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How do Neobanks Manage Fraud?

The idea of digital banking isn’t new, but the trend has grown fast in recent years. Banking on digital platforms has become part of the new norm. People are happier and more relaxed banking on their computers and mobile phone, making much fewer trips to bank branches. Neobanks are digital-only banks that thrive in this environment. Together, let’s explore what they are, how they compare to challenger banks and how they manage fraud.

What is a Neobank?

Neobanks are fintech firms that use software to provide streamlined online and mobile banking. They specialize in offering particular financial products like savings and checking accounts and, in some cases, provide tools that help with saving and budgeting.

How do Neobanks differ from other banks?

Physical presence

Most banks, including some younger challenger banks, have at least a few branch locations. Neobanks are exclusively online.

Banking license

Though the physical presence of challenger banks is often limited, they need banking licenses to provide services, while neobanks don’t. A banking license allows challenger banks to provide various financial services, including issuing loans and credit cards. Neobanks looking to provide these services must partner with licensed financial institutions.

Neobanks often start as fintech startups, but when their banking license request is approved, they transform into full-fledged challenger banks.

Examples of Neobanks

  • Chime is one of the most popular brands in the neobank world in the U.S. Chime eliminates most common fees associated with traditional banks and offers opportunities to build credit.

  • Varo Bank started as a neobank but transformed into a challenger bank after receiving a full-service national banking charter from the Office of the Comptroller of the Currency (OCC). It offers perks similar to Chime without overdraft and monthly fees or a minimum balance requirement.

  • Current is a popular neobank in the U.S. that offers early access to your direct deposits and offers cashback on debit card transactions.

  • Revolut is a U.K.-based neobank that got its license in the EU and became a challenger bank. Initially, in 2015, it focused on travel cards that offered cheap exchange rates. The bank accepts over 150 currencies, has no charges for standard currency exchange, and offers accounts for kids between seven and 17 years.

  • Dave is a neobank based in the U.S. providing personal accounts and debit cards. Moreover, it offers up to $250 in cash advance and helps to build a credit history.

Pros and Cons of Neobanks


  • No credit checks and have fewer rules

  • Use data to predict account activity, a feature that comes in handy in budgeting and planning

  • Banking is done through apps

  • Most have crypto trading options


  • The apps might be confusing for individuals who are not tech-savvy.

  • Customer service is through email, chat or phone - there’s no face-to-face option

  • Neobanks aren’t legally identified as banks

  • No ATM networks; means depositing cash can be hectic

How neobanks manage fraud

Neobanks don’t handle as many financial processes as traditional banks, but they still have to deal with disputes and chargebacks. Moreover, they need to adhere to consumer protection laws, card network mandates, Regulation E (the Electronic Fund Transfer Act), and Regulation Z (Truth in Lending Act)..

Regulation E lays down the rules for electronic fund transfers and offers guidelines for issuers of debit cards. According to this law, neobanks have ten days to pass a verdict on a dispute. However, the timeline can be extended to 90 days if provisional credit is provided within the initial ten days. Non-compliance attracts a $1,000 fine for every violation but not exceeding 1% of the neobank’s assets.

Reg Z stipulates rules for credit card issuers and merchants, and it also details the responsibility of consumers to dispute transactions within 60 days of the statement. Past this deadline, a neobank can reject the dispute. But for this rule to be in effect, neobanks need to have a proper process consumers can use to dispute transactions.

Should you switch to a neobank?

With the ease of access, lower fees, and often higher interest rates for consumer deposits, it’s easy to see the allure of neobanks. However, their minimal financial services mean they aren’t for everyone. Before switching, consider the financial products offered, ATM accessibility, interest rates on accounts, budgeting features and fees and fine print regarding overdrafts

This article does not necessarily reflect the opinions of the editors or management of EconoTimes

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