No Need to Rush Into Neo-Banks

Unlike manufacturers, banks don’t make things. Unlike retailers, banks don’t sell things. Banks make money in three ways - the fees they charge for services, the interest they charge on the loans they make, and the income they generate from investments. They fund the loans and investments from the deposits they gather from people like you and me - or from loans, bonds and equity investments in the bank itself. In return for these funds, depositors get interest paid on their savings, lenders are paid principal and interest, bondholders get income and stockholders get dividends - as well as equity appreciation.

Enter the neo-banks. These financial services firms look to lure consumers away from the large incumbent institutions like Chase and Wells Fargo. They offer free-checking and mobile apps to manage your account. These challenger banks, such as Chime, Simple and Moven, offer a wide variety of technology tools to help manage your financial life - particularly your spending. They are driven, due to the ever-increasing amount of time we spend on our mobile devices, to find ways to get consumers to interact with their financial services app and collect data on that usage.

These companies are very good at technology. However, neo-banks aren’t, by their own admission, banks.

• “We’re not a bank, we’re a technology company that provides online banking services, and partners with an FDIC-insured bank, BBVA Compass.” - from Simple’s website.
• “That means we don’t profit off of you. We profit with you: every time you use your Chime debit card, we earn a small amount from Visa (paid by the merchant).” - from Chime’s website
• “Moven is the world’s first real-time mobile money tool. Moven is a financial service provider. We partner with CBW Bank, along with other vendors, to provide digital banking services.” - from Moven’s website

BestCashCow helps savers make better decisions in their financial lives by helping them find the best savings rates at banks across the country. Though Simple has offered special rates that compete with the incumbents, at this point in time, most neo-banks are not in the position to offer competitive rates or the range of banking services desired by the majority of consumers.

Your banking decision should be based on a number of factors - customer service, access, convenience, financial stability and, of course, an offer of competitive interest rates. Though these new mobile players succeed at delivering convenience and access through technology, the reality is their size, and the fact that they are not banks, limits their offerings and calls into question their long-term financial stability.

You’ll undoubtedly hear more about neo-banks, as the Treasury’s Office of the Comptroller of the Currency (the “OCC”) continues to explore special purpose national bank charters for fintech companies. The future may bring opportunities to get access to new innovations in bank technology. But, for now, if you’re unhappy with your current bank, you probably will be better off finding one of the incumbents that is offering a better rate, as well as better technology and service, than you’re getting now.