How fintech is changing how we think about and use financial services

The U.S. credit card industry has historically been somewhat slow to adopt new technology.

Fortunately, we have witnessed dramatic improvements in technological advances in the U.S. card space over the last decade or so. A whole new industry called fintech, a catchy term that is short for the phrase “financial technologies,” has emerged and become quite popular.

Fintech has had a significant impact on the card industry and has resulted in a number of exciting card innovations and new product offerings. This has been welcomed news for consumers, particularly consumers with poor credit scores.

What exactly is fintech?

Fintech is simply technology that is used to improve the delivery of financial services. Namrata Singhal, who humbly holds a Harvard MBA and works in the fintech space, explains that fintech is a catch-all term that encompasses several areas.

“Just as financial services itself is an enormous and wide industry, spanning across many different verticals and disciplines, fintech is an equally broad catch-all bucket,” she says. “Until recently, the act of borrowing, setting up new accounts at banks, transferring funds or investing involved face-to-face interaction with bank employees. Fintech refers to the entire suite of various software and hardware solutions which make these activities more accessible and/or faster largely via the internet.”

While the term has only become popular in the past decade or so, it has driven how consumers interact with money for well over a century. According to Singhal, you “could even look at the ATM machine as an early version of fintech – in that, it made it easier for customers to withdraw money without having to wait in line for a bank teller.”

Singhal adds that fintech companies today “are involved in streamlining or disrupting financial services in areas ranging from lending to payment processing, to investing and saving.” The general goal of all companies is to use and scale technology to reduce costs and/or improve the customer experience.

What is a neobank and how does it differ from a traditional bank?

Neobank is another buzzword that is often used in conjunction with fintech companies. Singhal notes that the British call them “challenger banks.”

Neobanks offer many of the services of a traditional brick-and-mortar bank (that has physical branches that you can walk into) but are typically virtual and fully digital. Singhal explains that “essentially a neobank is an entirely online virtual bank where all services and interactions with the consumer are conducted at a distance as opposed to at a traditional physical branch.”

She adds that banks like TD Bank help set the stage for neobanks “when they strategically chose to piggy-back on other bank ATM machines and refund their customers the cost of using other bank ATMs instead of investing in making their own ATM machines.”

While neobanks may not offer all of the benefits of a traditional bank (also known as an incumbent bank), they attempt to offer many of the same services including credit cards, short-term loans, mortgages, and money transfer functionalities.

Interestingly enough, Beverly Harzog, a consumer finance analyst with U.S. News and World Report, notes that neobanks actually often “develop a partnership with a bank. The partnership is typically done so they can offer bank accounts that are FDIC-insured.”

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Unlike banks that rely heavily on interest or finance charges and penalty fees for revenue, a large portion of the income of neobanks is made up of merchant or processing fees received when customers pay with their debit or credit card. These fees are generally not seen as being as punitive in nature, so this can help give the perception that neobanks are more consumer-friendly.

What are the pros and cons of neobanks, particularly regarding credit cards?

The cost savings of neobanks are noteworthy. Harzog explains that since neboanks are virtual, expenses for neobanks are usually lower than traditional banks. As a result, many neobanks can offer competitive interest rates and lower fees. She cautions, though, that “there are premium services with fees, too, so make sure you understand the terms of any account you open.”

Singhal echoes Harzog’s remarks by adding that “some neobanks have genuine business model savings from not having to fund brick and mortar businesses.” And that some are truly looking to pass these savings back to the customer. Like Harzog, she warns, however, that “not all enticing offers are truly attractive.”

Here is a breakdown of some neobank advantages:

• Lower costs, including attractive interest rates, and fees.
• More innovative products, such as credit cards that help consumers build or rebuild their credit in unique ways (more on this below).
• Higher interest paid on savings products, like savings accounts.

Here is a breakdown of some of their disadvantages:

• Neobanks are new and, therefore, don’t always have a consistent history of success.
• Many neobanks specialize in certain services, so make sure you choose one that addresses your needs and realize that they may offer limited options.
• Since neobanks are accessible predominantly online or via an app, it can be difficult to talk with a person if you have a problem and this could adversely affect customer service.

As you might expect, cards offered through neobanks can be very attractive, particularly regarding interest rates, fees and rewards. Singhal is particularly impressed with card rebate offers. She notes that some reward cards “can be appealing since they are often investing in acquiring customers with enticing cash-back deals.”

She cautions, though, that “the devil lies in the details.” She advises that you research card terms, including APR (annual percentage rate) and any potential fees and benefits.

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Do you have poor credit? If so, don’t despair! Neobanks have done a wonderful job of introducing new card offers that can help improve your credit score.

The good news is that these offers are often much cheaper than similar offers from traditional banks. One example are cards that feature credit builder loans.

Are major credit card issuers embracing fintech?

You can rest assured that major card issuers have taken note of the strides that neobanks have made in the fintech space. While they are somewhat late to the party in some cases, there is no doubt that major issuers have seen neobanks as a threat to their business model and that they are embracing fintech.

Singhal, who has spent the past few years working with startup companies, observes that “as a general rule, big companies tend to be less nimble and agile and less able to evolve relative to their startup peers.” It is for this reason that many of the innovations we have witnessed have come from smaller, more agile startups such as neobanks.

Singhal further explains that “many less agile, large firms view lightning-fast developments in technology with some reticence. They know they can’t evolve at the speed of their smaller competitors and markets.”

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Not all neobanks are small. Chime, which issues the popular CardName that can help customers build credit, is one of the most popular and largest neobanks in the U.S. According to Contrary Research, Chime had 21.6 million account holders as of January 2023. Introducing Credit Builder (effective 10/28/24, members can apply for Credit Builder without $200+ direct deposit requirement), to apply for Credit Builder, you must have an active Chime® Checking Account. Chime is a financial technology company, not a bank. The secured Chime Credit Builder Credit Card is issued by The Bancorp Bank, N.A. or Stride Bank, N.A., pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted. Please see the back of your card for its issuing bank. Note: Visa exception: If the actual card is shown, we can remove “pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit/credit cards are accepted.”

The future of fintech

In closing, it looks like the fintech industry and neobanks are here to stay. And, while there are certainly cons, the pros seem to far outweigh the cons from my perspective.

I really like how neobanks are making cards more accessible to millions of consumers who previously could not afford to apply for a secured credit card. The Chime card referenced above, for instance, boasts no interest, no annual fees and no credit check¹. In addition, unlike other secured bank cards, there is also no minimum-security deposit required².

Looking ahead, Singhal states that “the possibilities are endless. You could see artificial intelligence solutions popping up to help people use their cards more smartly (i.e., decide which card may give them the best rewards at which locations).”

Singhal also believes “solutions could be created to help people deliberately improve their credit scores, or to better help banks avoid / target fraud,” which in the end benefits consumers since lower fraud-related losses can be passed along to their customers in the form of less fees.

Finally, she predicts that “you could see all sorts of innovations in points or cash-back programs.” The end result is that all of this can make your life slightly easier and/or reduce your cost of living to some degree.

¹Out-of-network ATM withdrawal and OTC advance fees may apply. View the Bancorp agreement or Stride agreement for details; see back of card for issuer. ²Money added to Credit Builder will be held in a secured account as collateral for your Credit Builder Visa card, which means you can spend up to this amount on your card. This is money you can use to pay off your charges at the end of every month.