Neobanks and fintech: What they are and why you should be paying attention
Technology and finance are both rife with obscure and difficult concepts. Merge the two and it seems that some unfamiliar bit of jargon awaits you at every turn. To make sure you’re up to speed with all the latest developments in the world of financial technology, we run through what fintech is and how key players in that space, like neobanks, are leveraging it to provide exciting new services.
What is fintech?
Simply put, fintech is the integration of technology and financial services. The term is quite broad, and includes several technologies that are wildly different from one another. Cryptocurrencies, for example, come under the umbrella of fintech, as do payment services like Afterpay and prepaid travel cards like Pelikin, so we don’t blame you if you’re a bit confused.
The fintech landscape includes big tech companies and established financial institutions, as well as the trailblazing young start-ups that are challenging the dominance of both. One big thing that connects them all is a willingness to overhaul traditional systems and processes and make things cheaper, faster and more efficient. Many will use artificial intelligence and machine learning to help hone in on customer needs with laser focus.
In the banking arena, the fintech revolution is well underway. Many new technologies (like spend trackers, contactless payment and digital wallets) have become such a big part of our daily routines that it would be difficult to imagine life without them. Here are just a few that have emerged in recent years.
Examples of fintech
Budgeting apps: Gone are the days when you had to pore over a spreadsheet and painstakingly log your income and expenses for the month. Now you can rely on one of several budgeting apps out there to do the task for you.
Crowdfunding platforms: These platforms allow everyday people to raise money to finance personal or charitable causes, business ventures, and creative projects. Kickstarter, Patreon and GoFundMe are some examples of prominent crowdfunding platforms.
Cryptocurrency: An internet-based form of currency, cryptocurrency functions by removing banks from the equation and letting people transfer funds with one another via blockchain technology.
Open banking: Open banking gives people greater access to their financial data (think transaction records, repayment history, and credit card habits), rather than leaving it up to the big banks to hoard for themselves. The goal is to help Australians’ make better decisions when it comes to their money, eliminate some of the obstacles involved in switching banks, and lower the hurdles new entrants face when entering the banking space.
Payment services: Whether you’re looking to transfer some money to a friend or after alternative ways to pay off big ticket purchases you’ve made, there are hundreds of tech-based payment services available - like Osko, Beem, Afterpay, and Zip Money - to help you out.
Robo advisers: If the fees charged by a traditional investment advisor are a bit too steep, you might want to consider using a robo advisor. These are systems that rely on algorithms to make investment decisions, often at a much more successful rate than humans.
Wealth and investment apps: There’s been a slew of investment apps to emerge in the last few years that aim to demystify investing and make it accessible to all kinds of people. Some like Raiz are geared towards casual investors, and operate by rounding up purchases users make to the nearest dollar and investing the difference, along with allowing for regular or one-off deposits.
Others, like the CommSec App and Westpac Online Investing App, are mobile versions of existing share trading platforms, and allow people to monitor the share market and jump on opportunities no matter what time of day.
What are neobanks?
‘Neobank’ is a catch-all term for the new wave of app-based digital banks that have entered the scene in recent years. With the launch of neobanks including 86 400, Up Bank and Xinja, this new type of app-based bank is already starting to make waves in Australia. Neobanks are on pace to transform the way we make payments, track our spending, and manage our money.
If the idea of an app-based bank makes you uneasy, rest assured. Neobanks are held to pretty strict standards by all the usual regulatory bodies, just like any other financial institution. For example, before they’re allowed to hold your money, neobanks will need to be recognised as an Authorised Deposit-taking Institution (ADI) by APRA, or at the very least owned by an organisation that’s licenced as such.
Despite plenty of overlap in what neobanks and traditional banks do, there’s a world of difference between the two. For one thing, they’re much more technology-oriented than your typical bank. In fact, some neobanks even go so far as to describe themselves as a tech company first and a bank second.
A look under the hood will reveal that both the front and back ends of their systems are 100% digital, and unlike most of their competitors in the banking space, they aren’t beholden to pesky legacy systems. They’re also primarily app-driven, meaning that if you need to move money around, sign up for a new account, or review your spending, you’ll likely be able to do so with a few taps of your fingers.
A different way to bank
Another big difference is in how neobanks market themselves. Since the banking Royal Commission wrapped up back in February, the big banks have lost a lot of goodwill among Australians. Neobanks are trying to capitalise on that disillusionment by positioning themselves as a more modern, customer-focused alternative.
To that end, they tend to be vocal about their principles in a way that other banks aren’t. For example, 86 400 has said what it does goes beyond just taking deposits — it aims to take the stress out of money management and help customers forge better financial habits. And Xinja makes good on its community-first ethos by giving users a forum to provide feedback, learn about upcoming projects, and discuss general money matters.