Why neobanks offer better savings rates than the big four banks

Neobanks may be the new kids on the block, but they’ve taken the banking world by storm, ruffling the feathers of the big four and offering Aussies a one-way ticket out of savings doom. 

Right now, the average savings rate for neobanks in the Mozo database is 2.23% p.a. - well above the big four bank average of 0.57% p.a..*

To put this into perspective, only 12 savings accounts in the Mozo database have ongoing rates of 2.00% p.a. or more. The highest sits at 2.25% p.a., and all three accounts with this offer belong to neobanks (Xinja’s Stash, Up’s Saver Account and 86 400’s Save Account). Just bear in mind that as of 5 March, the Xinja Stash is no longer available to new customers. 

But if neobanks haven’t been in the game for that long, how are they able to offer such competitive savings rates? 

Fewer overheads, higher rates 

“Neobanks don’t have a branch network, huge numbers of customer service staff, or legacy computer systems to support,” Mozo’s Banking Expert, Peter Marshall said.

“They run very lean and are 100% digital. So there are all these things that the banks have had to do over years that the neobanks can just ignore and get on with making great products.” 

And according to Marshall, in order to build their customer base, the neobanks have passed those savings onto customers in the form of competitive rates. 

“Neobanks want to get a lot of attention so they’re pricing their products as high as possible. They’re still in the launch phase so they probably aren’t worrying too much about profit at the moment.” 

Marshall added that the real test will come a few years down the track, once the neobanks have lifted themselves off the launch pad and switched their gears to making profit. 

Where do neobanks get their funding from? 

With traditional banks, a lot of their income comes from having that gap between the interest they pay out on deposits and the interest they receive from products like home loans and personal loans. 

However, most Aussie neobanks don’t have any lending products in their portfolio right now, with the exception of 86 400 which currently offers home loans.  

So where are these neobanks getting their money from? 

Marshall said it depends on the neobank.

“Some neobanks like 86 400 and Up are joint enterprises with existing institutions. 86 400 is backed by Cuscal, one of Australia’s largest payment solutions providers, while Up has the support of Bendigo and Adelaide Bank,” he said. 

“Others like Xinja are completely new startups, so they rely more on funding from investors.” 

In January 2018, Xinja launched its first ever Retail Equity Crowd Fund via equity crowdfunding platform Equitise and raised almost $2.7 million from over 1,200 investors. And just yesterday, it kicked off another funding round on Equitise, with an aim of drumming up an additional $50 million in capital. 

Is my money safe with a neobank? 

Like traditional banks, all neobanks in Australia are Authorised Deposit-taking Institutions (ADIs), which means any deposits up to $250,000 that you keep with them are guaranteed under the government’s Financial Claims Scheme. 

For more information, head over to our Financial Claims Scheme guide. 

Your next steps 

The good news is signing up a neobank can take just a matter of minutes - all you’ll generally need to do is download the app onto your phone and provide some personal details.

Itching to switch? Then head over to our neobanks comparison table or take a look at some of your options below. 

*Data as of 4 March 2020.