Is a neobank right for you? The pros and cons explained

They’re new, they’re fully-online and they’re promising to change the way Australians bank by integrating the latest technology with some innovative new features, but is a neobank the right place to keep your cash and manage your finances?

Whether you're ready to make the switch, or you’re just curious about what these new players are offering, read on below as we lay out some of the pros and cons of neobanks, as well as some of the Aussies a neobank might be the right fit for.

Before we jump in to the pros and cons of neobanks though, it would be rude if we didn’t introduce the Australian neobank players that have already (or are about to) hit the market.

Up

Launched in October 2018, Melbourne-based Up was the first neobank to hit the Australian market. A partnership between technology developer Ferocia and Bendigo and Adelaide Bank, Up is an app-based bank currently offering an Everyday Account and a Saver Account plus an app which is chock-full of innovative savings and budgeting features (more on those below) - many of which you won’t find elsewhere.

Xinja

Xinja was an independent neobank based in Sydney which did offer a bank account and savings account until it ceased operating as a bank in December 2020. The fintech may end up launching its Dabble share trading platform sometime in the future though.

86 400

Another Sydney-based neobank, 86 400 is owned by payments provider Cuscal but operates under its own full Authorised Deposit-Taking Institution licence which it obtained in July 2019. 86 400 hit the market to the public in September 2019 and has since launched its Pay account, Save Account and various fixed and variable 86 400 home loan products - all of which can be accessed via its app.

Volt Bank

The first Australian neobank to be granted its own full Authorised Deposit-Taking Institution licence in early 2019, Sydney-based Volt Bank launched the Volt Bank Savings Account to the general public in February 2020.

Judo Bank

While it looked like it would go down the neobank route when it first launched, Judo Bank has since emerged as a challenger bank with a difference: targeting small and medium-sized businesses rather than individuals. Judo acquired its full ADI licence in April 2019 and is now offering a host of products to customers including a variety of business loans, home loans and term deposits.

The next wave

There are also a number of fintechs and aspiring neobanks already operating in this space that don’t have a full ADI licence yet (and therefore can’t be called a neobank), but also deserve a shoutout: Alex, Douugh, Infinity, Hay and Revolut.

So now you’ve met some of the Australian neobanks making a name for themselves, but is a  digital bank actually suited to you, and what are their benefits and drawbacks?

Before we dive in, it’s worth noting that because many of the neobanks listed above - and the Australian neobank scene more generally - are still in their infancy, we don’t know exactly what they’re going to offer in the future. The proof will be in the pudding! Nonetheless, working with what we’ve already seen, plus the examples we’ve already seen from digital banks and neobanks in the UK, here’s what we can say:

Smartphone and tech lovers

You don’t have to be a millennial to appreciate the ease and convenience of being able to conduct your banking from the palm of your hand, but that’s certainly what neobanks are offering with their app-only focus. That includes being able to sign up for an account totally through the app, contacting your bank through in-app messaging services and, of course, making transfers and payments through the app.

Speaking of payments, neobanks couldn’t be considered real mobile players without offering the latest smartwatch and mobile payment options. So if you like the idea of tapping with your phone, smartwatch or other wearable device you’ll be pleased to know that many of Australia’s neobanks and fintechs are already compatible with Apple Pay, Google Pay, Samsung Pay, Fitbit Pay and Garmin Pay.

As you’d expect from mobile-focused banks, neobanks are also incorporating the latest mobile technology into their apps. That means customers will be able to use voice banking through assistants like Siri and Google, and keep their accounts safe with biometric security measures such as a fingerprint, facial and voice ID, as well as two-factor authentication.

Travellers

We know that Australians are generally big travellers, but one of the largest hurdles many face is working out how to actually spend their money overseas in a way that’s both convenient and doesn’t attract a million fees. That’s why Aussie travellers might be happy to know that Australia’s neobanks and other money apps are already jumping on the opportunity to make apps and products that are as travel-friendly as possible:

• 0% International Purchases Fees: Neither 86 400 or Up charge an international purchase fee on payments made abroad with their respective debit cards - either in person, or online.

