Digital banking and neobanks
Friday 15 March 2019
If all you’ve ever known is dollarmites and the big four, the idea of an online neobank may seem a bit intimidating to you. But as banks roll out new app features and handy online services, the reliability of online banking grows, and makes room for neobanks, digital banks and other fintech to emerge. If you’re curious about the world of online banks, we’ve answered some frequently asked questions below.
What is digital banking and what online-only banks are there in Australia?
Digital banks, or online-only banks are exactly what they suggest, banks that operate online through a computer or through smartphone apps. This means they don’t offer in-branch service like traditional banks do, so you can do your banking at any hour of the day. They’re often either a division of a bigger bank or union, offering the added security of these bigger players.
Some of the main digital banks operating in Australia include:
- UBank. Owned by NAB
- ING. Owned by ING Bank
- RaboDirect. Owned by RaboBank
- ME Bank. Owned by industry super funds
- Easy Street. Owned by Community First Credit Union
Is a digital bank and neobank the same thing?
A digital bank and a neobank aren’t quite the same, even if they do sometimes appear that way. Whilst the terms are sometimes used interchangeably, digital banks are often the online-only arm of a bigger player in the banking sector, whilst neobanks are completely digital, existing independently to traditional banks.
What are neobanks?
Neobanks are just like normal banks - they’re a place to put your money, a place to borrow money from and a place to hesitantly hand over interest repayments to - the only catch is they’re 100% digital. They’re usually not associated with any traditional banks, and have no branches you can visit, existing solely online.
While this may raise concern about a lack of personal touch, neobanks plan to lead the pack in personalised banking by using artificial intelligence to keep track of your data and customise your app experience.
Why does Australia need neobanks?
As much as it may seem seem to be the case, neobanks didn’t just show up out of nowhere.
Here are some of the reasons for the emergence of neobanks in Australia:
- Lack of competition in the banking sector. 80% of Australians bank with the big four, which made a combined $32 billion in profits last year alone. With such a monopoly on Australian banking, competition is needed to drive down interest rates and fees, which is where Neobanks come in to challenge the big banks.
- The rise of digital banking. Banking hasn’t always been as easy as it is today, with cheques and money orders (thankfully) a thing of the past. According to J.D. Power research, 89% of banking customers used a digital channel to interact with their primary bank in 2017. Existing banks are rolling out new app features and online services to keep up with the demand for a convenient and easy way to bank, and neobanks are first in line to deliver Australian consumers better service features.
What features do digital banks and neobanks offer that traditional banks don’t?
Digital banks and neobanks separate themselves from the pack by offering a range of features traditional banks don’t in order to help Aussies save. Here are just some of them:
- Low costs. By avoiding costs associated with operating bank branches, neobanks and digital banks could offer competitive rates and minimal fees.
- Great app experience. Because digital and neobanks invest a lot of time and resources into improving their online functions rather than in-branch service, they’re able to develop great features for their apps. These could include the ability to get instant approval for loan applications or deactivate accounts at the click of a button.
- Spend tracking. Neobanks may use artificial intelligence to track your spending behaviour and even send you warnings if you’re on track to run out of money before your next pay day.
- Current bank balances. Gone are the days of pending payments - neobanks could potentially show you exactly how much you have to spend in real time.
It is, however, good to keep in mind that online banking won’t suit everyone. Here are a few features offered by traditional banks that you can’t get with a neobank:
- In-branch service. The main setback of neobanks is that they can’t offer in branch service, which some people prefer when dealing with large loans, such as a mortgage.
- Reliability. Whilst neobanks do have to go through the same processes to start banking that every other bank does, they don’t have the years of operational experience that traditional banks do.
- A large range of services. Established banks offer everything from transaction accounts to term deposits to home loans, and whilst neobanks plan to expand their product offering, all those options may not be available when they first launch.
What is artificial intelligence and how will neobanks use it?
In the last decade, artificial intelligence (AI) has made the leap from sci-fi movie plots to reality, with many fintech companies using the technology to improve their customer service.
