- Neobanks, or digital banks, became a possibility in Australia in 2018 after a change in legislation opened the floodgates.
- Since late 2019, a wave of digital banks have arrived in Australia, seeing competition in banking heat up for the first time in decades.
- But what is a neobank, how do they work and are they really any better than traditional banking? This is everything you need to know.
App-based banks have sprung up in Australia quicker than you can say ‘digital disruption’ – but what the bloody hell are they? How do they work, are they safe and are they any better than our old banks?
This is everything you’ve ever wanted to know about them, and probably quite a bit more.
What is a neobank?
Neobanks, or digital banks, are just as their names suggest: new app-based banks you interact with entirely – or almost entirely – through a smartphone.
While the word ‘bank’ conjures up austere mental images of faulty pens chained to desks and long lunchtime queues, neobanks claim to be anything but. Not only do they not have pens, they don’t even have branches – scandalous, but true. Instead, they promise to provide you with all the services you need but in the way you want: at the touch of a button, 24 hours a day, with no baffling opening hours.
They also promise to deliver far more than the apps offered by traditional banks. More on that below.
Where did they come from?
However, while neobanks are just cropping up in Australia, they aren’t a new concept. They’ve operated for years in countries around the world, including Germany, Brazil, South Korea and Vietnam, and have particularly thrived in the UK, which bodes well for Australia.
The reason they’re just arriving in the land down under is because, until recently, we made it very difficult to start one. Banks are, as you might hope, highly regulated financial institutions. However, the legislation stopping shysters from setting up shop was perhaps a little too restrictive, not allowing new competition to enter banking sector.
That was until the 2017 Budget when then-treasurer Scott Morrison dramatically simplified the application process to enter the deposit market (AKA become a bank). Within months of the reforms, new digital banks had announced their intention to set up in Australia.
Of course, becoming a bank still isn’t easy, as any of the new digital banks would attest. As one founder told Business Insider Australia, they all require three big things: a banking licence, a core banking system, and around $100 million to start.
Money takes time to raise, as does an unrestricted banking licence. It adds up to a bit over a year on average convincing the regulator APRA to trust you.
All those obstacles have slowed down neobanks’ journey to establish themselves. Fast-forward to the present day, and the initial group have now all arrived.
What advantage do neobanks have over traditional banks?
Australia’s existing banks having already had apps for years, so what are neobanks actually offering?
Firstly, like any good startups, neobanks claim they’re far more cost-efficient. Without needing to maintain national offices, hundreds of physical branches, and workforces running into the tens of thousands, their expenses are minimal.
While you might not give a toss about a bank’s balance sheet, it matters to your bottom line. The smaller their spending, the less money they need to make off you the customer. Neobanks argue they will be able to pay higher interest rates, charge minimal or no fees, and offer competitive mortgage rates. Big banks, on the other hand, effectively have to tax you to keep the lights on.
Secondly, neobanks can start fresh. While some of our biggest banks have been around in some form for more than 200 years, neobanks can build all their systems from scratch. They say this means they can arm themselves with the best tech and expedite and optimise their service as a result. If you can submit forms via an app, rather than fill out reams of paperwork, why wouldn’t you?
Beyond that, they promise to utilise everything from big data to artificial intelligence (AI) to help you manage your dollars. While it remains to be seen whether the long list of buzzwords will actually be realised in something concretely beneficial for consumers, it’s an attractive proposition. From recognising higher than usual bills, notifying you of unused subscriptions, and even helping you switch to a cheaper energy provider, neobanks say they can do banking better.
Thirdly, and perhaps most importantly, neobanks promise to be unlike our old banks. To speak frankly, Australia’s recent financial services royal commission have provided a slew of examples of banks failing customers.
In short order, Australia’s big banks were caught extorting hundreds of millions of dollars in fees from customers for services they knew they weren’t providing. In fact, they love fees so much they were charging them to dead people.
They also admitted to lying to the regulators that were meant to keep them honest, forged documents, failed to verify customers’ expenses when handing out loans, and sold insurance to people who couldn’t afford it. All in a day’s work.
And while there are a whole host of reasons they could get away with putting profit over people, including a total lack of regulatory teeth, the stark lack of competition looms large. When 80% of the banking sector is tied up with our four bank oligopoly, there’s little incentive to do better. When you can get away with charging loyal customers more than new ones, a company is too comfortable.
Notably, it is in the direct aftermath of the royal commission that neobanks are beginning to take to the stage.
Are neobanks safe to use?
