What is a neobank and what do they do?

Many people believe neobanks are digital-only banks, but it goes one step further than this. 

Neobanks are licensed banks that operate solely through smartphone apps. This means they aren’t accessible on websites, unlike traditional online banking. 

And don’t expect to be able to demand assistance from a real person at a bricks-and-mortar branch – there aren’t any. 

So, at the end of the day, you can still do – or will be able to do – things you do at your traditional bank, such as open a transaction account or transfer money, with these newer players.

Currently, there are still limitations to what services some neobanks can provide, such as loans, but this would vary from bank to bank.

The digital, flexible nature of these platforms means neobanks tend to be geared towards the younger generations. That doesn’t mean it’s only for millenials though; anyone who prefers online self-service or anyone who just wants to break free from the big banks’ control could benefit from neobanks.

How do neobanks differ from standard banks and credit unions?

Banks, building societies and credit unions are authorised deposit-taking institutions (ADI), which have been given the green light by the Australian Prudential Regulation Authority (APRA) to do banking business in Australia.

Neobanks including Xinja, 86 400, volt bank and small business lender Judo Bank are ADIs with unrestricted licenses, while Up uses the license of Bendigo and Adelaide Bank.

A key differentiator between neobanks and established banks is that the systems behind the former are independent from the established infrastructure used by their more traditional counterparts. 

In other words, neobanks have developed their own systems which are completely unassociated with an existing banking network.

This is essentially what sets neobanks apart from branchless banks, such as ING, UBank and ME, which all use systems created by the big banks.

With these edges, neobanks are trying to market themselves as an alternative, more innovative option to the big banks.

Is neobanking for me?

With many customers becoming increasingly frustrated at Australia’s big banks following revelations from the Banking Royal Commission, it makes sense that the industry is ripe for disruption.

But not everyone necessarily subscribes to the idea of digital-only or mobile-only banks.

Here are some of the pros and cons to consider if you’re curious about neobanks and what they can offer.

  • Flashy features: Like other fintech startups hitting the industry, neobanks have a major focus on technology and innovation. Some of neobanks’ snazzier features include contactless payment options such as Apple Pay and Google Pay, instant money transfers and voice-controlled banking.
  • Smarter: All retail neobanks trading in Australia show user spending insights in their apps so there’s less of a need to keep receipts or bank statements to track your outgoings. This transparency could promote financial visibility to help demystify your spending habits.
  • Pay less, get more: Neobanks aim to reduce or eliminate fees, offer lower rates for borrowers and higher rates for savers. As neobanks have lower overhead costs with no physical branches, they claim they can afford to be more competitive than traditional banks.
  • No paperwork: Because neobanks’ services are all app-based, it’s considerably easier to set up an account with no paperwork involved. This could be a big plus for time-poor individuals and mobile-focused millennials.
  • Not very established: As a nascent sub-sector of the banking industry, neobanks don’t yet have a track record of success to prove they work the way they say they do. This could repel some banking customers who trust banks with history and reputation.
  • Limited services: Many of the services of Australian neobanks are not yet available and few have actually confirmed specific roll-out dates. So, if you don’t want to wait around for the specific services you’re after or you dislike uncertainty, neobanks may not be for you.
  • No branches: The lack of a bricks-and-mortar presence is not great if you don’t like being limited to self-service. Some people may also dislike the fact that they can’t talk to a person face-to-face when they need it.