Is a neobank right for you? The pros and cons explained
Neobanks, 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.
Meet the neobanks
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.
Launched in October 2018, Melbourne-based Up Bank was the first neobank to hit the Australian market. Owned by Bendigo and Adelaide Bank, Up Bank is mobile-only, offering a bank account, savings account and an app chock-full of innovative savings and budgeting features (more on those below) - many of which you won’t find elsewhere.
Aiming to fully launch in the coming months, Xinja is an independent neobank based in Sydney which is currently offering a travel-friendly prepaid card and a transaction account to early customers. Xinja Bank have a full Authorised Deposit-Taking Institution (ADI) licence, and they’re likely to offer a wider suite of products including a savings account and even home loans once they fully launch.
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. 86 400 hit the market to the public in September 2019, launching with an app, transaction account and savings account. 86 400 have also already heralded their intention to provide home loans.
The first Australian neobank to be granted its own full Authorised Deposit-Taking Institution licence in early 2019, Sydney-based Volt Bank is also edging nearer to a full launch later this year. When it does, Volt is also expected to come equipped with a bank account and savings account, as well as home loans and credit cards down the line.
Judo Bank is a challenger bank with a difference, targeting small and medium-sized businesses rather than individuals. Also based in Sydney, Judo acquired their full ADI licence in April 2019 and are already offering a host of products to their customers including a variety of business loans, home loans and term deposits.
Who are neobanks good for?
So now you’ve met some of the Australian neobanks making a name for themselves, but is a digital bank actually suited for you, and what are their benefits and drawbacks?
Before we dive in, it’s worth noting that because many of the Australian neobanks listed above are yet to fully launch, it’s still a matter of time before we know exactly what they’re going to be like and what they’re going to offer - the proof is in the pudding as they say. Nonetheless, working with what we already know, 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 millenial 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 interfaces. 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 or watch you’ll be pleased to know that Up Bank and 86 400 are already compatible with Apple Pay, Google Pay, Samsung Pay, Fitbit Pay and Garmin Pay, while Xinja have also announced that their debit card is compatible with Apple, Google and Samsung 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.
We already know that Australians are big travellers, but one of the largest hurdles many Aussies 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.
For example, in order to appeal to travellers some neobanks and money apps are already offering the following handy travel features:
- 0% International Purchases Fees: Neither Up Bank (Debit Card) or Xinja (Prepaid Card) charge an international purchase fee on payments made abroad - either in person, or online. However, in Xinja’s case the fee is charged then refunded.
- $0 overseas ATM fees: Neobank 86 400 (Debit Card) and money apps Pelikin and Revolut don’t charge fees on foreign ATM withdrawals. However, Pelikin provides free withdrawals for the first six transactions you make under $200 AUD ($3 per withdrawal afterwards) and all withdrawals over $200, while Revolut caps free withdrawals at $350 per month for ‘Standard’ customers.
- 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 15 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 the money they’re making 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 those 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 communities, while Xinja are seemingly trying to replicate this in Australia with their own community section and forum
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 Xinja 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:
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.
For example, Up Bank not only labels transactions with real merchants and vendors (Woolies, Netflix etc.), it’s 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 Up Bank, and in all likelihood other neobanks down the track, provide 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
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? Looking at Up Bank again, the Melbourne-based neobank has already released a number of handy savings tools for their customers including:
- Automated Round Ups: Every transaction you make 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’: Up Bank also allows users to create multiple different savings accounts (or ‘savers’) for different goals (e.g. a holiday or a new car). The added benefit being that these additional accounts still quality for the same high interest rate, as long as the total in the accounts sits beneath a certain figure.
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 Bank are already doing this by offering integration with Afterpay. This allows users to connect with their Afterpay account through the Up Bank app and incorporates Afterpay transactions (including merchant data) made with an Up Bank card in their normal transaction feed. It even providers payment reminders days before an Afterpay payment is due!
So don’t be surprised if some neobanks end up offering similar integrations down the line with buy now, pay later services, superannuation accounts and budgeting and savings apps.
Okay, so those are some of the standout benefits of neobanks and some of the people neobanks 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 a high street bank.
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!). The same is the case with neobank Up Bank, whose customers can use Bendigo and Adelaide Bank ATMs for free. Although in Up Bank’s case, it’s owned by Bendigo and Adelaide Bank, so it will be interesting to see whether independent neobanks set up deals of their own to give their customers (fee-free) ATM access.
Let’s be real, Australia’s neobanks are really in their infancy. These are new banks, many of which have only just obtained their full licences as Authorised Deposit-Taking Institutions.
In the case of Up Bank and 86 400, when it comes to products, their customers currently only have access to transaction and savings accounts, and the same is likely to be true of Volt Bank and Xinja when they fully launch. While many are likely to expand further by offering products like term deposits, home loans, personal loans and perhaps credit cards in the future, that might be a while away.
So 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 or provider - then a neobank might not be the bank for you. At least, not just at the moment.
Security and safety
One of the main concerns many 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 Australian Government deposit guarantee scheme, deposits 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.
Check out our guide for more information about how you can keep your phone safe while banking.
Ready to read even more about the latest Australia banking players? Check out our fintech hub for the latest news and guides on neobanks and other banking innovations.