What Are ‘Neobanks’ And How Do They Work?

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In the past 12 months you’ve probably heard the word “neobank” thrown around a few times, which may have left you wondering exactly what it is, and how it’s different to a traditional bank. If you haven’t yet had a chance to find out, here’s the rundown.

Neobanks are 100% digital

‘Neo’ comes from the Greek word neos, meaning “new”, which is exactly what these banks are. Also known as challenger banks, neobanks are branchless, digital-only financial institutions that challenge the traditional banking model.

Built for the digitally savvy, these banks can provide a simpler way to manage your money, without the frustration and paperwork commonly associated with regular banking. The services and products neo banks provide are delivered online via a smartphone app, and this focus on technology means they increase efficiency and reduce overhead costs.

As neobanks use existing frameworks and physical entities established by traditional banks, like ATMs, they can reallocate their funds to build AI driven customer service frameworks, and deliver no fee bank accounts, low fee home loans and savings accounts with high interest rates.

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Neobanks have low or no fees, and higher savings rates

Lower overhead costs, no physical branches and a 100% online offering means that neobanks can offer lower cost banking to their customers.

Neobanks can potentially offer much lower home loan interest rates than the big banks, however in the Australian market only one neobank is active in the mortgage market. 86 400 offers a variable home loan rate of 3.09%, as well as a three-year fixed loan with a rate of 2.88%.

Most neobanks will have no fees on transaction accounts, and come with much higher savings rates than traditional banking competitors. In Australia, for instance, the three highest savings rates (excluding introductory rate offers) in Australia are from neobanks Volt, 86 400 and Xinja. 86 400 and Xinja offer a rate of 2.25%, and Volt offers a rate of 2.15%.

Whilst 86 400 requires customers to deposit at least $1,000 a month to claim the interest, both Volt and Xinja offer these rates with no conditions or strings attached on any amount up to $245,000.

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Neobanks test and iterate BEFORE they launch

Traditional banks operate within legacy systems, and the red tape can make it difficult to test and iterate new products and services. Neobanks, on the other hand, operate in startup environments and embrace the idea of testing new ideas with their friends, family and prospective customers to ensure their product works.

This focus on testing and iterating to deliver the best products possible is the reason why Volt, the first neobank to get its license in Australia, is still in beta testing mode.

Steve Weston, CEO & Co-founder of Volt Bank, explained to RateCity that whilst Volt is planning to launch to the public in late February 2020, it’s not in a hurry to do so.

“We would much prefer to take our time, iron out any kinks, and get it right for our customers, because we believe that a measured, prudent, and considered approach is integral to building trust and loyalty with our customers,” he said.

“Neobanks are still a relatively new concept in Australia, and so it is vital that we do our best to earn and maintain relationships built on a foundation of trust.”

Neobanks can come in different forms

All neobanks are 100% digital, using technology to reduce overhead costs, but are not all cut from the same cloth. Many neobanks, such as Monzo, Xinja, and 86 400 only offer banking products and services, as a traditional bank would.

Other neobanks, such as Starling, offer both low or no fee accounts and services, as well as the tools to build both branded and white labelled banking products and services. Starling has seen success with this in the UK, offering Banking-as-a-Platform APIs to businesses that want to offer their own retail banking services.

Volt is planning to launch a similar platform-based service, and has appointed Julian Sawyer, the Co-founder of Starling, as an advisor to help deliver the marketplace in Australia.

Neobanks started in the UK

Challenger banks have their roots in the UK as during the post financial crisis in 2008/2009, many financial institutions were consolidated due to financial losses in mortgage defaults and rising interest rates. During this time, banks stopped lending each other money, which meant it was much harder for both consumers and businesses to get credit.

In 2013, in response to the banking crisis, a new opportunity was introduced in the UK. Regulation was changed to allow neobanks to raise capital and build systems before they applied for a full banking license. This gave startups like Starling, the first neobank in the UK, the chance to compete against the bigger, legacy banks.

Since then, other neobanks like Monzo, Atom Bank, Revolut and Tide Bank have entered the UK market, and the neobank trend has gone global.

Neobanks are regulated like any other bank

In the past 12 months, Australian neobanks Volt, Xinja, Judo and 86 400 have all been granted full licenses to operate as Authorised Deposit-taking Institutions (ADI).

Starting with Volt in January 2019, Xinja, 86 400 and Judo are now Australian neobanks licensed and governed in the exact same way as every other ADI in Australia.

This means they are regulated by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC), and customer deposits of up to $250,000 are protected by the Australian government.

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The fact that neobanks are branchless, with an all digital offering, sets them apart from traditional banks and makes them attractive to the younger generation.

However, it’s their intuitive AI driven customer service, low or no fee accounts, higher savings rates and personalised financial solutions that could see them become market leaders in the next decade.


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