Neobanks: what are they and what are your options?


If you’re not 100% sure what a neobank is, you are not alone. Even people in the fintech (financial technology) industry disagree about some technicalities. And no, it isn’t Keanu Reeves defying gravity to dodge bullets inside a financial institution (though who knows, The Matrix 4 is due to be released in 2021…).

But you may have noticed these neobanks becoming more prominent in conversations as new entrants launch into the Australian market. Here we’ll look at what a neobank is, a list of neobanks in Australia, what they offer that is different to traditional banks and some possible pros and cons of choosing to bank with them. 

What exactly is a neobank?

Excellent question. And one that financial commentators haven’t entirely come to an agreement on. But in essence, a neobank (sometimes referred to as a smartbank) operates purely online, is usually accessed via an app on a smartphone, and is not backed by one of the big four banks (ANZ, Westpac, NAB or Commonwealth Bank). This means they don’t have physical infrastructure, such as branches, and their technology is typically developed from scratch, rather than modifying existing or legacy digital systems that longer-serving banks often have in place.

According to Australian neobank Xinja’s CEO Eric Wilson, a neobank is designed differently to a traditional bank.

“It’s not just the channel and the technology, it’s the approach. We are not just a digital face or front-end on a traditional bank and it is specifically designed to help customers make more out of their money,” Mr Wilson told Canstar.

How is this done? Fellow neobank 86 400’s CEO Robert Bell said the fact the bank was based entirely on the cloud and was building its technology foundation from scratch meant it could show customers what was actually happening with their money with a full financial picture.

“Our app enables customers to connect all of their accounts (from about 100 financial institutions) in one place and smart technology surfaces the most relevant information about spending, saving and bills,” Mr Bell told Canstar.

This means users can connect other transaction and savings accounts, credit cards, home loans and personal loans and the bank plans to include superannuation and investments in the future. Mr Bell also said the bank’s ‘Coming Up’ feature alerts customers when they have an upcoming bill or subscription due to help avoid late fees.

Neobank Up offers the ability to set up a number of savings accounts to achieve your goals – such as saving for events or a house deposit – with your income immediately split as you would like across them. The bank also identifies the businesses where you spend your money, including their location and logo and the time you make the transaction. It says this can help to overcome the confusion we’ve all likely faced at some point when some transactions are processed under the merchant’s business name, which sometimes has no relation to the place you actually shopped. And you can then track your spending with insights that show you a breakdown of how much you have spent with each brand, or more broadly in various categories.

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 qualify under the definition of a neobank. Likewise, online goliath ING is owned by the multinational ING Group and relies on its legacy systems and pre-existing infrastructure to operate, and ME Bank – while digital – is owned by over 20 industry super funds, 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. In fact, Commonwealth Bank and Beyond Bank took out Canstar’s 2019 Mobile and Online Banking Bank or the Year and Customer Owned Bank of the Year Awards respectively.

Source: 86 400

The rise of neobanks in Australia: how does a neobank launch?

So why are we suddenly seeing a surge of neobanks entering the Australian marketplace? Neobanks have been around for a while in the UK, Europe and Asia, but the first neobank to be granted its licence down under was Australian start-up Volt in January 2019. This is likely because the Australian Prudential Regulation Authority (APRA) brought in new rules in 2018 (around the same time the Banking Royal Commission was underway) that simplified the process to enter the deposit market (to get your banking licence). This made it more feasible for neobanks to launch within our shores.

This isn’t to say it’s now easy to get a licence – a start-up still needs a core banking system and reportedly around $100 million to start, and it can take over a year on average to convince APRA to grant an unrestricted banking licence. This is largely because the start-up needs to convince APRA that it is safe and worthy of a licence to become an Authorised Deposit-Taking Institution (ADI) before it can begin to operate.

According to Mr Bell, it took two years of discussions with APRA before 86 400 was granted its ADI licence in July 2019.

“The ADI licence process is incredibly thorough – and for very good reason,” Mr Bell said.

“We had every element of our business stress-tested to confirm we were as robust, secure and safe as any bricks-and-mortar bank. We were assessed on our risk capability, our people, our technology and our capital.”

Likewise, Mr Wilson told Canstar the process for Xinja involved making a robust and detailed business case and proving the bank had the necessary legal and risk management processes and technology in place.

“We had to prove we could run a bank. We had to ensure the security of our customers. Regulators only grant a bank a licence after rigorous examination,” Mr Wilson said.

Neobank apps
Source: Xinja

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).

What are the neobanks currently in Australia?

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

  •  Xinja
  •  86 400
  •  Up
  •  Volt
  •  BNK and Goldfields Money
  •  Douugh
  •  Revolut (note, Revolut is not currently a licensed ADI)
  •  Hay (note, Hay is not currently a licensed ADI)
  •  Judo (specific to business banking)
  •  Tyro (specific to business banking)

Upcoming launch (watch this space):

  •  Infinity (now holds an Australian Financial Services License and is reportedly preparing to launch its prepaid Card to customers) 
  •  Alex

Pros of banking with a neobank

Now we have covered what a neobank is and how it is different to a traditional bank, what are some potential pros of banking 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 (see the 86 400 and Up examples above).

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.

“The fact that we have no branches and significantly lower staff costs means we can operate at a fraction of the cost of a traditional bank,” Mr Wilson said.

“As we grow we will become more competitive, as our cost per customer is lower than that of a traditional bank.”

Cons of banking with a neobank

However, before you jump across, you may want to consider some of the potential setbacks of banking with a neobank.

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, most neobanks are not yet offering the full array of products you may have become used to. However, BNK and its sister Goldfields Money offer loans and insurance, 86 400 is offering digital home loans and others, including Xinja, say they are not far behind. So watch this space. 

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.

How do I sign up with a neobank?

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.

Comparing savings and transaction accounts

If you’re in the market for a new savings and transaction account, it can be worthwhile to compare your options to help determine a competitive interest rate and what features are available. You can begin your search with Canstar.

The comparison table below shows some of the savings accounts on Canstar’s database for a regular saver in NSW. The results shown are based on an investment of $100,000 in a personal savings account and are sorted by Star Rating (highest to lowest), then provider name (alphabetically). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement or other terms and conditions before making a decision.

Cover image source: Lia Koltyrina (Shutterstock)

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