AI is a computer system that can seemingly do things that you need human-like intelligence to do. It’s already used by the big four and other banks in implementing chatbots to answer basic questions or help with small tasks.
Neobanks build on these elements of AI in order to maintain the personal touch in-branch service offers and offer a more sophisticated virtual personal assistant experience. Through tracking behavioural patterns, it could also be able to validate transactions in real time and spot fraud quicker. This same system could also help proactively offer customers solutions to banking problems before they occur.
What neobanks, digital banks and fintechs are there in Australia?
Neobanks only hit Aussie shores last year, and many of the new banks that are in Australia are still in their pre-development stage. Here’s a list of Australia’s current neobanks and digital banks, and how far along they are:
- volt. volt bank is an Australian startup vying for the spot of Australia’s first operating neobank. It was the first neobank in Australia to be granted a restricted banking license, and in January 2019 it was granted a full licence to operate as an ADI. volt bank is expected to launch a savings and transaction accounts some time this year, followed by products like home loans and credit cards down the track.
- Xinja. Xinja is also aiming to be Australia’s first operating, independent, 100% digital bank. So far, it’s launched an app and has a prepaid spending card. Xinja is currently aiming for a 2019 public launch now that they've secured restricted Authorised Deposit-Taking Institution status from APRA.
- 86 400. Representing the number of seconds in each day, 86 400 is a new Australian neobank entering the race, and is funded by IT giant Cuscal. It hasn’t launched any products yet but is working to secure a banking license and then release a transaction account and savings account sometime in 2019.
- Up Bank. Backed by Bendigo Bank, Up Bank is a mobile-only, app-based digital bank that's already released both an award-winning bank account and savings account for Australians to use.
- Pelikin. Fintech Pelikin is a Melbourne-based start up close to releasing a mobile-only, multi-currency account and prepaid Visa debit card which it hopes will change the way young Aussies manage their money overseas.
- archa. Another of the Melbourne-based fintechs, archa are set to launch a travel-friendly prepaid debit card and their linked archa app sometime in 2019. At the moment they don't have a full Australian banking license, but they certainly plan to get one in the near future.
- Douugh. Started by the co-founder of P2P lender SocietyOne, neobank Douugh is aiming to launch a 'smart' app-based bank account and a linked debit Mastercard in Australia sometime in 2019.
- QPay. Launched in 2015, QPay is an app and reloadable Debit Mastercard aimed at university students. QPay provides inbuilt student-only discounts as well as spending insights on its app.
- Revolut. With over 3 million customers in Europe already, Revolut is a UK-based digital bank which offers a range of traditional banking services as well as P2P payments and cryptocurrency exchange. Update 19/06/19: Revolut has lauched in Australia, using their European "electronic money licence" (EMI) to support them. They say they will eventually apply for an Australian banking licence, but for now they are focused on creating a foundation and having their products available here first.
Are neobanks and digital banks safe?
It can seem scary to put your trust in a bank that doesn’t have the traditional tools in place to operate. A lot of trust in traditional banks comes from their reputation and customer service, and knowing you can go in branch or pick up the phone whenever you need to.
The good news is neobanks need to go through the same regulation processes as traditional banks. It’s not easy to break into the Australian banking market, and these new banks need the support of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC).
In order for a bank to receive money, they need to be an Australian authorised deposit-taking institution (ADI). The Australian government protects the investments of customers into ADI’s by up to $250,000 in the case the bank was to stop operations. Not all current Australian neobanks have this title, but all digital banks do.
How can I get started with a neobank?
Neobanks in may not be ready to open up shop in Australia just yet, but they’re forecasting movement in late 2018 and early 2019. Until then, you can sign up to the waitlist for a neobank and wait for APRA and ASIC to approve its banking license, so you can be one of the first in line to own a transaction or savings account through with a neobank.
If, however, you’re looking to switch to online banking in the near future, you can choose one that’s right for you from range of digital banks in our bank account comparison table.