The terms neobank and challenger bank are often used interchangeably. However, some consider neobanks to be firms that do all their business online. In contrast, challenger banks have some physical locations. 

The market for deposit accounts has become more crowded in recent years. That’s because neobanks and challenger banks are winning new customers by offering deposit accounts along with other product offerings. In addition, they’re standing out in the marketplace against traditional banks by offering improved ease of use, targeting specific demographics and waiving unpopular account minimums and fees levied by the larger banks. 

For consumers, opening a neobank account can be much simpler and easier than through a traditional bank. Savers can typically access the bank through its website or app, sign up for an account, and deposit or transfer money, all without visiting a physical branch or filling out paperwork. Because neobanks have no or few physical locations, customers who need to withdraw funds often need to access a third-party ATM. And unlike traditional banks, neobanks can’t extend credit to customers.

Many consumers seek a financial partner who can help them reach their personal financial goals where they are today. Some of these neobanks meet that need by targeting consumers based on their occupations, like freelancers, or their economic situation, like individuals living paycheck-to-paycheck, or those who are focused on savings. Some other neobanks offer checking accounts linked to an investment accounts with the goal of building wealth, or they issue secured credit cards without the usual credit check to help them establish or boost their credit score. 

Neobanks also target specific demographics that may feel overlooked by traditional financial services.

Neobanks generate revenue from fees paid by merchants when consumers use their neobank debit card, known as interchange fees. Some banks also charge users fees for accessing cash through ATMs. Since the banks lack the brick and mortar costs of traditional banks, they often enjoy higher profit margins.

Similar to any bank in the U.S., if a neobank is insured by the FDIC or partners with a licensed bank(s) to offer the deposit account, deposits up to $250,000 per individual are insured, even if the bank goes out of business. Still, consumers may want to ensure a neobank is well protected against potential cyberattacks. 

Given the unique offerings, many consumers open their first bank account at a neobank or switch over from another bank. As a result, deposits at neobanks rose to an estimated $47.1 billion in 2021 from $34.8 billion in 2020, according to research firm Statista, which also estimates those deposits will soar to nearly $725 billion by 2028. Neobank deposits are a small but growing part of the $19.2 trillion in total bank deposits in the U.S., according to YCharts. 

Providing deposit accounts can open the door to linking to more accounts owned by a consumer or provide them with more products and services. Once a neobank creates a deposit account for a user, the bank can then link ACH, wire, account numbers, interchange and other payment vehicles to fund the deposit account and/or issue cards for a more holistic experience. 

Yes, if the neobank or challenger bank is either a licensed bank or partners with a licensed bank(s) to offer the account. For example, Synapse’s* Deposit Hub allows you to create FDIC-insured deposit accounts because we have partnerships with licensed banks.

At Synapse, neobanks can use our Deposit Hub for many other applications that require an embedded deposit account. These applications include support for other business applications, including digital wallets, payment accounts, debit cards, and spend cards. We’ve seen them used most frequently for digital wallets, merchant processing, savings accounts, debit cards, and spend cards 

Synapse’s Deposit Hub powers neobanks and full-featured consumer budgeting apps, payroll platforms, and more. With Deposit Hub, you can customize unique products and bring them to market in weeks, not months. Account types available include interest-bearing deposit accounts, custody accounts, clearing accounts and FBO sub accounts. If you’re interested you can learn more here. 

* Synapse Financial Technologies, Inc. is not a Bank. 

Deposit, Banking and Card services are provided by Synapse Financial Technologies, Inc.’s partner banks, Members FDIC.