Neobanks in Australia

What makes neobanks different from regular banks?

The biggest difference between the two banking options is that neobanks have no physical branches. As mentioned, their services are completely digital and almost entirely app-based.

In fact, getting started with a neobank takes mere minutes after downloading an app. Most neobanks are compatible with digital wallets such as Apple Pay, Google Pay and Samsung Pay. However, new users can also get a physical card posted to their address if they want.

Aside from that, neobanks generally share a philosophy of wanting to change the way their customers manage their money and do their banking. Since they don’t need to maintain a branch, neobanks are known for having low costs thanks to minimal fees. They use artificial intelligence to help users track their spending and give personal insights on each user’s overall financial position.

One drawback of neobanks is that unlike traditional banks, which have been established for years and offer services like car insurance and home loans, neobanks may have limited offerings initially as they launch with only basic transaction accounts. Some neobanks do not have a joint account offering.

Neobanks should not be confused with online-only banks. Online-only banks are often a division of a bigger bank or credit union, meaning they use a digital version of an existing legacy banking system.

Examples of these would be UBank, which is owned by National Australia Bank; ING Bank (Australia), which is owned by ING Group (NYSE:ING); and ME Bank, which is owned by industry super funds. A neobank is different from these since it uses its own system that has been built from scratch.

Are neobanks financially safe to use?

Neobanks have some appeal over regular banks, but investors and potential users may wonder if they are safe. Despite their novelty, there are measures in place that provide protection.

Like other banks, neobanks must convince the aforementioned Australian Prudential Regulation Authority (APRA) that they are safe and worthy of getting a licence to become an Authorised Deposit-Taking Institution (ADI).

Once a neobank has its ADI licence, it is covered under the Financial Claims Scheme, which means users’ savings are guaranteed up to AU$250,000 by the Australian government. This is the same guarantee offered by a big four bank (or any other brick-and-mortar bank). Making sure a neobank holds an ADI licence is a good indicator for its consumer safety factor.

APRA brought in new rules in 2018 that simplified the ADI process and made it simpler for neobanks to launch. The first neobank to be granted a licence was Australian startup Volt in January 2019.

What’s the future of neobanks in Australia?

Australia’s four major banks may be feeling the pressure to increase their digital offerings as neobanks rise in popularity, but right now, their hold on the banking space remains fairly solid — the majority of Australians have never heard of neobanks.

Aside from that, the neobank space suffered a setback in December 2020 when Xinja, the most famous neobank, folded less than a year after launching in Australia.

COVID-19 reportedly played a role in its downfall. After record-breaking equity crowdfunding rounds, in 2020 things took a turn for the worse for the startup, which began hemorrhaging capital by paying out more than AU$7 million in interest payments a year. Without a lending product (and thereby a revenue stream) the collapse was inevitable for Xinja.

The second and most recent neobank to return their banking license and collapse was Volt in June of 2022. Volt was the first Australian neobank to get a banking license, but failed to raise enough funds to continue operations.

That said, the global pandemic has had positive implications for neobanks in Australia as well — 82 percent of Australians under 55 are now open to the idea of a digital-only bank for at least one product offering, although not yet for their main banking service.

For investors who want to gain a toehold in the market, publicly traded options are still sparse. But if neobanks can avoid pitfalls and attract broader interest, there may be more chances to get involved.