Oct 9, 2020

What Is a Neobank?

Neobanks (from the Greek neos, “new”) are companies offering banking services exclusively online, principally via an app. Unlike traditional banks, they do not have physical branches. They generally offer a more limited array of services, focusing instead on current accounts and payment solutions, rather than savings, investing, and credit.

Understanding Neobanks

Direct banks operating without branches through the telephone or the internet have existed for a long time, but what distinguishes neobanks is generally this double focus on mobile banking and a simple offering. They’re to the point, easy to use, and there to get the job done without the hassle of needing to interact with a brick and mortar bank and an in-person banker.

If what you’re looking for in a bank isn’t centred around investing or credit service and you don’t feel strongly about having personal contact with an advisor, then Monito recommends the use of neobanks. Their apps are easy to use and give you total control of your accounts, while also saving you on the fees you would pay to traditional banks. 

What's the Difference Between Neobanks Like n26 or Neon and E-Money Institutions (EMI) Like Revolut and Wise Multi-Currency Account?

There are two types of institutions to consider when thinking about neobanks: actual banks, like N26 in Germany or Monzo in the UK, and what can be called E-money institutions, or EMI, like Revolut, or Wise and its Borderless accounts.

Both types of institutions have a lot in common: they will provide you with an account on which you can deposit money, use it to make payments and transfers, and will provide you with a payment card and, often, a personal IBAN to do so. Both of them are generally supervised by their countries’ financial regulatory body: in the UK, for example, the Financial Conduct Authority supervises both Monzo and Revolut. A quick look at the activities and services both companies are allowed to provide by the FCA will tell us, however, that they are fundamentally different behind the scenes. Monzo is allowed to provide banking, mortgages, loans, consumer credit, pensions and investment accounts, and even insurance: all features of traditional banks. Revolut, on the other hand, is only allowed to provide payment services and E-money, which means that it has to rely on a more traditional bank to actually keep your money: in effect, they are only able to handle the movement of your money themselves.

Neobanks like N26 and Monzo are institutions that are accredited to be banks – meaning they have the legal infrastructure to support more traditional banking practices. On top of handling the movements of your money, they can actually keep it themselves, and on top of that, they can also provide services like loans or credit cards. But most importantly, if the worst happens, they’re supported by a system that will guarantee that your money stays safe. What does that mean? Well security-wise, it means that if a traditional bank goes under while you have money deposited with them, a guarantee is often in place for retail customers to ensure that you get at least some of your money back. N26, for example, a German neobank with a full European banking license, is covered by the Entschädigungseinrichtung Deutscher Banken for up to €100,000 in most cases if the bank were to fail. In fact, according to European regulations, EU countries have to provide such a scheme, which generally takes the form of a guarantee for retail customers of a 100% of their deposits up to €100,000. In the UK, banks, including neobanks like Monzo, are covered by the Financial Services Compensation Scheme which guarantees up to £85,000. Similar institutions also exist in the US with the Federal Deposit Insurance Corporation and in Canada with the Candian Deposit Insurance Corporation, which respectively covers up to $250,000 USD and $100,000 CAD per type of account per bank.  

EMI like Revolut and Wise will often act like banks on the surface and like to tell you they can do some things better than established banks (and let’s be real: they often do have an edge on older institutions, especially in the world of international money transfers), even though they cannot offer the same wide set of services. Revolut, in particular, is fond of calling itself “better than a bank”, which is a positive spin on the fact that it cannot call itself a bank! It does allow you to keep money in an account associated with an IBAN, allows you to transfer money, and provides you with a debit card, but despite all of this, cannot do the most important thing a bank can: keep your money itself. The funds on your Revolut account are actually kept by another British bank, either Barclay’s or Lloyds, on an account owned by Revolut itself. Among other things, this state of affair means that Revolut, not being able to use the money it is entrusted with like a normal bank, will not give you interest on your accounts: while you might have a savings “pot” with them, you can’t have an actual savings account. As we have seen, Revolut is itself regulated by the FCA, and the money you entrust Revolut is kept separate from the company’s own money, which means that if it were to go bust, your money should be safe, even though it is not protected by the UK’s Financial Services Compensation Scheme. However, the twist is that if the same thing were to happen to Barclay’s or Lloyds, your deposits through Revolut wouldn’t be protected under the Scheme either, as Revolut is not a retail customer, and in this case, would not necessarily able to reimburse your deposits. A less likely turn of event, but not one that should be ignored all the same.  

What Does This Mean?

Well, it means that like with any big decisions in life, you should exercise caution when choosing a neobank and do your research. Just because an establishment claims to be a neobank doesn’t mean that it’s enough to gain your trust. Look for accreditation, look at reviews, look at ratings, at numbers of users, at any affiliations. The more of these there are, the more tried and true the neobanks are. Good news is that you can trust Monito to do some of this work for you in our independent reviews of neobanks like N26, Monzo, Monese, Neon,  where we take security and credibility, functionality, features, user experiences, and more into consideration, but it’s important to do some extra research on the qualities that are most important to you.

Think also about what you need your new account for. Are you looking at neobanks because you need the full range of services traditionally provided by a bank – somewhere to cash your paychecks, to start saving money, and to generally manage your finances – and want someplace more convenient and up-to-date than a brick and mortar bank? If that’s the case, then you want to make sure to find a neobank that can fulfil your needs and may be more interested in finding one that has a banking license that can address them. Neobanks that fall into this category include N26, Monzo, Monese, Neon, and more. 

If you’re looking at neobanks because you want an easier way to manage transfers between friends, to have a local IBAN in a country you’re temporarily moving to, or to manage cards in your mobile wallet, or to more easily (and more affordably!) transfer or spend money internationally, then whether or not a digital institution can build interest on your savings account or back up large sums of money becomes much less important. With digital institutions like Revolut and Wise Multi-Currency Account, you can transfer the amount of money you intend to spend on your card or transfer abroad to your account, as you need, without needing to worry about managing a full bank account. 

Today’s neobanks have a wide offering of services, and you can likely find one that is right for you! 

Featured image by Tyler Franta, via Unsplash.

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