What are neobanks and how are they different?

The term ‘neobank’ refers to a new crop of financial institutions that has been sprouting up throughout Australia and the rest of the world since at least 2017.

What makes these banks different from traditional banks is that they have been reimagined from the ground up with a purely digital focus – to run seamlessly through an app and with no branches anywhere in sight.

What are the benefits of using a neobank?

The outside-the-box thinking common to neobanks offers several advantages over traditional banks:

• A better digital experience. Neobanks’ digital offerings aren’t hamstrung by complex legacy systems common to traditional banks. That lets them quickly develop and release features like peer-to-peer payments, spending analysis, AI-based money management tips and customisable user-friendly dashboards.
• Lower costs. The lower cost of operating a digital bank means the bank can pass those savings onto you in the way of no-fee accounts, a free debit card and overdraft protection – by not allowing you to overdraw in the first place!
• Less hassle overseas. Many digital banks offer fee-free international transactions at highly favourable exchange rates. Some digital banks will even let you store multiple currencies all within the same app.

What’s the difference between a digital bank and a neobank?

You may be wondering about digital banks like ING, ME Bank and UBank. After all, they don’t have any branches (at least until recently), they operate via an app and it seems like they’ve been around forever.

The truth is, these banks aren’t truly 100% digital; they’re usually operated by a large traditional bank. For example, ING is owned by ING Bank, ME Bank by industry super funds and Ubank by NAB. Digital banks generally have the same drawbacks that traditional banks have, namely they generally operate off a digitised version of their legacy systems.

There’s nothing wrong with digital banks like these. After all, their lack of branches translates into lower operating costs for the bank and ideally better terms for you.

But neobanks take this one step further by focusing on purely digital solutions that are built from the ground up for a digitally savvy customer.

Are neobanks safe?

A bank needs to become a licensed authorised deposit-taking institution (ADI) to take deposits in Australia. This means they have to go through the regulatory process to get approval from and be overseen by the Australian Prudential Regulation Authority (APRA).

Being an ADI means the bank has demonstrated to APRA that they meet APRA’s prudential standards and other regulatory and legal requirements.

It also means the Australian government will protect your deposits up to a cap of $250,000 with that ADI

Are there any neobanks in Australia and what services do they offer?

Here are the Australian neobanks with full ADI status offering consumer-facing products as of November 2019:

• Xinja. Offers transaction accounts and is beta-testing home loans.
• 86 400. Offers everyday transaction accounts, savings accounts and home loans.
• Up Bank (through Bendigo and Adelaide Bank). Offers everyday transaction accounts and savings accounts.
• Judo Bank. Offers small-business loans and term-deposits.

Other financial institutions that either don’t yet have an ADI or have not officially launched any products include Revolut and Qpay.

The information in this article is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal, financial, and other professional advice.