Neobanks – The Choice for Millennials

By Byron Wu

With rapid advancements in technology, coupled with strong shifts away from physical workplaces and face-to-face interactions, the world has become increasingly digital in all forms of life. One major change we have seen is the boom of digital banking, also known as ‘neobanking’. Neobanking has grown exponentially since 2017, initially from a total of one-hundred digital banks to three hundred worldwide. So what exactly are these neobanks? How do they work? What are the benefits of signing up with a neobank?

Source: Exton

What is a neobank?

As the name suggests, Neobanks are new app-based banks which allow customers to interact and bank entirely through the digital world. While the traditional image of banks may conjure up images of long lines, faulty pens chained to tables, and defective machines, neobanks are anything but. Not only do these digital banks eliminate incredibly long queuing times, they also promise to provide customers with all the usual and additional banking services, twenty-four seven, through the simple touch of a button. Eric Wilson, the C.E.O. of a former neobank, Xinja, stated that at its core, digital banks are very particular about their approach, and their specific purpose is to help customers make more out of their money. 

What are the benefits?

Neobanks offer a plethora of different features; checking and savings accounts, payment and money transfer services, financial education tools, low costs, user-friendly apps, and the ability to purchase commodities and cryptocurrency. 

1. Low costs

As digital banks can avoid the costs associated with opening up countless physical branches and maintaining national offices, they experience lower overhead costs. These savings are passed on to customers by way of reduced fees and competitive rates. 

“The fact that we have no branches and significantly lower staff costs means we can operate at a fraction of the cost of a traditional bank” – Eric Wilson.

In fact, the average savings rate for Neobanks is currently 2.23 percent per annum – well above the Big Four’s average of 0.57 percent per annum. 

2. International Fees

Whilst traditional banks like the Big Four are known for their relatively expensive currency conversion fees, the table above shows the international fees for four of Australia’s top neobanks. Although international travel is still a distant reality, these ‘low ‘fees’ grant a competitive edge over other banks. 

3. User-friendly Apps

While some of our biggest banks have been around for more than two-hundred years, neobanks can build all their systems from scratch, allowing them to develop their technology to be as user-friendly as possible. Although there are concerns with the loss of personal customer experience and one-on-one assistance received at a branch, neobanks strive to personalise the banking experience. They use artificial intelligence to keep track of customers’ data, which ultimately helps in providing budgeting services and forecasting financial spending. For example, Up is known for their immersive user experience, offering customers a highly detailed spending history. They also provide the option of rounding up transactions and depositing those round-ups in a savings account. Indeed, simple adjustments to day-to-day spending like these truly have a long-running impact.

Further features include the ability to get instant approval for loan applications, the means to recognise higher than usual bills, notifications regarding unused subscriptions, and helping customers switch to a cheaper energy provider. 

4. Investing 

Some Neobanks also allow customers to purchase equities, commodities, and cryptocurrencies on their respective platforms. One example is via the Revolut app (though this option is not available to Australians), which allows customers to enjoy commission-free stock trading according to their monthly allowances. This built-in trading platform also includes real-time market graphs so users can make informed decisions. 

Are Neobanks Safe?

In 2018, the Australian Prudential Regulation Authority (APRA) introduced new rules that simplified the process for new entrants to enter the deposit market (i.e. to ascertain a banking licence). Although some may view these more lenient requirements as a concern, new banks still need to go through the process of obtaining an Authorised Deposit-taking Institution (ADI) licence from the APRA before they are allowed to call themselves a bank. Reports from Business Insider purport that start-ups require around US$100 million to start – certainly not an easy feat. For 86 400 (one of Australia’s neobanks), the process of getting an ADI took two years – an ‘incredibly thorough’ process. Indeed, businesses need to be stress tested to confirm they are robust, secure, and safe as any other bricks-and-mortar bank.

Furthermore, through the use of financial technology (fintech), neobanks can maintain the personal touch that in-branch services offer and present a more sophisticated virtual personal assistant experience. Transactions can be validated and fraud can be detected earlier by tracking behavioural patterns. The system can also provide customer solutions to banking problems before they occur. 

Utilising several of the new waves of disruptive technologies such as big-data analytics, artificial intelligence (AI), and cloud computing, neobanks are fundamentally transforming the very notion of banking. However, neobanks also come with their fair share of trials and tribulations. Xinja for example, has handed back their licence due to the impacts of the COVID-19 pandemic and lack of investments, while 86 400 was acquired by the National Australia Bank earlier this year. Moreover, there is increased competition as traditional banks are now accelerating their digital offerings, which only drives banks to keep evolving with our ever-modernising world.

Sources: Business Insider, Canstar, Mozo, NAB, Australian Fintech

Disclaimer
The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.