Neobanks Found Struggling to Make Good on Their Big Promises

    Bloomberg News reports that Digit, a financial technology firm operating in San Francisco, offers traditional banking services virtually. The services come along with an automated tool that can allocate part of the customers’ deposits to a savings account, enabling them to match their investing objectives. The services are offered with a so-called “no overdraft guarantee.”

    The services offered may sound too good to be true, although some of them are fulfilled by the bank, according to Consumer Financial Protection Bureau. At the beginning of this month, the regulator scrutinized Digit, which has now become a part of the Oportun Financial Corp, a San Carlos-based lender. The regulator has imposed a fine of $2.7 million for falsely advertising that their services do not attract the no-overdraft guarantee.

    It turned out that the algorithm Digit had been using siphoned off some of the money from a few of the customers’ checking accounts, which led to the overdraft fees. Although Digit promised to reimburse the drained-out money, it has not been able to as per CFPB.




    What are the Challenger Banks?

    Bloomberg News reports that Digit is not the only neobank that has failed to meet its promises. As many as 60 such fintech companies are being called “challenger banks” or the “neobanks” in the United States that have been extending similar products.

    These banks have a client base of around 23 million customers, which is anticipated to double by 2025 to 50 million, per the consumer finance website, Bankrate.com.

    Although they are known as neobanks, they are technology companies that enter into partnerships with conventional banks to allow customers digital access to their money. By doing so, neobanks have been offering Federal Deposit Insurance Corp protection to the savings and checking accounts.

    Bloomberg News reports that in the case of Digit, the banking services partner is MetaBank, a South Dakota-based bank, which states that it was not involved in the matter related to Consumer Financial Protection Bureau.

    Digit operates in a way in which instead of earning money by lending out the deposits, the neobanks subsist on the fees they charged to the merchants when any account holder swipes his debit card. Some challenger banks, including Digit, also take subscription fees.

    In most instances, these banks look for young professionals that have just started their careers and prefer to save a part of their paycheck automatically and tempt them with promises of higher interest rates. It has been observed that most such people have low balances in their checking accounts. So, they fall prey to promises of higher rates of interest rates.



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