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Personal Finance Articles
5 questions to ask before trying a neobank
(posted on Bankrate.com)
By Heather Larson


From new players to innovative concepts, there's no shortage of news in banking these days. Last year, a group of startups launched "neobanks," a mobile-first banking experience that has moved away from the traditional banking experience.

Consumers want simpler ways of handling and using their money in this mobile age. Technology is evolving rapidly in a way that's relevant for consumers and at a time when banks are not very well-liked or trusted, says JP Nicols, a Certified Financial Planner in Seattle and a customer of Moven and Simple, two neobanks. Nicols is also CEO of Clientific, a strategy firm for banks and financial technology companies.

"Everything from the account-opening process to the customer service experience is unlike traditional banking, at least not like the banking experience that has turned so many people off," Nicols says. "Neobanks show you via emails and text messages exactly how you're spending your money and if your spending patterns are putting you in danger of overspending."

The perception is that traditional banks didn't want you to have this information because it was more profitable for them if you did overspend and overdraw, Nicols says.

Originally a financial blogger, Ron Shevlin at Snarketing 2.0 referred to these new banking concepts such as Moven, Simple, Bluebird from American Express, GoBank and the newest competitor, Mobile Money from T-Mobile, as "neochecking." That term has morphed into neobanks.

Here are questions to ask about neobanks before joining the trend.

What is a neobank?

The general definition is an institution that provides checking, a prepaid debit card and some form of savings account without the traditional brick-and-mortar building, says Jim Marous, senior vice president of corporate development at the marketing agency New Control in Cleveland.

This usually includes features like mobile deposits, person-to-person payments using phone numbers, emails or even social media identities, mobile budgeting tools and real-time digital receipts.

"With the exception of GoBank, the majority of these banks partner with chartered banks that hold deposits in FDIC-insured products," Marous says, referring to the Federal Deposit Insurance Corp. "The banks in the background take care of the money while the neobanks provide a simple, customer-centric mobile and Web experience."

GoBank is a brand of Green Dot Corp., which is actually a bank holding company and FDIC-insured, so this neobank can actually call itself a true bank.

How do neobanks differ from other banks?

Marous says neobanks stand out because of these features:

  • Low cost structure: no monthly fees, no withdrawal costs and low reloading fees.
  • Large ATM networks with no fees.
  • No overdraft fees because the checking product is a prepaid, reloadable debit card.
  • Simple and engaging mobile experience, unlike banking on a phone with a traditional bank.
  • Intuitive budgeting and money-tracking tools that allow you to determine whether or not you should buy an item.
  • Real-time balances: The balance on your smartphone is the exact amount of money you have available.

Many neobanks also provide ways to use retail facilities for making deposits, reloading their accounts or paying bills. New player Mobile Money changes the dynamics of these "smart" banks once more because T-Mobile has 70,000 stores where money can be deposited or accounts opened. GoBank customers can put cash in their account at Wal-Mart or a 7-Eleven convenience store, says Alok Deshpande, chief product officer of GoBank in San Francisco.

GoBank also has a simple budgeting feature. Deshpande says you can ask the bank's "Budget & Fortune Teller" whether or not you should make a purchase. Sometimes, she answers with a little humor. If you choose to spend, you also can electronically write a check on your mobile app and GoBank prints it out and mails it for you if the recipient doesn't accept electronic checks.

Who uses neobanks?

Marous says that the initial audience targeted by neobanks is the almost 30 percent of consumers in the U.S. who don't use the traditional banking system for a variety of reasons.

"These people have used prepaid cards, check-cashing services, consumer credit companies or no financial institution at all," Marous says. "In some cases, the demographic favors young people, but many of the neobank customers have become disenfranchised with the current banking system or pushed out of it for various reasons."

Research conducted by T-Mobile prior to launching Mobile Money revealed that 40 percent of the households that opened their prepaid card-based checking accounts there were creditworthy and could have an account anywhere. They decided the mobile-first offering was better for them, Marous says.

What are the disadvantages?

Except for T-Mobile's product, no bank branches exist. Nicols says customers who choose this type of banking probably don't care about having a brick-and-mortar bank branch.

"They (neobanks) also have a narrow range of product offerings, so don't expect car loans, home mortgages or business services," says Nicols.

Individual retirement accounts, or IRAs, and credit cards aren't part of the smart banks' packages, either.

What does the future look like?

"Our hope is that we are disrupting the banking industry by doing better than traditional banks and making things simpler," GoBank's Deshpande says. "We need to expand the rest of our financial ecosystem with the same like-minded spin."

In the future, Deshpande hopes to see people rethinking investment products, too, with the same simplicity in mind.

Marous predicts that a major bank may spin off part of its company and develop a neobank division. Overseas, major banks like AXA Banque in France, CommBank in Australia, which has a Facebook-driven version, and mBank in Poland are offering a similar banking experience. The mobile offerings have a lower cost structure and the limited services of a neobank.

Each of these neobank products is different, and shopping for the service that feels best for each individual is important. But if someone is comfortable banking and managing money via their phone, a neobank may be the best option, Marous says.

If you're not sure, you can always put a little money into a neobank and see how it compares with the bank you're currently using.


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