Banking has evolved along with most other financial products and services in the online age. The result is the advent of neobanks, or digital-focused financial institutions that challenge the traditional banking model.

Neobanks typically offer a small range of core banking products, such as standard checking and savings accounts and high-yield savings accounts. They may also provide additional services such as paycheck advance features and cash-back programs for debit cards. In addition, they operate on an online platform and often, for little or no fees.

Here’s a look at what neobanks are, the products and services they offer, and what to know about how neobanks compare to traditional and online banking.

What is a neobank?

A neobank is a financial technology (or "fintech") company that offers banking services through a digital-only experience. This means neobanks don’t have local brick-and-mortar branch locations, so all communication and account management is done online or through a mobile app. You may already be familiar with neobanks, or even use one. Some of the best-known neobanks include:

• Acorns

• Chime

• Current

• Lili

• One

• SoFi

• Varo

While some exceptions exist, neobanks don’t typically have a bank charter, meaning they don’t hold users’ deposits directly. And contrary to what the name implies, they aren’t actually a bank in most cases, at least not in the legal sense.

Instead, neobanks are usually affiliated with a larger partner bank, allowing them to store deposits and, in some cases, even lend against those deposits in the form of loans or paycheck advances.

What services do neobanks offer?

Sometimes referred to as “challenger banks,” particularly in the United Kingdom, neobanks are often considered challenging, or disrupting, the traditional banking model. That’s because they offer similar products and services as the big-name banks, but often with added transparency, flexibility, and limited or no fees.

Neobanks may offer a combination of:

• Checking accounts

• Savings accounts

• Debit cards

• ATM access

• Rewards

• Secured credit cards

• Credit builder loans

• Savings and budgeting tools

• Tech services such as online bill pay, direct deposit, online transfers, early paycheck access, and more

Since most neobanks aren’t banks by definition, they can’t offer all of the same services as traditional banks. You may need to shop elsewhere for investment portfolio management, financial advisory services, and more.

If you prefer in-person assistance through a bank teller, you’ll also need to look for another financial institution. Neobanks don’t typically have branch locations you can visit.

Neobanks vs. online banks: How do they differ?

Online banks are similar to neobanks. However much overlap there may be, though, these two terms shouldn’t be used interchangeably.

Both types of financial institutions can offer depository products such as checking and savings accounts. In addition, consumers can enjoy features like debit cards, ATM network access, direct deposit, rewards on spending, and online financial tools with both institutions.

The difference is that neobanks are generally very limited in the products that they do, and can, offer. This is because neobanks almost never have their own bank charter, so they partner with another banking institution to gain access to depository services and Federal Deposit Insurance Corporation (FDIC) insurance coverage. They almost never have brick-and-mortar branch locations, and in-person services are all-but impossible.

Online banks, on the other hand, are usually true banks, meaning they have their own bank charter. Because of this, online banks may offer additional products including loans, investment portfolios, and financial advisory services.

Some online banks are simply an extension of a traditional parent bank, offering similar products but with a tech-based approach. This allows consumers to manage their accounts online or via a mobile app, but also seek in-person assistance at a branch if and when needed.

Neobank rates and fees

What neobanks can’t offer in terms of products and services, they tend to make up for with their rates and fees.

While each financial institution is different, neobanks generally have competitive interest rates on savings accounts and may even offer rewards on debit card spending. Accounts are also often free, rarely imposing monthly maintenance fees, balance minimums, or overdraft penalties. And since neobanks have a digital-focused presence, accountholders tend to have access to a wide network of free ATMs for cash withdrawals and even deposits.

Neobanks are often transparent about the fees they do charge, which might include:

• Out-of-network ATM transactions (in addition to any fee that the machine owner might charge)

• Funds transfers to other financial institutions or individuals

• Cash deposits made through a third party

• Over-the-counter cash withdrawals (not made at an in-network ATM)

• Cash advances

How do neobanks make money?

As with most banking institutions, neobanks make the bulk of their revenue through fees. Though neobanks tend to charge fewer fees than other financial institutions, they do still earn when customers use out-of-network ATMs, transfer funds to someone not in the neobank’s network, or deposit cash through a third-party.

Consumers should note that many of these fees are duplicates, as the neobank charges on its end while the other party — whether that’s an ATM owner, other financial institution, or third-party retailer that accepts cash deposits — may also charge its own fee.

Does the FDIC insure neobanks?

A neobank isn’t really a bank at all, at least not by true definition. Neobanks are instead fintech companies that offer financial products and services to consumers via a digital platform, though they don’t have their own bank charter.

Neobanks are frequently partnered with other, larger financial institutions. This gives the neobank access to certain depository services as well as protection under the other bank’s umbrella. So, while neobanks are fintech companies — not banks — they tend to be as safe as other financial institutions.

This partnership also allows neobanks to insure their products with depository coverage by the FDIC. This FDIC coverage extends to your funds held in a covered institution by the neobank, so you’re protected for up to $250,000 in deposits per depository, per financial institution, per ownership category, just as you would be with a traditional “big name” bank.

Should I use a neobank?

Deciding if a neobank is right for you depends on how you manage your money and the features you need most from your financial institution.

A neobank might be the answer if you:

• Don’t want to pay monthly maintenance fees on your checking or savings accounts

• Prefer not to be stuck with initial deposit or monthly minimum balance requirements

• Enjoy features like early paycheck access and free overdraft coverage

• Are looking for a robust ATM network

• Don’t need access to loans or investment services

• Prefer to manage your account online or through a mobile app

When not to use a neobank

Of course, neobanks aren’t for everyone. In some cases, an online bank or even a traditional banking institution may better serve your needs, especially if you:

• Are interested in loans, certificates of deposit (CDs), or other products

• Like to visit a brick-and-mortar branch for certain services

• Regularly make cash deposits

• Need investment portfolio management or financial advisory services

• Don’t know how to (or don’t want to) open a bank account online

How do I sign up with a neobank?

So, you’ve decided that a neobank is right for you and meets your banking needs. Great! Now, what do you need to open a bank account online?

Since neobanks are digital-based companies, signing up is usually as easy as visiting a website or downloading an app. To open an account, you will likely need to provide some personal information:

• Name

• Date of birth

• Contact information such as phone and email

• Mailing address

• Proof of identity such as a copy of your driver’s license or Social Security number.

If the neobank has a minimum opening deposit, you’ll either need to link another account or visit a third-party retailer to fund your new account.