disadvantages between a neo-bank and a traditional bank or credit union, and then go ahead. With that being said, there is so much that is still required to be done in the premises of neo-banks to completely replace it with traditional banks. Hence, consider having accounts with retail banks as well as neo-banks to make the best of your finances.