Given you’d be entrusting your finances to one, it’s a valid question. First of all, to even think about operating neobanks have had to go through a lengthy regulatory process in which they have to prove they can handle the demands of running a bank. They obviously aren’t given their licence to operate until they can comprehensively convince the regulator APRA of this.
Once they are, customer deposits are guaranteed by the government up until $250,000. If the bank were to go bust, you’d have the same protections as if the Commonwealth Bank went out of business.
When is a neobank not a neobank?
While these shiny new digital banks boasted of providing a unified front against the big banks, there have been a few digs between them as they each try to carve out a niche for themselves.
Without getting too lost in the weeds, there’s a contention that a ‘true’ neobank is one wholly independent from the reach of the old banking sector and even the old tangled financial system. Some might argue for example that Up Bank which is partnered with Bendigo Bank, is exempt from this status.
For the sake of sanity, and this article, let’s say a neobank is really any bank that exists primarily on an app and isn’t owned by a big four bank. This definition precludes the likes of NAB’s UBank, which isn’t independent of a large incumbent and operates on NAB’s banking licence and some of its systems.
Who are Australia’s neobanks, and where are they up to?
These are the current players.
First, we have Xinja – pronounced zin-ja. While a nightmare to try to communicate verbally to people, the name has stuck and here we are. It comes, so I’m told, from adding a bit of ‘zing’ to ‘ninja’, with the bank reckoning “we’re fast and we’ve got your back.”
Started by ex-NAB banker Eric Wilson, Xinja launched in September in fluro pink and founded on ten golden rules, including ‘no dickheads’ and a simple ethical principle undergirding the whole operation: ‘if our grandmother would think it’s wrong, then it is’.
It currently sports a high-interest savings account named ‘Stash’ as well as a transaction account. While Wilson has ruled out credit cards – he says they aren’t in the best interests of customers – Xinja plans on launching loans and mortgages later this year.
Speaking of difficult to tell-your-friends-about-names, we also have 86400 – pronounced 86-400, and referring the number of seconds in the day. It is chaired by Anthony Thomson, a banking veteran, who started both Metro Bank – the first new high-street bank in the UK in more than 150 years – and Atom, the island nation’s first app-based bank. CEO Robert Bell is another former big four bank exec, with ANZ vintage.
Operating on its own independent banking licence, 86400 is wholly-owned by payment network Cuscal. It, in turn, is owned by credit unions, building societies, Bendigo Bank and Mastercard. While Xinja has been critical of this before, claiming it negates 86400’s independence, the absence of big four ownership and its relative separation from Cuscal goes some way to assert its status as neobank.
It offers transaction and high-interest savings accounts, currently paying the same market-leading rate as Xinja. More impressive is the fact that it is, at the time of writing, the only digital bank that directly provides home loans. While not having a physical office, it does offer mortgages via brokers, the same way any other bank, but with a twist – it claims it is five times quicker than any traditional outfit. While only having signed $10 million of loans so far, the fact it’ even lending at all is a huge milestone.
Then we have Volt, founded by another ex-NAB guy (and former exec of UK giant Barclays) Steve Weston. After paying a creative agency presumably too much money to come up with a whole host of terrible suggestions, ‘Volt’ came one of the bank’s team – spurred by the chance discovery of a literal vault in the company’s newly acquired North Sydney HQ.
While being the first digital bank to receive their full banking licence, it has been a little slower out of the gates. Weston told Business Insider Australia that Volt will be following a partnership model, similar to Starling in the UK. What this means it will essentially take a bit longer to launch, but will strike agreements with different businesses to amass customers and provide perks like shopping discounts.
Waiting list customers currently have a savings account, with it looking to publicly launch later this month.
Fourth, we have Up. Launched in 2018, it has been around the longest on the scene since launching in 2018, made possible by the fact it operates on Bendigo and Adelaide Bank’s licence. That head start also makes it the biggest consumer digital bank of the group. At the time of writing, it had more than 200,000 customers. While not doing home loans itself, it has the advantage of being able to lend out those deposits via Bendigo Bank.
Finally – for now – we have Judo, a digital bank specialising in business lending. It’s been active in Australia since 2018, servicing small and medium businesses.
While that’s the current bunch, they won’t be the last neos to attempt to crack the Australian market. There are at least two others looking to launch in Australia. Fintech Hay has rolled out a transaction card to its waitlist, while its application to become a neobank is with the regulator APRA. Queensland-based Infinity is in the same boat with a prepaid card and a banking application pending, while UK neo Revolut is currently in beta mode here, presumably with a view to launch properly at some point down the track. Finally, Douugh has designs on a launch in 2021.