Neobanks Are Struggling To Make Good on Their Lofty Promises

Some offers of high rates and low fees have strings attached. From a report: Digit is a trendy financial technology company in San Francisco that offers traditional banking services online, complete with a tool that can automatically allocate a portion of customers' deposits to a savings account to match their investing goals. The service comes with a "no overdraft guarantee." Sound too good to be true? According to the Consumer Financial Protection Bureau, some of it is. Earlier this month the regulator hit Digit, now part of Oportun Financial, a lender in San Carlos, Calif., with a $2.7 million fine for falsely advertising the no-overdraft guarantee. Turns out, the algorithm Digit used to move funds around drained some customers' checking accounts, triggering the overdraft fees. Even after customers complained, Digit failed to reimburse them, despite saying it would, the CFPB found. "While we disagree with the CFPB on this matter, we are happy to have it settled," says an Oportun spokesperson. The company says fewer than 2,000 customers were overcharged. Digit isn't the only consumer finance company failing to meet the lofty expectations its own advertising sets. There are about 60 other such fintechs, known as "challenger banks" or "neobanks," in the US, offering a similar suite of products. They have about 23 million customers, a figure that's expected to more than double -- to 50 million -- by 2025, according to consumer finance website Bankrate.com. Despite the name, they aren't banks but technology companies that form partnerships with obscure, conventional banks to give customers digital access to their money. In doing so, neobanks can offer Federal Deposit Insurance Corp. protection to checking and savings accounts. In Digit's case, its banking-services partner is South Dakota-based MetaBank, which says it wasn't involved in the CFPB matter.

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