With online-only banking platforms on the rise, parsing the differences between these and traditional banking options gives you a better understanding of what you’re signing up for — and what value you may be leaving behind — when weighing whether to go with the “next big thing.” Here’s a look at the pros and cons of banking with a neobank versus a community bank.
What is a “neobank?”
Neobanks are banking platforms with no physical location. They are also known as “online-only banks.” Some examples of the most popular neobanks are SoFi, Chime, and Varo.
The rise of neobanking
Neobanks came into focus following the 2009 financial crisis and quickly stood out for their flexibility and higher saving account interest rates compared to their traditional banking counterparts. To date, neobanks remain popular for their accessibility, ability to support specialized needs, and lower barriers to entry.
Claiming their lack of brick-and-mortar locations as an advantage, neobanks bill themselves as the most accessible banking option on the market. Accessibility is a key factor in neobanking’s staying power to date because these banking models are built to serve targeted communities that feel underrepresented by traditional banks, including those in undeveloped areas. By providing a banking alternative for individuals struggling to build credit, neobanks position themselves as the answer for digital-first, barrier-free solutions curated and based on cultural affinity and shared financial goals.
For example, neobank Kinly was created to help “Black America build generational wealth,”1 while Cheese was built as a platform for and by Asian Americans to navigate language barriers and build strong foundations for Asian-American businesses.
The drawbacks of neobanking
For starters, neobanks are less regulated than traditional banks, and in some cases, are not regulated at all. Neobanks may not be fully chartered or licensed and insured by the FDIC, an issue that could become disastrous in the event of bankruptcy or a cybersecurity threat, where customers may be left unable to access their accounts and funds.
Some of these drawbacks have led to substantial issues that call into question whether neobanks are truly secure and reliable for the long term. Take Chime, for instance — the popular neobank has been a target of speculation recently due to alleged unlawful shutdowns of its customers’ accounts, failing to return money to accounts, and leaving users locked out of their accounts without warning.2 Customers who experienced these shutdowns banded together and started Facebook groups, all of which circulated similar stories of money disappearing from accounts.
After multiple Better Business Bureau complaints,3 Chime responded to the allegations, stating shutdowns occurred due to suspicious and fraudulent account activity. But examples of customers waiting to be reimbursed remain.4
When people seek out new banking options, the promise of high investment saving accounts, fewer fees, and faster access to funds sounds appealing. However, these perks can also pose a threat when people aren’t told the whole story, resulting in reckless lending that threatens customers’ entire livelihoods. That’s where the fine print becomes essential — neobanks paint themselves as modern banking solutions with less red tape that serve everyone, but the essential information about how your money is protected is in the details.
How does neobanking compare to community banking?
Community banks are a more traditional form of banking and are often referred to as banks “for the people” because of their local presence and community investments. Their teams often get involved by volunteering for community organizations, which their banks can also help fund. Community banks support their area as a resource for financial guidance and support from within it, not from afar.
Because deposits are received and loans are distributed locally, money managed by community banks is often pumped back into the community in several ways. This supports community members when and how they need it, whether through favorable interest rates, competitive mortgages, and flexible small business loan terms. Sometimes, the support just comes in the form of high-quality financial advice and guidance with every customer’s unique circumstance and goal in mind.
Because of their core values and community focus, they are less likely to have issues that will disrupt the security of their customers’ funds and have more incentive to uphold high customer service standards due to their local presence and footprint as a corporate citizen.
Advantages of banking with a community bank
Community banks operate not only for the community, but as a part of it — their teams too work, live, and raise families in the same area as the customers they serve. Community banks have a local presence that allows customers to put faces to names when they seek out financial help, most crucially, in-person — a feature neobanks can’t and don’t offer.
A primary function of community banks is fostering economic growth in the area. Although neobanks claim to have a curated banking experience, community banking efforts extend beyond the walls of a bank — something that neobanks couldn’t claim even if they did have a physical presence in the community.
