Neobanks: what are they and what are your options?

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Neobanks are becoming increasingly common in Australia, as we take more and more of our everyday banking online. So what is a neobank, how do they work, and which ones are currently operating here?

While you may think of a bank as an institution with physical branches and ATMs, this is not always the case anymore, and there are some with no physical presence at all, operating exclusively in the online realm. In this article, we take a look at what neobanks are and how they differ from traditional banks, and consider the pros and cons of choosing one.

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What is a neobank?

A neobank is a bank that operates exclusively online, without a traditional branch network, whose services can be accessed and used through smartphones or computers. Their technology is typically developed from scratch, rather than modifying existing or legacy digital systems that longer-serving banks often have in place. For a neobank to meet the definition of a bank, it needs to be an authorised deposit-taking institution (ADI), which means that it is licenced to take deposits by the Australian Prudential Regulation Authority (APRA).

Dominic Pym, the cofounder of neobank Up, told Acuity Magazine that the bank differentiates itself from a traditional bank by the fact there is no call centre and no human interaction. “The only way to interact with a human at Up is using the app, with a team replying using emojis and animated GIFs,” he told the publication. “All the kids love their mobile phones and talk to each other via chat, so they love it.”

Neobank Hay, which is still awaiting final regulatory approval in order to start taking deposits, offers customers a mobile app that allows users to see their spending behaviour categories automatically, complete with merchant logos, categories, and your average spend at a particular store. “We consider ourselves always in a constant state of evolution,” said CEO Andrew Laycock, “and the digital nature of Hay means we are able to continue to add new features rapidly … so, as they say, watch this space.”

It is important to note that just because a bank has a digital offering, does not make it a neobank. For example, popular online Australian bank UBank is operated as a division of NAB, so doesn’t strictly quality as a neobank. Likewise, ING is owned by the major multi-national ING Group and relies on its systems and pre-existing infrastructure to operate. ME Bank – while digital – is owned by Bank of Queensland, meaning these are not neobanks.

On that note, just because a bank isn’t classified as a neobank doesn’t mean that it doesn’t offer a sound digital service for customers.

What are the neobanks currently in Australia?

At the time of writing, the neobanks operating in Australia (in no particular order) include:

Tyro Payments (Business Banking)
Judo Bank
Up Bank
Alex Bank
BNK
Easy Street Financial Services

Are neobanks safe?

Once a neobank is a licensed ADI, it is covered under the Financial Claims Scheme (FCS), which means the Australian Government guarantees your savings with that institution up to a total value of $250,000. This is the same security that you receive from bricks-and-mortar banks. If you’re unsure, it can be worthwhile checking whether the institution you are considering is a licensed ADI, or operating under the ADI licence of another institution (as neobank Up does with Bendigo and Adelaide Bank’s licence, for example).

In general terms, in order to become an ADI, neobanks must show the regulator that they are as robust and safe as any bricks and mortar institution. They must prove that they have the necessary legal and risk management processes and technology in place, and show they can ensure the security of customers.

The now-closed neobank Volt was the first Australian neobank to receive a fully-fledged licence from the banking regulator in 2019, and co-founder Steve Weston told The Australian that the journey was not an easy one. “If a firm has got to a full licence they have earned their stripes,” he told the publication, adding that “getting a full banking licence is incredibly difficult.”

What are some pros of banking with a neobank?

Now we have covered what a neobank is and how it is different from a traditional bank, we can consider some of the potential benefits of doing business with one.

User-friendly apps with lots of features

As we discussed, neobanks have the ability to start from scratch, which means they can develop their technology to be as user-friendly as possible (or as they might say, consumer-first). The result is usually a slick interface that is easy to use, and with features that you may not get with traditional banking apps.

Competitive interest rates

Because neobanks don’t have branches and tend to operate with fewer staff, it means they may have lower overhead costs than most traditional banks. These savings, they say, can be passed on to the customer in the form of low or no fees and competitive interest rates for savings products.

What are some cons of banking with a neobank?

Before you jump across to a neobank, you may want to consider some of the potential drawbacks.

No physical branches

If you prefer to visit a physical branch to do your banking, a neobank probably isn’t for you. Many neobanks offer online chat and the option to phone to speak with a representative, but there are no physical branches to visit.

More limited product offerings

Unlike more established banks, some neobanks are not yet offering the full array of products you may have become used to. However, Hay offers a prepaid Visa card, and says it plans to offer traditional banking products to customers in the near future. Revolut’s app allows users to make and receive international money transfers in more than 27 currencies, and allows users to send and request money and split bills instantly.

It is worthwhile to become familiar with the features that are available or potential limitations of any bank you are considering to determine whether it suits your needs before you sign up.

To start an account with a neobank, users can download the bank’s app through the Play Store or App Store on their mobile device, and follow the prompts to confirm their identity. Usually, the process can be completed in a matter of minutes. Once your account is set up, you can transfer money into it and start using it – most neobanks are compatible with your preferred digital wallet such as Apple Pay, Google Pay and Samsung Pay, or you may be able to opt for a physical card to be posted to your address.