A guide to dabbling in the newness of neobanks

A guide to dabbling in the newness of neobanks

Gone are the days of brick-and-mortar financial institutions being the only way you could do your banking. There are some serious competitors in the finance world and neobanks are the space to watch.

Here is everything you need to know if you’re considering dabbling in the world of neobanks.

What is a neobank?

In the wake of the Royal Commission into the Banking Sector in Australia, it’s no surprise that Aussies became discouraged by traditional banks. This is where neobanks have been able to get a leg up on the competition, by positioning themselves as an alternative to these financial institutions in a David and Goliath-style battle.

Neobanks are licensed banks that operate solely through smartphone apps. The apps typically come with a customer service platform inbuilt.

Unlike traditional banking, they aren’t accessible in branch or on websites. But they are still competitive in two ways: technology and price.

For technology lovers, neobanks offer a rare, exciting look into the development of a financial company. Neobanks, like Up, provide complete transparency to its customers through asking beta users for feedback on products. The ‘Tree of Up’ offers a roadmap for customers to see just how and when some features will be brought on to the app.

In terms of their place in the financial market, they typically offer more competitive interest rates. As neobanks are app-based platforms, they are able to keep overhead costs low and put these savings towards their customers.

It’s no secret that a record low Reserve Bank of Australia cash rate means that interest rates are at rock bottom. However, RateCity data shows that neobanks have consistently offered higher savings account rates in the months of 2020 compared to the big four banks.

In January this year, the average neobank savings rate was 2.25 per cent, and the average big four bank rate was 1.50 per cent. Today, the average neobank savings rate is 1.10 per cent, and the average big four banks savings rate is 0.53 per cent.

Big four bank vs neobank average savings rates throughout 2020

Date Neobank average rate Big 4 bank average rate
16/01/2020 2.25% 1.50%
16/02/2020 2.25% 1.48%
16/03/2020 2.00% 1.26%
16/04/2020 1.85% 1.14%
16/05/2020 1.85% 1.01%
16/06/2020 1.85% 0.98%
16/07/2020 1.65% 0.96%
16/08/2020 1.60% 0.93%
16/09/2020 1.55% 0.88%
16/10/2020 1.40% 0.79%
16/11/2020 1.15% 0.68%
13/12/2020 1.10% 0.53%

Source: RateCity.com.au. Data accurate as of 13.12.2020.

Note: Based on a $50k deposit and meeting monthly conditions. Westpac launched a < 30 years account in July with a rate of 3%. This table assumes the regular Westpac Life account rates.

Neobanks versus big four banks ongoing savings accounts

Savings account provider Interest rate Conditions to activate max rate
86 400

1.20%

Deposit $1,000+ each month
Up

1.10%

5 or more card purchases per month from your Everyday Account.
NAB

0.50%

Make a deposit every month with no withdrawals.
ANZ

0.50%

You could get bonus interest when you make a single deposit of $10 or more in a month and no withdrawals.
CBA

0.50%

Deposit at least $200 and make no withdrawals each month.
Westpac

0.55%

Make a deposit each month and ensure your account balance is higher at the end than the beginning.

Source: RateCity.com.au. Data accurate as of 13.12.2020.

Note: Based on a $50k deposit and meeting monthly conditions. Westpac launched a < 30 years account in July with a rate of 3%. This table assumes the regular Westpac Life account rates.

Which neobanks are in Australia?

The major neobanks currently licenced in Australia are:

Neobank What it offers
Up Transaction account

Savings account

86 400 Transaction account

Savings account

Home loans

Volt Savings account
Judo Term deposits

There are a few more coming into this space, such as Douugh and Hay. However, they are either still awaiting financial licences or are in a funding process. Interestingly, these upcoming platforms can be open to crowdfunding, meaning you could financially back a neobank today.

Neobanks typically offer transaction and savings accounts. These come with some of the more competitive rates and waived fees in the market. This is what makes them stand out against the bigger financial institutions.

But for neobanks to stay competitive, make money and survive in the Australian financial market, they may soon need to start lending through personal loans, car loans and home loans. One neobank, 86 400 has begun offering home loans, and it’s not unexpected that the other major neobanks could soon follow.

What the neobanks are offering customers

Neobanks have stepped away from the rigid infrastructure of traditional banks and credit providers by offering app-based financing. The advantage of starting a bank today, as opposed to trying to instigate change within an established big bank, is that you can develop your own independent systems and push for innovative ideas.

The ideas that end up being developed may be done quicker and more outside of the box than if, say, you needed to ask a big banking executive board for permission. Put simply, neobanks are carving their own paths outside of the existing banking network.

Neobanks also offer a financial platform geared towards younger generations through their digital-based, flexible nature. However, Australians of any age who are looking to step away from the big banks, or just prefer online-based banking, can take advantage of what neobanks have to offer.

Neobanks may offer:

  • Innovative features – contactless payment options, savings round-up tools, instant money transfers and voice-controlled banking.
  • Competitive rates – whether it’s high savings account rates or low home loans, neobanks are consistently offering more competitive interest rates.
  • Lower fees – many neobanks also aim to reduce or totally eliminate fees, such as transaction account keeping fees or foreign transaction fees.
  • No paperwork – setting up an account with an app-based bank is much easier, and more environmentally friendly, without the fuss of paperwork.

What risks are involved with neobanks?

As with any financial decision, there are benefits and risks to banking with a neobank. Firstly, as they are operating in such a new space, neobanks may be limited in the services they can provide as of yet. If you’re looking for just one bank to offer you a home loan, car loan, credit card and bank account, you may be better off considering a more established provider.

Secondly, if you are one of those Australians who need brick-and-mortar branches, neobanks may not be your speed. Being exclusively app-based is a comparatively limited customer experience for those who rely on face-to-face service.

In terms of safety, however, the licenced neobanks listed above have been approved by the Australian Prudential Regulation Authority (APRA) as Authorised Deposit-Taking Institutions (ADIs). This means that customers are protected under the Australian Government’s Financial Claims Scheme (FCS), which states that deposits up to $250,000 for each account holder at any ADI are safe in the worst-case scenario a neobank were to go under.

This month, neobank Xinja announced it was to exit the industry, with APRA monitoring the return of all funds to customers. Thankfully, Xinja's depositors are protected by the FCS, so on top of the neobank's promise to return all funds, in a worst-case scenario they're guaranteed up to $250,000 per account holder. 

For those concerned about the security of banking through a smartphone app, these fears are legitimate. Security measures are heavily in place to protect your finances and personal details from theft or scammers. But it’s worth considering that pretty much every ADI in the country offers a banking app, so these concerns are not unique to neobank customers. Meaning, the responsibility still falls on the customer to not be careless with your banking details.

Neobank high interest rate savings accounts

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Learn more about savings accounts

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.