• $0 overseas ATM fees: The same three neobanks don’t charge any overseas ATM fees, though that’s not to say the ATM provider won’t. In addition, fintechs Hay, Pelikin and Revolut also won’t charge fees on a certain number/dollar figure worth of foreign ATM withdrawals, though each has a different cap.

• Hold and transfer multiple currencies: Travel money app Pelikin allows users to hold up to five different currencies in their app at one time, which they’re also able to swap between in real time.

• Transfers at the interbank rate: Fintech Revolut allows users to transfer money overseas (in 27 different currencies) at the interbank rate, however, transfers are capped at $9,000 per month for ‘Standard’ users.

Ethical and community focus

Feel like your current bank cares more about money and less about your own interests? While that might not be a huge concern for some when it comes to choosing a bank, it may be a turn off for other Aussies - especially in the wake of the recent Banking Royal Commission.

That’s why neobanks are trying to position themselves as alternatives to traditional banks. They want to be places where you can stash your money safely and do your regular day-to-day banking, but they also want to help improve your financial health and awareness. To do this, some are providing:

• Greater personal data insights as well as helpful features and tools (more on these below)

• Dedicated communities of like minded savers and tech lovers who are there to support each other. For example, UK neobanks such as Monzo already have thriving online communities, which Australian players like Hay are also trying to acheive in Australia

• Aspiring neobank Hay has launched an Australian-first, 85% biodegradable card to try and limit the amount of plastic waste it produces

Another way neobanks are looking to differentiate themselves from existing banks is to cater to Aussie banking customers who are looking for a more ethical alternative. That's not to say that there aren’t already existing banks in Australia who are doing the same (Bank Australia, Bendigo Bank and UBank to name a few), but both Up Bank and 86 400 have already made a point of clarifying their positions on ethical investing - namely by making a commitment not to lend to projects involved with industries such as fossil fuel and tobacco.

Innovative features and tools 

This is where neobanks are really trying to make their mark with genuinely useful and innovative app features and tools. This comes back to the idea of financial health, with neobanks wanting to go beyond the idea of a traditional bank by offering the tools and features you might find in budgeting and savings apps on top of financial products.

So if that sounds like your cup of tea, you might be interested in some of these features and tools that are currently on offer, or might be offered by neobanks in the near future:

Spending Insights

Ever scanned through your transaction history with a puzzled look on your face as you try to make sense of pending transactions, dates which don’t match up to your actual purchases and merchants you’ve never heard of in your life?

This lack of clarity can be a nightmare for anyone trying to budget, or for anyone who just wants to see what they’re spending their money on and when. That’s why many neobanks are going down the path of providing richer insights for their customers.

86 400 and Up not only label transactions with real merchants and vendors (Woolies, Netflix etc.), they are often able to provide the company logo, as well as the exact time you made the purchase and the location you made it in.

It doesn’t stop there though as, for example, Up provides users with reports and information on things like:

• How much they’ve spent at a specific store or with a specific company

• How much they’ve spent on a specific category (transport, food etc.)

• Month-to-month spending comparisons

Savings Tools

Having access to greater insights is one thing, but they go hand in hand with tools to help you save. So what are neobanks offering Aussies beyond a standard savings account?

• Automated Round Ups: Up gives savers the option of using roundups whereby every transaction made is rounded up to the nearest dollar, with the difference deposited into your savings account. For example, 50c from your $3.50 coffee would be automatically rounded up and banked in your savings account. This can be a handy way to keep boosting your savings on a day to day basis.

• Multiple 'savers’: 86 400 and Up also allows users to create multiple savings accounts for different goals (e.g. a holiday or a new car). The added benefit being that these additional accounts still qualify for the same high interest rate.

