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  • What You Need to Know About Neobanks

    Jan 12, 2026 1:00 pm by Emmy TitherNewsProtectSave

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    Disclaimer

    Any reference to specific companies, businesses, products, or services in this article is for educational purposes only and does not constitute an endorsement by the University of Illinois System.

    Introduction 

    Picture this: It's 2090. Banking is entirely digital. Transactions happen instantly through devices embedded in everyday objects. Physical branches are historical landmarks. Currency exists only as data. 

    Sound futuristic? Most of it is already reality, although we still go to physical bank branches for many things. Let’s talk about an aspect of that potential future: neobanks. 

    This is a new and rapidly evolving space, so definitions are still shifting. There’s often overlap between services provided by traditional banks and what consumers consider neobanks, making terminology somewhat fluid. For our purposes, let's use the Britannica Money definition: "Neobanks are online companies that offer limited financial products and services similar to [traditional financial institutions], but they aren't true banks" (Britannica Money, 2024).

    Neobanks are gaining traction worldwide. Countries like Brazil, India, and Ireland (Kadar, 2023) have seen substantial adoption, while emerging markets in Asia, Latin America, and Africa (Ejimone, 2025) are poised to lead the next growth wave. Neobanks are also more popular among younger and lower income consumers (Gutierrez, 2026). 

    But what are neobanks, really? How are they useful? And where should we be cautious? 

    What Exactly Are Neobanks?

    To understand neobanks, it's helpful to start with some basic terminology: 

    Fintech now refers to technology companies involved in financial services. You're probably already familiar with some like Venmo, PayPal, and Zelle. These are all examples of fintech companies that have transformed how we handle money. For example, it can be much easier to just virtually transfer some money to a friend with peer-to-peer fintech services after a dinner out than it is finding the exact amount in cash. 

    Neobanks are more modern examples of fintech. Popular examples include Revolut, Wise, Chime, and Credit Karma. They differ from traditional banks in their licensing, operations, and overall approach to connecting consumers with banking services. 

    How They Work

    Here's where things get a bit more complex. Let’s remember the Britannica Money (Britannica Money, 2024) definition from earlier, "Neobanks are online companies that offer limited financial products and services similar to [traditional financial institutions], but they aren't true banks." 

    Many neobanks offer high-yield savings accounts that appear to be insured by deposit insurance. For member banks in the United States, that insurance is provided by the Federal Deposit Insurance Corporation (FDIC) (Federal Deposit Insurance Corporation, 2019) and covers up to $250,000 per individual on covered accounts. For accounts eligible for deposit insurance at credit unions in the United States, that insurance is provided through the National Credit Union Association (National Credit Union Administration, 2026). 

    What is deposit insurance? It's protection if your bank fails or goes bankrupt, typically covering up to a certain amount per customer. The coverage amounts and terms vary by country, so the address you use to sign up matters. 

    The FDIC in the United States has issued guidance on pass-through deposit insurance coverage to address how accounts are protected at fintech companies that use "for-the-benefit-of" or "FBO" accounts (Federal Deposit Insurance Corporation, 2025). FDIC insurance covers checking and savings accounts at insured banks up to $250,000 per individual on the account. The National Credit Union Administration (NCUA) insures the same types of accounts at credit unions, and there are even some other types of chartered banks with different rules. 

    With neobanks, there's an important catch: the money is usually held at a partner bank and may not always be fully protected. This partnership model is central to how neobanks operate-- they provide the user interface and customer experience, while a traditional bank actually holds your funds. 

    This arrangement has important implications. If you're considering using a neobank, it's wise to limit the amount you keep in the account and put the bulk of your savings in a federally insured bank or credit union. Why? If the neobank or its third-party recordkeeper fails, you may have difficulty recovering your funds from the partner bank. 

    Financial Regulation and Insurance

    Financial regulation is important. It ensures financial stability, protects consumers, maintains trust in the financial system, and provides recourse when things go wrong. We’re going to focus on American financial regulation here. Keep in mind that, depending on where you are based in the world, different regulations will apply. In the United States, neobanks must follow state and federal regulations in the jurisdictions where they operate. 

    State-Level Oversight: Illinois as an Example

    The Illinois Department of Financial and Professional Regulation (IDFPR) hasn't introduced legislation specific to neobanks or bank/fintech partnerships (Illinois Department of Financial and Professional Regulation, 2026b). That being said, IDFPR does have regulatory authority over the bank side of these partnerships, though such partnerships are less common in Illinois compared to states with higher or no APR caps for consumer lending. 

    In other words, Illinois has stricter limits on how much interest lenders can charge (APR caps). States with higher or no interest rate limits are more attractive for neobank partnerships because there's more profit potential in consumer lending if that’s a service they are offering. 

    IDFPR previously entered into a consent order against the neobank Chime for their use of the terms "bank," "banker," or "banking" (Illinois Department of Financial and Professional Regulation , 2021). State law prohibits non-bank companies from using those terms to advertise or hold themselves out as banking institutions to the public. 

