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Understanding Neobanks: Are They Right for You?

Neobanks are digital-focused banking providers that offer many of the same financial services as traditional brick-and-mortar banks. Due to their online nature, they often provide more generous terms on banking products. Whether a neobank is right for you depends largely on your financial goals and the benefits you’re seeking in a financial institution. Let’s explore neobanks, their pros and cons, and whether they might be a good option for you.

What Is a Neobank?

A neobank is an online-only provider of checking accounts, savings accounts, and loans through a website or mobile app. They don’t operate physical branches, which allows them to offer low or no fees and higher interest rates on deposits. However, most neobanks are not licensed or chartered as traditional banks; instead, they partner with banks to issue loans, receive deposits, and provide other financial services.

Common products and services offered by neobanks include:

• High-yield savings accounts
• Checking accounts
• Early access to direct deposits
• Debit cards
• Cash back and credit builder credit cards
• Loans
• Digital tools for money management or debt reduction

Neobanks are gaining popularity, with 17.3 million account holders in the U.S., representing 6.5% of the population. This number is expected to rise to 40 million by the end of 2025.

Pros of Neobanks

Neobanks aim to compete with traditional banks by excelling in areas where the latter often falls short. Here are some benefits of neobanks:

Potentially Earn and Save More

Neobanks don’t incur the heavy costs of operating physical branches, allowing them to pass savings along to customers through higher annual percentage yields (APYs) on deposit accounts and lower interest rates on loans. Many neobanks also don’t charge monthly account fees or foreign transaction fees.

Convenient Account Management

With neobanks, you can manage your account online or through a smartphone app with ease. This includes depositing checks, making payments, applying for loans, and performing other financial tasks.

Enhanced Customer Service

Many neobanks offer 24/7 customer support by phone or chat, making it easier to get help compared to traditional banks. They also frequently add new apps, budgeting tools, and other technology to help improve your financial health.

Global Banking Benefits

If you travel internationally, you may benefit from a multicurrency account offered by many neobanks. These accounts allow you to deposit dollars and convert them to another currency in seconds, often with lower conversion fees and no foreign transaction fees.

Deposits Could Be FDIC-Insured

While neobanks are not licensed as traditional banks, the deposits they manage could still be covered by Federal Deposit Insurance Corp. (FDIC) through their partner banks. Always verify if a neobank offers federal insurance by checking its website or the account’s terms and conditions.

Cons of Neobanks

While there are many benefits to neobanks, there are also some downsides to consider:

No Physical Branches

Neobanks don’t have physical branches, which means you can’t get in-person help for complex transactions. While live phone or chat support is available, in-person assistance can sometimes save time and effort.

Limited Access to Cash

Neobanks typically offer access to partner ATM networks, but you could incur fees if you withdraw cash from an out-of-network ATM. Many neobanks cover these fees, but it’s something to keep in mind.

Potentially Limited Range of Financial Products

Neobanks often focus on a few specific benefits rather than offering a broad array of products and services. This means you may not find mortgages, auto loans, or other products commonly available at traditional banks.

Is a Neobank Right for You?

Neobanks are growing in popularity and offer many benefits, such as lower fees and higher deposit APYs. However, they may not be ideal if you prefer in-person banking or find using technology more of a nuisance than a convenience. For the best of both worlds, consider using multiple bank accounts, such as a neobank for favorable yields and a traditional bank for in-person services.

The Bottom Line

Neobanks could be a great option for many banking customers who want to get more from their bank. While it might mean losing access to in-person services, other benefits could more than make up for it.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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