What are neobanks, anyway?

By Nicole Webb 2 July 2019 3 min read

What is a neobank?

A neobank is generally described as an independent, digital bank. This means it is only accessible online, through an app and/or web browser, and not from a bricks-and-mortar branch.

Due to inroads in technological disruption, these digital, challenger banks are cropping up in Australia. Right now, there is Volt Bank, the first neobank in Australia to attain an unrestricted banking license, Xinja and Judo.

The perks of neobanks

Neobanks offer a range of advantages for banking customers, while also adding healthy competition to the broader banking industry.

1. They’re built on new technology

Neobanks don’t rely on legacy systems tied to existing providers as their technology is purpose-built for its customers.

2. They democratise banking

Neobanks introduce new banking players to a relatively stable and traditional banking sector, potentially opening up the playing field for further new entrants.

Volt became the first new retail-focused bank in Australia in years when it gained its restricted banking license in 2018. It also became Australia’s first neo-bank to attain a fully-fledged banking licence in early 2019.

3. They have lower fees

Because neobanks have fewer operational costs, they are liberated from the systems that can limit a traditional banks adaptability. So, it's expected these challenger banks, aka neobanks, by contrast, can price their services more competitively.

Xinja CEO and founder, Eric Wilson, sums up its cost savings to customers like this: “We have no branches to run, no crappy legacy systems, and no staff serving those branch networks. That makes it much cheaper to run a neobank and those savings get passed on as lower fees for customers.”

4. Customer interest

It is ingrained in Aussie culture to love an underdog, and nothing speaks to this ethos more than an up-and-coming entrant, especially in an already established and stable industry such as banking.

This means that neobanks that offer a new way of doing things can prove appealing to disillusioned customers of traditional banks, perhaps especially in the wake of the banking royal commission.

Considerations

Due to the nature of neobanks as challenger banks, there are a range of considerations when looking at neobanks as a potential customer.

1. Neobanks have no physical footprint

If you like the ritual of walking into your local branch and chatting to the team on payday or when you cash your cheque, then neobanks might not be the right fit.

They are online only, with no bricks-and-mortar branches.

2. There is little awareness and education around the sector

Neobanks are less known in Australia and among consumers, especially beyond the sphere of digital disruption techies.

Recent research shows only around one in ten Australians is familiar with neobanks.

So, neobanks will need to muscle up to improve awareness and education around their points of differentiation to appeal to new customers and grow their base.

3. Neobanks have little or no prior history

Neobanks are pretty new. They don't have a long history or legacy in Australia yet.

There are certainly lots of opportunities for neobanks to become game-changers and shake up the banking industry. But because there isn't sufficient history yet we'll need to wait to see how it plays out in terms of its evolving reputation and customer service.

4. The challenge of achieving scale when it comes to customers

Neobanks are faced with an uphill challenge to sustainably grow and retain a substantial customer base over time.

Because neobanks are a recent banking entrant, they don't yet have an established customer base, which is an asset of traditional, larger banks enjoy.

And bank execs have highlighted that this position may impact their ability to attract income flows.

Westpac executive Macgregor Duncan has said the issue for the online-focused challenger banks is acquiring customers beyond the “initial bang.”

Duncan says: "Global experience suggests that it’s hard for challenger banks to scale beyond their early adopter base."

So, what does all this mean?

While neobanks are relatively new and bring a digital-first approach to banking, there's lots to mull over — both perks and considerations — if you’re a potential customer.

What are neobanks, anyway?