Neobanks: what are they and what are your options?

SHAY WARAKER

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. But you may have noticed 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. And I promise not to make any more Matrix references.

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 neobanks 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.

Dominic Pym, the cofounder of neobank Up, recently 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.”

Up offers the ability to set up a number of savings accounts to achieve your goals – such as saving for events, a holiday 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 systems and pre-existing infrastructure to operate, and 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. In fact, Commonwealth Bank and Beyond Bank took out Canstar’s 2021 Mobile and Online Banking Bank of the Year and Customer Owned Bank of the Year Awards, respectively.

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.

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.

Volt was the first Australian neobank to recente 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.”

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:

  • Up
  • Alex
  • Volt
  • BNK (formerly Goldfields Money)
  • 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):

Pros of banking with a neobank

Now we have covered what a neobank is and how it is different from 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.

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.

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, 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.

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.

Additional reporting by Alasdair Duncan.

 

Cover image source: Lea Koltyrina/Shutterstock.com


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This content was reviewed by Sub Editor Tom Letts as part of our fact-checking process.


Shay has worked in content for over a decade. Her experience includes PR and copywriting in Australia and the UK where she consulted to Lloyds Banking Group. She also gained work experience at Czech Republic English-language newspaper The Prague Post and Quest newspaper The Wynnum Herald.

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