Last Updated: 20th September, 2022

What is a neobank?

A neobank is a 100% digital-only financial institution that does not have a physical presence.

Neobanks are also referred to as a digital bank or a challenger bank.

What makes them different from traditional lenders is that they are:

  • A 100% digital bank with no brick and mortar presence, meaning they don’t have branch offices.
  • Do not have service centres.
  • Are using completely innovative technology and doing away with the cumbersome existing legacy technology used by traditional banks.
  • Operating on a low cost structure which is passed down to the customer in terms of low fees.
  • Entirely focused on online mobile banking and offer banking services through their mobile app. (Some neobanks do not even provide desktop banking options.)

People incorrectly classify existing banks like UBank, ME Bank and ING as neobanks just because they have gone online.

However, these banks still rely on legacy tech for their operation so they are actually online banks.

There have been cases of traditional banks which have establishing neobanks like NAB created UBank, ASB has BankDirect, Banamex has Blonk, BNP Paribas has Hello Bank.

What are the benefits of neobank?

Neobanks are marking their presence in Australia by revolutionising the way people bank.

They have a well-defined and streamlined process and aim to offer faster, smarter and efficient banking.

They offer a faster and smoother application and approval process than traditional banks.

There are many benefits of neobank over traditional banks:

  • No additional fees: Neobanks do not charge additional fees like atm fees, overdraft fees, etc. to their customers. Some even offer no-charge withdrawals in foreign countries.
  • Competitive interest rates: Neobanks are known to offer lower interest rates on their loan products and savings account.
  • Customer-centric service: All of their banking solutions are customer-centric, and they can offer hyper-personalized services on their mobile apps.
  • Transparent: They are more open than traditional banks and do not charge hidden fees. Also, some might not have overdraft penalties as customers can only spend what they have saved in their accounts.
  • Clear transaction history: All of a customer’s transactions from depositing money, using ATMs, etc. are differentiated by categories and have labels marked on them.

What are the drawbacks of neobank?

Since neobanks are still in its infancy in Australia, the major drawback is that the banks are not able to offer a wide range of products.

As of November 2019, 86 400 is the only neobank offering home loans, but Xinja will also be announcing its home loans soon.

The other disadvantages of neobanks in Australia are:

  • No branches: They do not have any branches so are not a viable option for people who prefer face-to-face banking.
  • Limited product offerings: They are not ideal for people who want all their banking solutions. At the moment, these banks offer mostly daily transactions and savings accounts.

Which neobanks are operating in Australia?

As of 2019, four neobanks are operating in Australia with a full banking licence.

  • Volt Bank was given its banking licence in January 2019. It does not have any products at the moment but will be offering deposit accounts and loans in the future.
  • Judo Bank was given its banking licence in April 2019. It currently offers term deposits.
  • 86 400 was given its banking licence in July 2019. It now provides transaction and saving accounts and is the only neobank offering home loans in Australia as of November 2019.
  • Xinja was given its banking licence in September 2019 and is currently offering transaction account. In the future, it will offer deposit accounts and loans.

Xinja pulls out of Australia

Xinja announced that it would close its savings and transactions account by the end of December 2020.

Xinja is handing back it’s license to the Australian Prudential Regulation Authority (APRA).

Existing customers will have to transfer their funds to another bank account. Debit card and pay facility will not work from 15 January 2021.

Xinja had launched in Australia in 2019 with an online banking model.

Another neobank that is operating in Australia is Up, which is using the banking licence of Bendigo Bank and Adelaide Bank.

Up Bank currently offers transaction accounts and savings account.

Are neobanks offering home loans?

Currently, 86 400 is the only Australian neobank lender to offer home loans.

It launched its home loan offerings on November 2019, with both fixed and variable rate home loans that come equipped with a redraw facility.

Moreover, it claims that it can get home loans approved six times faster than the big four banks of Australia as it is replacing paperwork with digital verification.

Customers applying for a home loan with 86 400 do not need to provide any paperwork, except for a contract of sale.

While there have been other lenders like Tic:Toc and Athena who are offering digital home loans, 86 400 is the first to offer it through mortgage brokers.

Anyone from investors, refinancers, owner-occupiers and purchases can get a home loan with 86 400.

For now, 86 400 home loans are only available to full-time workers or those on PAYG income, so it does not look into self-employed individuals.

Customers will still require a 20% deposit of the property value, so it only does home loans for a loan to value ratio of 80% or less.

Why are neobanks on the rise in Australia?

In 2017, the Australian Prudential Regulation Authority (APRA) made a considerable change to banking licence rules by reducing the minimum capital requirement and the percentage of ownership required to increase banking competition.

The lax banking rules was a huge factor for neobanks to enter the market.

Furthermore, with the increasing levels of dissatisfaction among existing customers of traditional banks, neobanks wanted to capitalize on their resentment.

According to a 2019 Nielsen Report, 2.1 Australians aged 18 years and above are already looking to change their banks within the next six months.

67% of these Australians were customers of big four banks, and 16% had even opted to rewrite with online banks like ING, ME Bank or UBank.

Moreover, after the Banking Royal Commission in Australia, consumers were looking for ethical alternatives for their banking needs.

This left the market space wide open for neobanks to rise in Australia.

With the adoption of open banking in Australia from July 2019, this further paved the way for neobanks to enter.

Open banking allows Australians to have more ownership of their financial data.

All of these factors primed neobanks to start their operations in Australia.

Neobanks are set to capture the market by their intuitive customer-centric mobile apps and convenient banking solutions.

What are some challenges faced by neobanks in Australia

As neobanks are still in its infancy phase in Australia, it has faced some challenges.

  • Not all of the neobanks operating in Australia are authorized ADIs. Only 4 neobanks (Volt Bank, Judo Bank, 86 400 and Xinja) have an ADI licence.
  • Customer acquisition is a considerable challenge for neobanks due to the lack of market penetration. A May 2019 report by Credit Union Australia revealed that 50% of people between the ages of 18 to 24 years still prefer to choose their parents’ banks.
  • Neobanks are entering a highly competitive market that is rife with competition from traditional banks who are also offering online services.
  • The rise of neobanks might have inadvertently led traditional banks to up their ante and improve their online banking services, and some have even removed late fees and overdraft fees.
  • While neobanks are low cost, they are also low-earning. They might incur more cost than revenue for the business. For instance, Monzo, a neobank in the UK, suffered a heavy loss of £33.1 million even when their customer base had increased to 750,000 people.

Are neobanks safe?

It is a common misconception that neobanks are not safe.

They are governed by the same laws and regulations like traditional banks.

Since neobanks are authorized ADIs, they technically share the same legal status as a traditional bank.

Furthermore, since APRA and Australian Securities and Investments Commission (ASIC) regulate neobanks, your deposit of up to $25,000 is protected by the Australian government.

Like traditional banks, they also have to follow the strict Banking Code of Practice which is a strict guide that all members of Australian banking must follow.

In addition to this, neobanks invest money and resources to ensure their security protocols meet industry standards.

Since neobanks do not rely on legacy technology, they can identify security lapses and problems and solve them quickly.

They use the same security measures used by other banks like two-factor authentication and biometrics.

Is neobank right for you?

Neobanks are a great alternative to traditional banks and offer a hassle-free process of getting a home loan.

Unfortunately, your option of getting a home loan with a neobank is difficult – with 86 400 being the only one offering home loans.

If you’re on the lookout for a home loan at a competitive interest rates, then we can help you choose from our panel of 40 lenders.

Our award-winning mortgage brokers will guide you step-by-step through the process of getting a home loan.

Get in touch by calling us at 1300 889 743 of filling in our free assessment form.