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A wave of digital-first challengers to traditional banks has attracted millions of customers with free accounts and hassle-free sign-ups. But a recent report highlights some risks of entrusting money to neobanks, financial tech companies that partner with established financial institutions to provide banking services.
The nonprofit news organization ProPublica reported July 6 that customers of Chime, one of the largest neobanks, have had their accounts closed without notice, leaving them with no way to access their money. ProPublica’s report included interviews with 13 former or current Chime customers as well as publicly available customer complaints.
Chime “has according to experts been generating a high rate of complaints, with 920 filed at the Consumer Financial Protection Bureau since April 15, 2020,” ProPublica reported. Of those complaints, 197 — more than 20% — were categorized as involving a closed account. Complaints to the CFPB also mention slow response times, sometimes weeks, from Chime customer support.
Neobanks often promise a quick account setup with limited background checks. Chime’s website estimates that the process takes two minutes, and the website of Varo, another neobank, says it's five minutes. Chime and Varo don’t check applicants’ credit, nor do they disqualify people who have been rejected by banks before.
The easy sign-up process makes neobanks targets for fraudsters, according to a 2019 report by the National Consumer Law Center. Crooks may open multiple accounts under false identities to try to receive money from hacked bank accounts or collect improper government benefits.
In ProPublica’s report, Chime said many account closures are linked to fraud, such as wrongfully receiving stimulus payments. But it also admitted that several of the closures brought to its attention had been mistakes.
How to reduce your risk
Neobanks, like other banking institutions, can close accounts without notice, but most closures occur for one of only a few reasons, including:
Unpaid fees, especially overdraft fees.
Account inactivity over a given period of time.
Suspicious activity, such as fraud.
Many Chime account closures happened after a government deposit, as Chime tried to verify millions of new accounts for fraudulent activity, ProPublica reported.
If you’re worried about a neobank freezing or closing your account because of a mistaken suspicion of fraud, here are some tips to reduce the risk:
Report any unauthorized use of your account. If you see any purchases or other account activity you didn’t approve, let your banking provider know as soon as possible. You don’t want to be on the hook for a fraudulent transaction.
Don’t use your account for commercial use if it’s not allowed. Neobanks such as Chime, Varo and N26 mention in their account agreements that accounts may be closed due to suspected business activity. If you freelance or run a small business, set up an account at a neobank such as Oxygen, Lili or Lance that focus on business banking.
Know your eligibility for government benefits. Making an improper claim for benefits such as unemployment insurance or stimulus funds may be considered fraud and trigger an account closure.
There are also ways to reduce the impact if your account is frozen or closed:
Keep your account contact information up to date. Chime’s primary method of contacting customers is via email, and other neobanks may do the same, so be sure to monitor notifications.
Keep an offline record of account information. Write down the neobank’s email address or phone number, your account number and other details, such as any previous correspondence you’ve had with the neobank, including dates, names of customer service representatives and what you were told.
Have a backup account and debit or credit card. You don’t want to be stuck if your only payment option stops working, or lose account access before your next direct deposit. Consider opening a backup account at a local credit union or online bank with low or no monthly fees.
What to do if your account is closed
As the ProPublica report revealed, an account can get flagged even if you’ve done nothing wrong. If that happens to you:
Move quickly. Account closures don’t necessarily occur right away, so there might be time to straighten things out. "For the vast majority of account closures, we communicate to members that the account will be closed in a minimum of five days," said Gabe Madway, head of communications at Chime, in an email. He adds that in some closures, Chime must hold onto funds for legal or restitution purposes.
Contact the neobank. Chime customers can email member services at [email protected], call 844-244-6363 or contact the company on social media. "Be sure to have documentation handy to explain any unusual activity on your account, including large deposits from new sources or suspicious login activity," Madway said. In some cases, you may need to provide additional proof of your identity, such as a utility bill to establish your home address, if a payment requires you to be a resident of a certain state.
If you’re not getting helped, file a complaint with the CFPB. This option can get a neobank’s attention, and generally, you can expect a response within 15 days, though it may take longer.
The particular risks of neobanks
A neobank usually isn’t a bank. Rather, it’s a financial technology firm that partners with a bank to provide mobile-focused banking accounts and debit cards. The partner bank provides federal deposit insurance to protect customers’ money in case the neobank fails. Chime, for example, partners with The Bancorp Bank and Stride Bank.
Neobanks can be attractive alternatives to traditional banks, offering perks like free checking accounts, no overdraft fees, two-day early direct deposit and more. But they may lack the support systems of a regular bank. Except for a select few with bank charters, such as Varo and GO2Bank, neobanks aren’t directly supervised by a federal regulatory agency.
Since neobanks don’t have physical locations, verifying customers’ identities is all done online or over the phone — and their customer service may not be as reliable as at traditional banks.
"Newer mobile-based accounts from fintechs tend to over-rely on automated and online customer service and make it difficult to get to a human being, which may work with simple questions but not when things go seriously wrong," said Lauren Saunders, associate director of the National Consumer Law Center, in an email.