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

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

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:

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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