Digital banking and neobanks

If all you’ve ever known is the big four, the idea of a neobank or digital bank may seem a bit intimidating to you. But the world of banking is increasingly turning online and towards apps, with new app features and handy online services rolled out every month. With that in mind, and as the reliability of online banking grows, neobanks, digital banks and other fintechs are starting to emerge.

So if you’re curious about the world of neobanks and digital banks, we’ve answered some frequently asked questions below.

What are neobanks?

Neobanks are just like normal banks - they are a place to put your money, a place to borrow 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, instead they exist solely online and generally through a smartphone banking app.

While this may raise concerns about a lack of personal touch that you may only get in a branch, neobanks plan to lead the pack in personalised banking by using artificial intelligence to keep track of your data and customise your app experience. Plus they’re determined to make banking, and finances in general, less of a chore by creating products and rolling out features that are designed to help their customers.

These digital banks are still banks though. So if you’re concerned about the safety of your bank account funds with a provider you’ve never heard of, rest assured that they’re licenced and governed in the exact same way as the Australian banks you know well, meaning your money is just as safe in that respect. More on that below though. 

Is a digital bank and a neobank the same thing?

A digital bank and a neobank are one and the same - they’re just different terms used to describe the same thing. In the UK and Europe ‘digital banks’ tends to be the more common term used, while in Australia it’s common to refer to these players as either neobanks or digital banks. 

Neobanks and digital banks are completely digital, they’re almost all 100% app-based, they don’t have any bank branches and they generally all share a similar philosophy of wanting to reshape the way Australians do their banking and manage their finances.  

What neobanks, digital banks and money apps are there in Australia?

Neobanks only hit Aussie shores last year, and many of these new banks and other money apps are still in their development stage or just starting to roll out. Here’s a list of the current Australian neobanks, digital banks, fintechs and money apps that you’ll want to know about:

Up  

Backed by Bendigo and Adelaide Bank, Up is a mobile-only, app-based bank. Up was the first of Australia’s ‘digital banks’ to launch to the public in October 2018, and since then it’s already released both a transaction account and savings account. In February 2020, Up was also named the 2020 Mozo Experts Choice Award Everyday & Savings Bank of the Year.

Intrigued? Check out our reviews of the Up Bank Everyday Account and Saver Account. 

86 400  

Representing the number of seconds in each day, 86 400 is one of Australia’s newest banks, having fully launched to the general public in September 2019. The neobank has since released an app-based transaction account and savings account, the latter of which took out a 2020 Mozo Experts Choice Award, as well as home loans.

In early 2021, 86 400 announced that it was in the process of being acquired by major bank NAB subject to shareholder approval.

Volt Bank  

Volt Bank was the first neobank in Australia to be granted a licence as a Restricted Authorised Deposit-taking Institution (RADI) in May 2018, and in January 2019 it was granted a full licence to operate as an Authorised Deposit-taking Institution (ADI). 

In February 2020, Volt Bank launched its Volt savings account which is available to users through the Volt App, and they're likely to follow this with a transaction account and perhaps even other products like home loans down the track.

Xinja 

Sydney-based fintech Xinja was a fully-fledged digital bank offering a bank account and savings account until it discontinued its banking services in December 2020.

Hay

Founded in 2018 and launched in February 2020, Hay in one of Australia's newest fintech players currently offering a prepaid Hay card and Hay account which can both be accessed and managed via the Hay app. Hay very much has its eyes set on becoming Australia's next neobank though, so don't be surprised to see it make the transition in the near future once it obtains its RADI licence from APRA. 

Judo Bank

Unlike the neobanks above, Judo Bank is a little bit different. That's because they're a a challenger bank aimed at providing products and services mainly to Australian small and medium-sized businesses rather than everyday individuals.  

Based in Sydney, Judo acquired their full ADI licence in April 2019 and are offering a variety of business loans, term deposits and even business home loans to their customers. In February 2020, Judo Bank was named a 2020 Mozo Experts Choice Award winner in the Best Term Deposit category. 

Pelikin  

Pelikin is a Melbourne-based travel money app aimed at providing young Aussies with a travel money companion with a point of difference. Pelikin is mobile-only and features a multi-currency account and prepaid Visa debit card which allows users to spend, transfer and split money in up to five different currencies. Pelikin also provide travel insurance for their users. 

QPay   

Launched in 2015, QPay is a mobile-based money app designed to deliver Australian students with a different way to pay. QPay users can make use of both the QPay App and reloadable QPay Debit Mastercard which offer features such as student-only discounts and spending insights (on the app).  

