Understanding the world of neobanks and digital banks: Expert opinion

Between 86 400’s launch and Xinja’s acquisition of its full banking licence, neobanks have been making plenty of waves as of late. But if you’re planning on making the switch, there’s a lot you’ll need to know. Mozo’s Kirsty Lamont answers some of the biggest questions about neobanks and what they have to offer.

We've been hearing the term neobank quite a lot these days. Can you tell us what exactly it refers to?

Neobanks are a new type of bank that are 100% digital, which means as a customer you’re signing up and interacting with your banking products via a mobile banking app.

Instead of investing in brick and mortar branches, neobanks are investing in super slick mobile banking apps and great value products to improve your banking experience.

There are two types of neobanks. First are those that have no banking license and instead partner with a traditional bank to deliver their products, as in the case of Up, which is backed by Bendigo Bank. On the other hand, you have neobanks like 86 400, Xinja and Volt who have obtained full banking licences of their own.

What are the pros of neobanks? And what are some of the things we can look forward to?

The new wave of neobanks in Australia promise to revolutionise our banking experience, with minimal fees, generous rates of interest and killer mobile apps designed to help you better manage your money.

The first neobank savings and transaction accounts to hit the market here suggest they will be competing hard on value. Up and 86 400 both offer the opportunity to earn 2.50% on your savings, which is the highest rate on the market and literally more than double the average savings account rate of 1.18%.

The everyday transaction accounts on offer from Up, 86 400 and Xinja are extremely competitive on the fee front, with no monthly fees, no ATM or transaction fees in Australia and the opportunity to save on some types of international fees as well.

Are there any drawbacks to neobanks? What are some of the downsides that Australians will need to be aware of?

There’s very little in the way of cons here. The biggest drawback is that there’s no traditional branch access, which won’t suit customers who like to have the ability to interact with their bank face-to-face.

Right now, the range of banking products on offer from neobanks is limited to everyday transaction and savings accounts, but this will change as they expand their offerings over time into lending and other areas.

There’s a big difference in how neobanks here and abroad are marketing themselves compared to other banks. Who would you say they appeal to?

Neobanks are appealing to customers who are fed up with the big banks and are looking for an alternative. They’re basically marketing themselves as the Ubers of the banking world, offering a better value and more customer friendly banking experience using the power of your mobile phone.

That will be an extremely appealing proposition to millennials who have very little interest in visiting a bank branch and are hungry for brands that are using technology to deliver better ways of doing things.

What are some of the main things consumers need to know about neobanks?

Neobanks looking to offer deposit products in Australia have either obtained - or are in the process of obtaining - a full ADI (authorised deposit-taking institution) license, as in the case of 86 400, Xinja and Volt, or are backed by a major brick and mortar bank, as in the case of Up, which is backed by Bendigo Bank.

This means that they will be regulated by APRA and ASIC in the same way as traditional banks, and your savings are covered by the government’s deposit guarantee, which protects your deposit up to $250,000.

It’s only recently that neobanks have set up shop in Australia, but they’ve been active for several years elsewhere. What lessons have we learned from similar ventures overseas?

Neobanks are popping up worldwide - everywhere from the UK and Europe to Asia
and South America. They’re a massive new force in the world of banking, but the overseas experience shows that we shouldn’t be expecting them to replace traditional brick and mortar banks any time soon.

Neobanks are digital game changers but traditional banks are responding by supplementing their full-service models with improved digital banking offerings of their own. The result is a win for customers no matter what type of bank they’re with, with better digital banking experiences and features on the cards for all.

I think many people will have questions about security. What should they know?

With all of your banking being hosted in the cloud, the onus is both on the bank and yourself to keep your details safe. Choose a secure password, don’t write it down or store it where it can be easily found, and don’t share it with anyone. 

Beyond that, you should always update your phone’s operating system and banking app, avoid jailbreaking your phone, and try to avoid connecting to public networks, as their security isn’t guaranteed.