Neobanks: What are they and should you give them a go?

Neobanks are the new kids on the banking block aiming to steal customers from the traditional banks. FIND OUT IF THEY ARE WORTH TRYING.

NEOBANKS are the new digital-only entrants looking to steal customers away from traditional financial institutions. And their numbers are multiplying.

In recent months, Xinja and 86 400 have entered the Australian market as the newest kids on the banking block.

Fellow neobank Up Bank launched 12 months ago and piggybacked off Bendigo and Adelaide Bank’s licence. It has already amassed 125,000 customers and they’re mostly Millennials, with 50 per cent of customers aged 16 to 24.

Volt Bank got its full licence in January but is yet to offer any products.

It’s full steam ahead for neobanks in the UK, including Monzo, Aldermore and Starling, which have been a success since their inception a few years ago.

So what on earth are neobanks and are they worth giving a crack?

PLEASE EXPLAIN

In simple terms, neo means “new”, so neobanks are exactly that: new banks or challenger banks.

Most neobanks have been granted their full banking licence, which means they can offer customers both savings and credit products.

If they don’t have their own licence, they have their hand firmly held by financial groups that do.

Neobanks are the new kids on the banking block aiming to steal customers from the bigger banks.

Customers who deposit their cash in these institutions can sleep at night because their money is protected by the government guarantee for deposits up to $250,000.

This means if a neobank happens to go belly up, a customer’s cash would be guaranteed.

These banks don’t have branches and cumbersome technology, which those within the neobank fraternity argue makes them smarter and faster.

Xinja’s chief executive Eric Wilson said “it’s a bank completely built from the start”.

IS YOUR MONEY SAFE?

Financial comparison website RateCity’s spokeswoman, Sally Tindall, said neobanks were targeting younger Australians who did not care about face-to-face customer service offered by bricks-and-mortar banks.

“They are targeting Millennials who are interested in doing all of their banking within an app on their phone,” she said.

“They are fast, nimble and using cutting-edge technology, but a lot of other banks are doing that already.”

Ms Tindall said neobanks also appealed to techheads who “get a kick out of using this technology”.

However, existing banks are pouring efforts into their own technology to ensure customers remain loyal and don’t jump ship.

“You don’t have to go with a neobank if you want cutting-edge technology,” Ms Tindall said. “CBA, for example, is putting a huge amount of money into banking apps.”

Xinja already has 28,000 customers signed up for its app, bank account and prepaid card.

Mr Wilson said they were priding themselves on not hitting customers with nasty fees and charges.

Xinja chief executive officer and founder Eric Wilson said many Australians are willing to give neobanks a go. Picture: Supplied.

“Neobanks don’t have any huge expensive network of branches and 30,000 branch staff,” he said.

“They are effectively an entire bank in your phone that’s very quick and efficient.” But one thing he vowed Xinja would not be rolling out was credit cards.

“Xinja will not offer a credit card. It’s one of the few products in the world where the bank makes money if the customer screws up,” Mr Wilson said.

“We’ll design another product which gives them the same advantages, so you still get that flexibility with some interest-free time, but it doesn’t encourage people to drive deeper and deeper into debt.”

SMARTER BANKING

A feature 86 400 chief executive officer Robert Bell boasted about was the ability for customers to have total visibility of all of their bank accounts.

This means they don’t just see the ones they have with their neobank but also accounts with other financial institutions.

“It’s really quick and simple to open an account but it’s OK to see other banks for the time being and see what we do,” Mr Bell said.

“And obviously, over time, we expect people to do more and more with us.”

The name 86 400 is derived from how many seconds there are in one day.

Mr Bell said a big appeal for customers was being “a bank delivered entirely by your mobile phone”.

“We already have smartphones, we have smart fridges, smart cars, and so having a smart bank makes a lot of sense,” he said.

Many new banks are entering the Australian market in a bid to take on the larger financial institutions.

Mr Bell said a customer could open an account in just two minutes.

“You can download the 86 400 app from the App Store or Google Play and in 120 seconds you can open a pay and save account,” he said.

“You can also set up Apple Pay in another 30 seconds so you can be using your phone to tap and pay in under three minutes.”

Xinja’s Mr Wilson said the entire bank was “stored in the cloud”.

“We are the first Australian bank to be 100 per cent in the cloud,” he said.

“What that means is it makes us very nimble and very efficient.”

Time will tell whether these newbies could make an impact and steal customers away from longstanding financial institutions.

@sophieelsworth

AUSTRALIAN NEOBANKS

• 86 400: backed by payments provider Cuscal. Offers transaction and savings accounts. Home loans to come.

• Judo: focuses on small business operators. Offers term deposits and loan products.

• Xinja: offers transaction accounts, savings accounts and home loans to come.

• Up Bank: backed by Bendigo and Adelaide Bank, it offers transaction and savings accounts. Credit products to come.

• Volt: no products offered yet. There is a waiting list for customers.