Revolut   

With over three million customers in Europe already, Revolut is a UK-based digital money app which offers a range of traditional banking services as well as P2P payments and cryptocurrency exchange. 

Revolut launched in Australia in June 2019, offering Aussie users an app and the choice of a  number of linked debit cards which can be used for spending at home and abroad, as well as transferring money internationally. Just bear in mind that Revolut is not a bank, and your funds will be held by an undisclosed Australian bank. 

Douugh   

Started by the co-founder of P2P lender SocietyOne, Douugh is an ASX-listed fintech positioning itself as a ‘smart app-based bank account’ featuring its very own AI assistant and a linked debit Mastercard. Douugh has already launched in the US and is set to launch in Australia soon. 

archa   

Another of the Melbourne-based fintechs, archa are set to launch a travel-friendly ‘digital account’, prepaid debit card and the linked archa app sometime in late 2019. At the moment they don't have a full Australian banking license, but they certainly plan to get one in the near future. 

What features do digital banks and neobanks offer that traditional banks don’t?

Digital banks and neobanks are separating themselves from the pack by offering a range of features traditional banks don’t in order to help Aussies save and manage their finances. Here are just some of the neobank pros and cons:

• Low costs: By avoiding costs associated with operating bank branches and maintaining legacy  banking systems, neobanks and digital banks are aiming to pass on these savings to customers by way of more competitive rates and minimal fees.
• Great app experience: Because digital and neobanks are able to invest a lot of time and resources into their online functions rather than on in-branch services, they’re able to develop great features for their apps. These could include the ability to get instant approval for loan applications, in-app sign up, savings tools, spending trackers, more personal insights into a users overall financial picture and the latest payment solutions including digital wallets and virtual cards.
• 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 might not be able to get with a neobank:

• In-branch service: One of the main setbacks of neobanks is that they can’t offer in branch service, which some people prefer when dealing with large loans, such as a mortgage or personal loan.
• Reliability: Whilst neobanks do have to go through the same regulatory and licence processes that every other bank does, they don’t have the years of operational experience that traditional banks do. Depending on your outlook, that could be a plus or minus for you though. 
• A large range of products: Established banks offer everything from transaction accounts to home loans to car insurance, and while neobanks plan to expand their product offering, all those options may not be available when they first launch.

Why does Australia need neobanks?

As much as it may seem to be the case, neobanks and digital didn’t just show up out of nowhere. They’ve already been around in Europe and the UK for the past few years, and there are also a couple of unique reasons for their emergence 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 in 2017 alone. With such a monopoly on Australian banking, competition could be one way to drive down interest rates and fees, which is where neobanks and digital banks 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 Mozo survey data detailed in our Neobank Report 2020: Digital banking in a new decade though, 75% of Australians are now using a digital platform - either internet banking or an app - to do their everyday banking. So with more and more Australians 'going digital', it makes sense that purpose-built neobanks are the first in line to deliver Australian consumers better service features.

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.

Are neobanks the same as the online-only banks already in Australia?

Online-only banks are exactly what they suggest, banks that operate online through a browser or app-based platform. 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 credit 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

While they certainly share large similarities with neobanks, there are a couple of crucial differences. One is the fact that online banks generally operate using a digitised version of a legacy banking system, while neobanks and other new digital banks have built their own brand new systems from scratch. 

One of the differences is the way in which neobanks are approaching banking and their customers. Instead of largely focusing on products, neobanks are attempting to position themselves as providers of a more holistic approach to their customers finances - offering new insights, tools and features.     

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, especially if you're unsure about their safety. 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 to go through the process of obtaining a full Authorised Deposit-taking Institution (ADI) licence from the Australian Prudential Regulation Authority (APRA) before they’re allowed to call themselves a bank and take unlimited customer deposits.

The Australian government protects the investments of customers with money held by an ADI to the tune of $250,000 per person, per ADI in the case the institution stops operations or goes bust.

How can I get started with a neobank?

With a number of neobanks having already opened their doors, and with more set to do the same in the coming months, we don’t blame you if you’re starting to get excited about this digital banking revolution. 

So if you’re interested in comparing some of the fully launched neobanks for yourself, check out the home loans, savings and  transaction accounts on offer from 86 400, Up, and Volt Bank today. 

Otherwise, keep an eye on the Mozo neobank hub for the latest neobank launches and updates, as well as a whole range of comprehensive guides which can help answer any other neobank and digital bank questions you may have.