Cash management or bank account?
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Neobanks are financial services companies that may offer you a better return on your savings than you get at a traditional bank. They often advertise high-yield accounts that pay attractive interest rates, but neobanks come with important limitations.
Although some of their products resemble those of traditional banks, neobanks are financial technology (fintech) companies, not banks, and your money may not be as protected as you think.
Key Points
- Neobanks are online companies that offer limited financial products and services similar to bank accounts, but they arenât true banks.
- Many neobanks offer high-yield savings accounts that are FDIC-insured, but the money is usually held at a partner bank and may not always be fully protected.
- If youâre considering using a neobank, limit the amount you keep in the account and put the bulk of your savings in a federally insured bank or credit union.
Neobanks, also known as challenger banks, are fintech companies that offer products and services similar to those of traditional banks. But neobanks arenât true banks, and they arenât required to meet the same regulatory requirements. Although they often promote being backed by the Federal Deposit Insurance Corporation (FDIC), that coverage applies only through partner institutionsâtypically banks that hold customer deposits.
FDIC insurance and neobanks
Neobanks arenât banks, and they donât carry their own Federal Deposit Insurance Corporation (FDIC) insurance. Instead, deposits are held at partner banks backed by the FDIC. If the neobank or its third-party recordkeeper fails, you may have difficulty recovering your funds from the partner bank.
Neobanks often offer a limited range of products and services. They may offer high-yield savings accounts, certificates of deposit (CDs), or cash management accounts that function similarly to checking accounts. Some also offer debit cards, and a few provide loans or credit cards. Consumers interact with neobanks primarily through mobile apps (many also have websites).
Examples of popular neobanks
Neobanks vary in the services they offer. Some well-known neobanks include:
- Albert. Combines checking and savings tools with financial guidance and small cash advances.
- Chime. Offers checking- and savings-style accounts, early direct deposit, and fee-free overdraft protection.
- Current. Focuses on budgeting tools, savings pods, and early paycheck access.
- Dave. Known for offering small cash advances and low-fee spending accounts.
- Monzo. Offers checking-style accounts and budgeting tools.
- Revolut. Features international accounts with currency exchange, savings, and budgeting tools.
- Varo. Provides high-yield savings accounts and access to small cash advances.
Common features of neobanks
Neobanks are often marketed to appeal to young, tech-savvy consumers (although anyone can use them). Common features include:
APY vs. interest rate
When you deposit money in a savings account, the bank pays you interest on your balance. The annual percentage yield (APY) shows how much youâll earn in a year, factoring in both the interest rate and how often that interest is added to your balance (that is, compounded).
Because of compounding, the APY is usually a bit higher than the interest rateâand itâs the best way to compare earnings between accounts.
- High-yield savings accounts that offer yields many times higher than those of traditional savings accounts.
- Debit cards that can be used anywhere Mastercard and Visa are accepted may be included with cash management accounts.
- Fee-free overdraft protection may include up to $200 in overdraft coverage with no fees when payments are made with the issued debit card. This feature allows you to complete a purchase even if your account balance is too low.
- Payday advance offers early access to a portion of your paycheck (typically $500 to $750) when you set up direct deposit, usually without interest or fees.
- Financial tools may include goal-based subaccounts, direct deposit, alerts, and budget tracking. Debit card activity may be reported to credit bureaus to help build your credit score.
Pros and cons of using a neobank
Although neobanks can be useful for some of your regular spending or for setting savings goals, there are also some downsides. Consider the pros and cons carefully before you put a significant amount of your money into a neobank.
What is a cash management account?
Neobanks and other fintech companies canât offer checking accounts because they donât hold a banking charter. Instead, they offer cash management accounts that blend the features of checking and savings accounts, and include a debit card. Your money is swept into one or more partner banks, where it may be eligible for FDIC insurance.
Only federally or state-chartered banks can offer true checking accounts. Calling a fintech product a checking account could mislead consumers into thinking the fintech is a bank, which could violate banking and consumer protection regulations.
Neobank pros
- Faster growth for savings. High-yield savings accounts and CD rates are often well above the national average, helping you reach savings goals faster.
- No maintenance, overdraft, or ATM fees. Many neobanks charge no monthly maintenance fees, waive overdraft fees, and offer fee-free access to large ATM networks.
- Direct deposit and cash advances. Your paycheck may be available up to two days early when you set up direct deposit, and you may be able to get small cash advances, usually with no interest charges (based on your deposit history).
- Support better money management. Tools include spending trackers to show where your money goes, budget planners to keep you on track, and features that build your credit history.
Neobank cons
- Subscription required for the best features. Higher savings yields or fee-free overdraft protection may require a monthly subscription fee.
- Funds are held at different institutions. Your money is typically deposited at a partner institution, and if something goes wrong, it may be difficult to access your funds.
- Less choice. Products and services may be limited to savings or cash management accounts and small loans or credit cards.
- Limited customer service. Often limited to email or online FAQs rather than live support.
Is your money safe with a neobank?
One of the biggest concerns with neobanks is that they arenât insured by the FDIC. Even if a neobank partners with a bank with FDIC insurance, accessing your money isnât always straightforward.
In 2024, the collapse of Synapse Financial Technologies left tens of millions of dollars in deposits at Evolve Bank & Trust unaccounted for. Synapse had served as a middleman, managing funds for more than 100,000 account holders whose money was held at Evolve. When Synapse failed, many lost access to their funds, and Evolve halted payments while trying to reconcile the balances. A court-appointed mediator later reported that as much as $96 million might be missing.
Evolve remained solvent, but gaps in recordkeeping meant customers couldnât prove which funds were theirsâand FDIC insurance didnât apply because the bank hadnât failed.
This example shows that even when money in a neobank account is held at an FDIC-insured bank, you may not be able to access it if the systems between the neobank and its partners break down.
Want to put yourself on solid financial footing? Start with two simple steps: make a budget, and live within it.
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Neobanks can be a useful alternative to traditional banks or credit unions for saving toward specific goals, handling everyday spending, or even helping build your credit score.
But neobanks come with limitations and often work best if youâre setting aside money for a goal, such as a vacation or major purchase, and want to earn a higher interest rate along the way. They can also be handy for limited day-to-day transactions.
If youâre concerned about losing access to your funds or the lack of FDIC insurance, consider keeping most of your money in a traditional or online bank and using a neobank only for smaller, short-term needs.
Specific companies and services are mentioned in this article for educational purposes only and not as an endorsement.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by David Schepp
