Should You Quit Your Traditional Bank And Join An Online Neobank?
An online bank or neobank is becoming an attractive choice. No fees, very flexible, and all online.
Joining an online bank may seem like a smart move right now. In fact, you may be thinking that the bank you have right now is in fact an online back because, it well, is online. You, more than likely, do your banking via an app where you can deposit checks and make sure your balance is still strong.
Well, chances are you have a traditional bank with a brick-and-mortar branch where you can talk to a teller, take out money, and get help face-to-face with financing. Just because you bank online doesn’t mean you have an online bank. Because online banks exist. They are called neobanks.
According to CNET, As neobanks get more and more popular and grow, they are ushering in a new field called fintech (a smashup of the words “finance” and “technology”). This world is growing in numbers and sheer size. In fact, many knowledge workers—laid off during the economic downturn during and after COVID-19 have found new careers and jobs in the fintech field.
Perhaps the first type of neobanks that many folks are familiar with is PayPal. Although at this time, PayPal does not consider itself a neobank, it does have some things in common. A popular neobank right now is Chime.
Chime operates just like an online bank and in fact even disclaims on its site that it is a financial technology company, not a bank. However, it says that its banking services are completed through two banks that are members of the FDIC.
The FDIC is the sign of approval you should have when searching for an online bank. Many neobanks are not members of the FDIC (The Federal Department Insurance Corporation). In short, if something disastrous were to happen to the banking institution, it is insured so you won’t lose your money.
So, what then is the real popularity behind neobanks? Not having insurance for lost money that is not your fault seems like a risky proposition. Well, the last time “something bad” happened and people who had banks lost money was in 1933. Yup, around the time of the Great Depression. To most people, that seems like ancient history. But, it isn’t.
However, Gen Z tends to prefer banking at online banks mostly because of the ease of use. These digital natives don’t see a need to ever enter a bank or even talk to someone at a branch. Because neobanks do not have locations, they operate with much less overhead than traditional models.
This means neobanks can get away without charging fee upon fee. Traditional banks have fees for everything from the occasional (or more) overdraft and even for opening up a new account. Online banks don’t even have a minimum balance—as traditional banks do. And for people who are looking to build their credit, the neobank is particularly attractive with its low rates.
It may seem like an online bank is the way to go. No fees, no minimum balance, can help you get some credit, it really seems like the better choice. However, remember neobanks are not banks, technically.
Neobanks do not have banking licenses. This means they have a lot fewer regulations they must follow (hence that big positive of few to no fee structure). However, traditional banks have a more extensive reach and have that personal touch of being able to talk to someone face to face. And, when you’re looking for financial advice, that’s a big deal.
In addition, traditional banks have programs that can help first-time homebuyers. And, when it’s your first time making such a large purchase, it’s important to go with an institution that can explain things. But, if you’re looking to build savings, there’s no risk in checking out an online bank.