• Savings challenges: Volt Bank is encouraging users to be more proactive with their savings by turning saving it into a habit with an ongoing weekly, fortnightly or monthly challenge and automated reminders. 

External Integrations

If you’ve been looking for a way to take a more holistic approach to your finances, then a neobank might be the future solution as there is certainly plenty of chatter among some Aussie neobanks to allow integration with external financial apps and accounts through their own apps.

For example, Up is already doing this by offering integration with BNPL provider Afterpay (which allows users to connect with their Afterpay account through the Up app) and international money transfer service TransferWise (which allows users to send money overseas via TransferWise through the Up app).

And with the rollout of Consumer Data Right (CDR), don’t be surprised if other neobanks end up offering similar integrations down the line with other fintechs and apps.

Okay, so those are some of the standout benefits of neobanks and some of the people they might appeal to, but what about the drawbacks of going with a neobank? Here are some of the common concerns raised about them.

No branch access

Neobanks are online. In fact, they’re almost all app-based, so you might not be surprised to learn that they don’t have physical branches like many traditional banks. Not having branches is one of the ways neobanks and digital banks are able to reduce overheads and offer their customers competitive rates, but it does mean that they’re not able to provide the same level of in-person interaction as traditional banks.

That’s why if you’re the type of person that prefers to conduct their banking over the counter, or would like the option of being able to talk to a real person face-to-face about opening a new account or taking out a loan, a neobank is not going to be the bank for you.

ATMs and cash

I know what you’re thinking - if neobanks don’t have a physical presence like branches, does that mean they don’t have ATMs either? It’s certainly true that neobanks don’t (or are unlikely to) have branded ATMs, but it doesn’t mean you won’t be able to withdraw cash with a neobank debit card or by using your phone.

In fact, many existing online banks in Australia such as ING and ME Bank already have systems in place which allow their customers to withdraw money from eligible ATMs (for free!). And given that Australia’s four major banks (ANZ, Commonwealth Bank, NAB and Westpac) now allow customers from all banks to make withdrawals from their ATMs for free, finding a participating ATM isn’t really an issue any more.

Limited products

Let’s be real, Australia’s neobanks are just getting started. These are new banks, many of which have only just obtained their full or restricted licences as Authorised Deposit-Taking Institutions.

While most of the cohort are now offering up bank accounts and savings accounts, 86 400 remains the only neobank (at present) to offer home loans to its customers. So though we’re likely to see more home loans plus other products like term deposits, personal loans and perhaps credit cards at some point in the future, that still might be a while away.

That means that if you’re the kind of person who likes being able to do all their banking in the one place - perhaps with a bank account, savings account, credit card and home loan all with the same bank - a neobank might not be the bank for you. At least, not just yet.

Security and safety

One of the main concerns people have about neobanks, and online banks in general, is whether or not their money is going to be safe: both from a trust point of view and a security point of view. Those are completely valid concerns to have, especially if you’ve never heard of the bank before.

 So, how can you trust a neobank with your money? Well, you’ll be pleased to know that neobanks and anyone calling themselves a bank in Australia must be an Authorised Deposit-Taking Institution (ADI) approved by the Australian Prudential Regulation Authority (APRA). Aside from the thorough vetting involved in the ADI application process, money held by an ADI is also covered (to a degree) by the Australian Government.

Under the Federal Government’s Financial Claims Scheme, deposits of up to $250,000 per person, per ADI, are covered by the government in case that bank goes under. That means the  money you have held in a neobank transaction or savings account (so long as it’s an ADI) will be guaranteed!

What about security though? Just like other banks, neobanks employ a range of security measures to ensure that your money and details are protected. But because these are mobile-based banks, some of that security responsibility also falls on you as a user - just like it does if you use an app with your current bank.

RELATED: Are neobanks safe?

Ready to start comparing neobanks and other money apps side by side? Start your search by  heading over to the Mozo neobank and money app comparison table for more.