Online Bank vs Neobank: What’s the Difference

The numbers don’t lie. These days, the majority of us conduct our business affairs online rather than in the banking hall. Gone are the days when you needed to physically enter a bank to make a transfer or a deposit or even open a bank account. In fact, bank branches have been closing at record levels because there is much less need for them.

But even as we conduct our affairs digitally, many of us are still confused about what type of platforms we are engaging with. Specifically, many of us can’t say definitively if we use a neobank or an online bank. At first glance, they can seem like exactly the same thing. In reality, however, there are many subtle and important differences that we should be aware of before we trust our money to any institution. In this article, we’ll differentiate one from the other. 

What Is an Online Bank?

An online bank is essentially what the name would imply: a bank that operates online. Since the advent of the internet, many traditional banks have operated both in-person branches and online platforms. However, an online bank is fully licensed by the relevant government bodies and operates solely online. This means there is no physical branch that its customers can walk into to have their needs met. Examples of online banks include Starling and Monzo.

What Is a Neobank?

A neobank is also what the name would imply. While it is an organization that can offer some level of banking services, it is not fully licensed. Essentially, it is a business that offers financial apps for customers to use. But how does it operate if it doesn’t have a banking license? Typically, an online bank will partner with a fully licensed banking operation, which will hold and ensure customer funds as permitted. 

So if you sign up with a money-saving or investment app, they will partner with a real bank that will hold and secure your funds while giving you access to their services. Examples of popular neobanks include Revolut and Chime.

Online Bank vs Neobank: Key Differences

The question of whether an online bank or neobank is more appropriate for a user ultimately comes down to the experience they are looking for. Each delivers a unique benefit, and the differences can be looked at in the following ways: 

Banking Services and Features

This is where the difference between the two is really apparent. Because an online bank is fully licensed, it can offer all of the same features as a typical bank, including loans, mortgages, insurance, and much more. Essentially, the full suite of banking-related services. Neobanks, on the other hand, typically offer only savings features, investments, and deposits and withdrawals. 

Fees and Account Costs

Generally speaking, online banks attract some type of monthly fees, though this can be avoided if you complete transactions or have balances above a certain threshold. New banks, on the other hand, are much more affordable to use and typically charge zero monthly fees. 

Customer Support

Online banks offer much more in terms of customer support, as not only can you get things like email and chat, but oftentimes you can also call the bank to get support. In some cases, can enter a physical office of one of their partners or go to their head office to escalate issues. Neobanks, on the other hand, have far fewer customer support options, typically limited to live chat, email, and help articles. 

Security and Regulation

Since they are fully licensed with regulators, online banks follow all standard industry procedures, including security measures and adherence to regulations. Neobanks, while not registered in the same way, partner with institutions that apply the same laws. This means that customers who use neobanks enjoy the same benefits in terms of insurance and security via those partner platforms 

Deposit Protection

Online banks offer deposit protection up to a certain amount as dictated by the financial bodies of the countries they operate in. This means that if you keep your money with them, it is completely insured up to a certain amount. With neobanks, you enjoy similar protections because your funds are held by their partners, which have the same license.

Pros and Cons of Online Banks

Advantages of Online Banks

• They are not subject to opening and closing times, unlike physical banks
• Money can be moved between accounts, invested, and saved in an instant
• There is no need to physically enter a bank hall
• They are fully licensed and thus, subject to regulations
• They offer deposit protection and other legal benefits

Disadvantages of Online Banks

• Because they exist purely online, they are often targeted by hacks and security breaches, and while most have very strong security systems, there is always the risk.
• If you need to escalate a query, there is no local bank branch you can walk into and be seen immediately 
• It is very difficult, if not impossible, to deposit cash into an online bank

Pros and Cons of Neobanks

Advantages of Neobanks

• Because their unique selling point is their apps, they typically roll out very unique features in terms of savings, investments, money management, and much more
• Users enjoy it due to no fees on account usage, transactions, and much more
• They typically offer sleek interfaces and a great user experience

Disadvantages of Neobanks

• Because they are not licensed themselves, some consumers do not feel comfortable using them despite their fully licensed partner banks 
• It is nearly impossible to get any in-person support while using them
• They cannot offer services such as mortgages, insurance, or loans. 

Online Bank vs Neobank: Which Is Better for You?

Final Thoughts: Online Banks vs Neobanks

In the modern financial landscape, online and neobanks occupy two unique positions. While one is essentially bridging the traditional banking system to the modern world, the other is carving a new path entirely. 

For consumers, the right choice ultimately depends on their specific needs. Those who still want the benefits of the traditional system might find themselves quite at home with online banking. On the flip side, those who want all the modern trappings of app-based financial management will find themselves drawn to neobanks. Regardless of which you choose, you should do proper research on each financial institution before trusting them with your funds.