You’re not stuck with the Big Four: Meet the Australian ‘neobanks’

The public image of Australia’s biggest and oldest banks has taken a battering in the banking royal commission, but you may feel that you have no other alternative but to use them.

Until relatively recently, that would’ve largely been the case, but the fact that several foreign banks are making credible plays for Aussie customers – Dutch bank ING, for one, regularly wins plaudits for its service – and that regional banks and credit unions have seriously upped their games when it comes to breadth of coverage has opened up new opportunities for depositors and borrowers.

Now, there are several new, digital-only banks that are piling into the competition for your custom, potentially giving you even more choice in which company you trust your dollars to. The digital-only banks, dubbed neobanks, have been building up steam over the past few years as technology has evolved and are soon expected to offer a reasonably wide range of banking services entirely through their apps.

Finder.com.au Editor-in-Chief Angus Kidman says that for now, neobanks are largely the realm of the youngsters but he expects their customer base to broaden as they develop – although he doesn’t think they’ll pose a serious threat to the established players anytime soon. In Europe, where they’ve been around for longer, neobanks are used by all age groups.

But before you jump in, you may want to know more about what’s behind the neobanks and, most key, whether your money is safe in their coffers.

How do they operate?

Neobanks operate entirely digitally, with no branches or physical infrastructure.

They’re not reliant on any of the old technological operating systems of the big banks; instead, they’re using bespoke technology designed to run exactly the way their creators envision banking should work. This is important because most of the big banks offer online banking, apps and the like, but those are usually slick digital fronts that still have old-school technology running behind them, so they can be pretty clunky, unintuitive and very much like dealing with a traditional bank branch but online.

It’s important to note that well-known digital payment systems such as Google Pay, Apple Pay  and Samsung Pay aren’t neobanks – they’re digital ‘wallets’ in that you still require a debit or credit card with an existing bank to use them.

Nor are they like digital banks – ING is one, as is ME Bank and UBank – in that digital banks tend to be owned by larger companies or investors. ME Bank is, for example, owned by a group of industry super funds, while UBank is owned by NAB and ING is owned by Netherlands-based financial giant ING Group.

Some of the better-known neobanks in Australia include Archa, Volt Bank, Xinja Bank and 86 400.

Xinja’s CEO Eric Wilson says that 9 percent of his current customers are aged 65-plus, adding that using neobanking isn’t about being of a certain generation but having a certain mindset. Xinja appeals to anyone who wants a bank that offers as much of a win for its customers as it does for itself, he reckons.

Are neobanks safe?

With the digital banking system a fairly new option on the market. there are of course some reservations among Australians about securing their money in a neoank account.

But neobanks must obtain a banking license, the same as the Big Four, prior to offering any services in Australia. Just like physical banks, neobanks are regulated by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC).

Once they obtain a banking license, they are considered an Australian authorised deposit-taking institution (ADI), or put more simply, a bank. It is only once they receive this title that customers’ money is protected by the Australian government up to the amount of $250,000. The $250,000 protection limit also applies to the big banks, meaning that in terms of government guarantee, your cash is as safe with a digital ADI as it is with a bricks-and-mortar institution.

How do neobanks obtain a license?

There are two ways for neobanks to obtain a banking license. They can either go through a direct route or via a newly developed, restricted license path. The direct route is beneficial to wannabe banks that have existing resources and are ready to start business as soon as they have the paperwork from the regulator.

But for those that need more time to develop their services, APRA last year developed a new framework that provides eligible entities with what’s called a restricted ADI license that permits them to conduct only a limited range of business activities for two years while they continue to build their offering. This was a big moment for neobanks because it meant they could begin business on some level while waiting to be registered as a fully authorised ADI.

APRA Chairman Wayne Byrnes said last year that the restricted ADI framework was created to balance the need to encourage competition in the financial sector while ensure the financial system stayed safe and stable for customers.

“By making it easier for aspiring ADIs to enter the market, APRA hopes to see consumers benefit from enhanced competition and potentially innovative new business models,” he said at the time. “However, the limitations imposed on restricted ADI licensees ensure the public can retain confidence that the safety of deposits with all ADIs is adequately safeguarded.”

Over the course of the two-year restricted ADI license period, the bank is expected to meet a set of standards by seeking investment and building resources in order to meet APRA’s full prudential framework to become a full-scale banking business. If they fail to do so, they are ordered to exit the industry.

There are also neoanks that are owned by existing, fully authorised banks, which means they can ‘piggyback’ on their owner’s licence and start business straight away. In effect, they’re covered by the same licence and just operating under a different name.

What neobanks should I look out for?

Though many neobanks are attempting to enter the Australian market, there is currently only one that’s achieved a restricted ADI license. Volt Bank was the first in the country to meet all the requirements necessary to take that step forward and is expected to launch a savings account, term deposit, transaction account and loans offering at some stage this year. Xinja also has a restricted ADI, which was granted in December, and already offers a prepaid tap-and-go function, plus a budgeting feature that helps you track your spending.

Another neobank set to soon make an appearance in the industry is 86 400, which is named after the number of seconds in a day. It has applied for a full ADI license, meaning if it is granted it will be able to offer a whole range of products immediately, which is expected to happen this year.

Lastly is Archa, an up-and-coming neobank that has applied for a restricted ADI. Once the license is granted, Archa is expected to launch a savings account, currency transaction account and international money transfers.

With at least a few options to choose from in the near future, Kidman says he expects to see some change in customer behaviour when it comes to selecting banks but not a huge upheaval of the market dominance the Big Four have enjoyed for many years.

“I think we will see some shift but I don’t think that’s going to result in suddenly there being a wildly diversified market,” he told Starts at 60. “It’s not going to result in some sort of wholesale declines for the major banks.”

Would you consider banking with a neobank? Do you think they are a good idea or something you would avoid?

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.