Neobank Report 2020: Digital banking in a new decade

Digitalisation is a phenomenon that has permeated throughout most parts of modern life, incorporating everything from the transition from video rental to streaming services and the move from paper tickets to virtual transport cards. While not particularly new, the same has taken place in the banking sphere with the digitisation of processes and platforms like online and app-based banking for Australian consumers.

What is new, and what we’ve witnessed in Australia over the past few years, is the emergence of digital-only banks, otherwise known as neobanks. Designed solely for smartphone apps, Australia’s neobanks are banking (literally) on an ongoing shift towards a banking experience which is not only online, but solely app-based. 

And with a nationally representative Mozo survey of 1,035 Australians conducted in October, 2019 revealing that one in four banking customers have either already switched, or are seriously considering switching to a neobank, it appears that they might be on the money. 

“With the majority of people doing their banking online, neobanks and other digital banks are one of the biggest threats to the stranglehold the big four banks have over the nation’s personal finances,” said Mozo Director, Kirsty Lamont.  

“With lower overheads, smaller staff numbers and a focus on a smooth digital user experience, neobanks are able to react to market changes quickly and offer some of the most competitive rates on the market.”

Read on for the full report findings.

Neobanks 101 

The definition of a neobank or digital bank is hotly contested, even amongst the banks themselves. But Australia is generally considered to have four main neobanks at present: 86 400, Up, Volt Bank and Xinja. 

These four players stand apart from traditional banks, and even some of Australia’s online banks, in a couple of ways, but the chief distinction is that neobanks have digital front ends (their apps) and back ends, meaning that they’re not beholden to the same legacy systems as traditional banks.   

Unlike other players in the fintech space, 86 400, Up, Volt Bank and Xinja are very much banks though. As the image below shows, each neobank has either obtained their own authorised-deposit taking institution (ADI) licence from regulator APRA, or is piggybacking off another institution’s licence. 

This gives neobanks the ability to accept deposits from Australian consumers by way of bank accounts, savings accounts and other accounts, and it provides customers with the same deposit guarantee from the Federal Government which is available to customers with every other Australian bank.

As of January 2020, each of Australia’s neobanks has at least one account available either to the general public or to early adopters, with even more products set to be rolled out in the near future. The banking products available from each neobank include: 

86 400 - Own Home Loan, Own Home Loan (Fixed), Pay Account, Save Account

Up - Everyday Account, Saver Account

Volt Bank - Savings Account (full release date expected in February)

Xinja - Bank Account, Stash

Neobanks and generation smartphone

From branches to phone banking to online banking and now app-based banking, the transition in the way Australians conduct their banking and communicate with their banks has steadily changed with advances in technology over time.  

According to Mozo’s research, the trend towards internet banking and app-based banking is clear, with roughly 75% of Australians now conducting the majority of their banking on a smartphone or computer. 

Interestingly only 20% of those surveys reported doing the majority of their banking in a branch, while only 5% relied on phone banking. 

Perhaps unsurprisingly, the strongest indicator for whether or not an Australian prefers to use an app or internet banking is age. 

For the majority of 18-24 years olds (43%) and 25-34 year olds (40%) banking via an app on a smartphone is the method of choice, while those aged 35-44 (46%), 45-54 (49%), 55-64 (64%) and 65+ (67%) all did the majority of their banking via internet banking on a PC or smartphone. 

Given their apps are the sole platform for their customers to actually do their banking (and communicate with their bank), neobanks are right at the forefront of the banking app revolution - especially when it comes to design and features. 

Among the app features already released by Australia’s neobanks, there’s been a notable focus on providing richer data insights into user spending and savings history and a willingness to integrate with external services. For example, Up has partnered with Transferwise to offer in-app international money transfers and 86 400 has allowed integration with a users account history from former banks on its app.   

As Mozo’s survey indicates though, the trend towards mobile and online platforms isn’t just limited neobanks and banking apps. There is a wider uptake in online and app-based financial services, particularly among younger Australians. 

45% of survey respondents aged 25-34 and 34% of those aged between 18-24 engage with Buy Now Pay Later services, while 20% of Australians in both age brackets used a smartphone budgeting app and over 15% used an investment app. 

Check out our recent 2019 Buy Now Pay Later report for a full rundown of the phenomenon. 

Targeting rates, not just apps

Creating an appealing app experience with innovative features is one thing, but as we’ve seen since Up Bank released its Saver Account back in October 2018, one of the main strategies of Australia’s neobanks has been to position themselves at the most competitive end of the market when it comes to interest rates.  

Interestingly, the period in which all four neobanks have emerged on the market has also coincided with the largest spell of interest rate volatility in Australia in recent years thanks to three separate Reserve Bank interest rate cuts in 2019. 

But as the market has settled since the last RBA cut in October, neobank interest rates - at least, those offered on their respective savings accounts - have risen to the top, providing a point of difference not only from the big four banks, but other savings accounts. 

As of January 24 2019, Xinja, 86 400, Up and Volt Bank are offering the four highest ongoing savings account interest rates in the Mozo database. 

As the graph above shows, these are well above the interest rates presently on offer from comparative major bank accounts and also much higher than the average ongoing savings account interest rate in the Mozo database. 

“At a time when official interest rates are on the slide and the big banks are struggling to compete, neobanks like 86400 and Up Bank are offering savings rates of up to 2.25% compared to the average Big 4 bonus rate of 1.44%,” said Lamont.   

Eyes on the big four

While their savings account rates may be well ahead of those offered by ANZ, Commonwealth Bank, NAB and Westpac, can Australia’s neobanks realistically mount a challenge to the big four? 

As Lamont states, there’s no doubt that Australia’s traditional banking powerhouses have taken a reputational hit in the last few years following the Banking Royal Commission, numerous scandals and criticism over lacklustre rates. 

“There’s been a major shift in consumer attitudes towards the big players in banking - the royal commission raised some serious trust issues and many Australians are fed up and ready for more competitive product offerings,” she said. 

“As it currently stands, neobanks such as Xinja and 86 400 offer the most competitive savings rates on the market - no traditional ‘bricks and mortar’ bank has been able to match it.” 

Mozo’s research reveals that while there has already been migration away from the big four, it remains a trickle at present. Only 6% of respondents admitted to having switched away from one of the major banks to a neobank, while an additional 11% said that they were seriously considering a move. 

However, a much larger proportion of survey participants (42%) already with one of the big four banks were not considering switching, suggesting that neobanks still have a long way to go in convincing many Australians.

Security remains front of mind 

“How safe is my money?” 

It’s only natural that this is one of the most common questions Australians have about neobanks, especially given how new they are to the market. And it’s an area that digital players may need to continue to address according to Mozo’s survey results. 

When asked to rank their most important criteria when it comes to a banking experience, 42% of respondents identified security as their number one priority. That was well ahead of factors such as low cost (21%), trustworthiness (21%) and ease of use (17%).   

“The research shows that while many Australians are happy to move their money online, digital banks still have work to do to build trust,” said Lamont. 

“The fact is digital banks are licensed and governed in exactly the same way as the big banks, so there is the same level of risk across the board, which is very low.”

Every authorised deposit-taking institution (ADI) in Australia is subject to the Federal Government’s deposit guarantee scheme which covers deposits up to $250,000 per person, per institution. 

So in the event that a neobank, or any other bank for that matter, goes under, a customers deposits are guaranteed.

For more news, guides and reviews on Australia’s growing cohort of digital banking players, head over to the Mozo neobanks and money apps hub.