    International Neobanks

    When international neobanks like Wise or Nubank operate in the U.S., they still need to comply with applicable U.S. financial laws. The banks they partner with are subject to oversight by U.S. regulators. Take Wise as an example: it partners with Goldman Sachs and J.P. Morgan Chase to offer banking products in the United States, both of which are overseen by federal regulators. The U.S. branch of Wise is also registered with the Financial Crimes Enforcement Network (FinCEN) and holds money transmitter licenses in most U.S. states, including Illinois (finCEN, 2019). 

    Why This Matters

    These regulatory frameworks affect: 

    • What services neobanks can offer 
    • How your money is protected (if it's protected at all) 
    • Which regulatory body oversees them 

    For instance, if you leave money in your Venmo or PayPal account, none of it is insured. This means small businesses that leave money in their Venmo accounts put their businesses at significant risk. The Consumer Financial Protection Bureau has warned that your money is at greater risk when held in a payment app instead of an account with deposit insurance (Consumer Financial Protection Bureau, 2025). 

    This is true with neobanks, too. To the extent possible, you should always ensure that your spending money is held in an insured account. This protects it and you. This is true even if the account is at a traditional banking institution. 

    For example, some FDIC and NCUA institutions offer account types that are not covered by deposit insurance. If you have an Investment Money Market Fund, the variable nature of that fund makes it ineligible for deposit insurance, though there are some insured Money Market Accounts. If an institution offers investment fund services, those may be called investment accounts but they aren't covered by deposit insurance. 

    All this to say: know where you’re putting your money and how its protected by insurance, if at all. 

    Benefits and Concerns

    Neobanks offer several compelling advantages for customers. These include things like: 

    1. Lower fees: Most neobanks have reduced fee structures compared to traditional banks, often eliminating monthly maintenance fees, overdraft fees, and ATM fees. 
    2. User-friendly experience: With intuitive mobile apps and streamlined interfaces, neobanks are designed with the smartphone generation in mind. Opening an account can take minutes rather than hours. 
    3. International features: Neobanks sometimes focus on international money transfers, offering cheaper and faster options for sending money across borders compared to traditional banks. 

    At the same time, while neobanks offer convenience, there are legitimate concerns about security and regulatory oversight. These include things like: 

    1. Confidence in transactions and deposits: The lack of robust regulatory oversight compared to traditional banks can create uncertainty about the security of transactions and deposits. 
    2. Misleading claims: Some neobanks have faced enforcement actions for deceptive practices. Credit Karma, for example, was recently sued by the FTC for wasting people's time with pre- approval offers that weren't actually available (Federal Trade Commission, 2024). Earlier, in 2014, Credit Karma settled FTC charges after claiming they had bank-level security when they didn't (Federal Trade Commission, 2014).

    Beyond security concerns, neobanks have some practical drawbacks: 

    1. Requires reliable internet: If you live in an area with poor connectivity, accessing your money can become challenging. 
    2. No physical branches: You can't easily deposit cash or speak to someone face-to-face when you have complex issues. 
    3. Limited services: Neobanks typically offer fewer products than traditional banks. Access to loans, mortgages, or specialized financial services may be limited. 
    4. Customer service: Support is often chat-based only, which can be frustrating for complex issues that benefit from personal interaction. 

    With all this in mind, what’s the best way forward? Well, that depends on you and your situation but there are some things you can keep in mind as you decide on the best way forward for you. 

    Advice for Users

    Before opening a neobank account, do your homework. Start by checking reviews and investigating the company's licensing status and track record. Visit their website—usually in the "About" or "Legal" sections—to find their license information, then verify that license number with the issuing authority, using a tool like IDFPR’s license lookup for entities licensed to do business in the state of Illinois (Illinois Department of Financial and Professional Regulation, 2026a). Legitimate neobanks clearly state their regulatory status; vague or missing information is a red flag. 

    Next, understand your protections. Verify exactly how much deposit insurance coverage you have and which scheme applies—don't assume it's the same as traditional banks. Check that they have robust data protection measures and clearly communicate how your information is secured. Be wary of companies claiming bank-level protections they don't actually possess. 

    Finally, if you decide to open an account with a neobank, start small. Test the service with a limited amount of money before moving significant funds. Review the complete fee structure, including charges for international transactions, withdrawals, and other services that may not be immediately obvious. Once you're confident the neobank meets your needs and you understand the protections in place, you can gradually increase your usage to a level that is comfortable for you. 

    Conclusion

    Neobanks offer a different approach to financial services, with benefits like convenience, lower fees, and digital access. They also come with some concerns: limited customer service options, potential regulatory gaps, and dependency on partner banks for deposit protection. Using neobanks safely requires understanding what you're getting into. Verify regulatory status, confirm insurance coverage, and recognize the limitations. Many users find neobanks work better as a supplement to traditional banking rather than a full replacement. The financial technology landscape continues to change, and regulations are adapting alongside it. Make decisions based on your specific financial situation, risk tolerance, and the level of protection you need for your funds. 

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