Neobank or Digital Bank or Bricks and Mortar Bank?

Digital banks, as the name suggests, are online-only banks that provide customers with services delivered solely through online banking platforms or dedicated smartphone apps. Digital banks typically don’t offer in-branch services, which allows users to perform banking tasks at any hour of the day, from any location.

Digital banks allow users to avoid the restrictive banking hours of operation in Australia for traditional banks that focus on in-branch services. In most cases, digital banks are operated by larger banks or financial institutions, and aren’t completely individual banks. This allows digital banks to leverage the higher level of security offered by a traditional bank while still delivering the flexibility and convenience of online services at any time.

The most widely-used digital banks in Australia are operated by traditional banks, and include:
• UBank, owned by NAB;
• ME Bank, owned by industry super funds;
• ING, owned by ING;
• Easy Street, owned by Community First Credit Union, and;
• RaboDirect, owned by RaboDirect.

While they may offer similar services, digital banks and neobanks aren’t the same thing. The terms “neobank” and “digital bank” are often used interchangeably, but there’s an important distinction between the two.

A digital bank is the online arm of a large traditional bank, while a neobank is a completely separate, digital-only entity that isn’t associated with any traditional financial institution. This distinction means that neobanks often offer more forward-leaning services focused on newer technology, but lack the financial banking that digital banks benefit from.

A neobank, as the name implies, is just a bank — neobank customers use neobanks to securely store money, apply for and receive finance from, and pay interest repayments, just like a traditional bank. The important difference, however, is that a neobank is 100 percent digital.

You can’t visit a neobank branch — they only exist in dedicated smartphone apps or online banking services. A neobank offers an extremely high level of convenience, but the lack of physical branch locations means that neobanks often lack a personal touch. The development of AI technology, however, means that neobanks are able to track your banking interactions and customize your personal experience with their bank.

AI, or artificial intelligence, is no longer science fiction — AI is science reality. While current AI technology development is a long way from Space Odyssey 2001’s HAL 9000, cutting-edge algorithms and data analysis software can track and identify the personal preferences of smartphone or online application users.

Fintech startups and neobanks leverage the data tracking and interpreting ability of AI to improve customer experiences. You’ve likely already encountered AI services in your current online banking services via chatbots. If you’ve ever spent time researching for an upcoming holiday and suddenly been subjected to a barrage of related advertisements in your social media feed, then you’re familiar with the personalization abilities of AI.

Neobanks expand on the functionality of AI to deliver sophisticated personal assistant options that are designed to replace the in-branch personalization delivered by traditional banks. By tracking the behaviour patterns and preferences of users, neobanks are able to proactively deliver solutions to their customers that resolve problems before they occur. The same technology can be applied to fraud identification, providing neobanks with a high level of security.

Neobanks are a relatively new innovation, but they didn’t appear out of nowhere — evolving digital banking technology and slow-moving incumbent financial ecosystem players have created an environment in which neobanks benefit from a rapidly-growing market share.

A lack of competition in the traditional banking sector is the primary driver of the growth of neobanks. Four in five Australians currently bank with one of the “big four” banks: NAB, CBA, ANZ, or Westpac. Together, these banks generated a profit of over $32 billion in the last year alone.

The monopoly held over the finance sector by the big four banks has stifled innovation, with Australian consumers experiencing high interest rates and fees. The rise of neobanks, which are able to offer favorable rates due to lower overheads, has captured the attention of Australian banking customers.

The rise of digital banking has shifted consumer attitudes toward online banking services. Banking has never been easier — the days of cheques and money orders are long gone. Global marketing information services platform J.D. Power’s 2019 retail banking satisfaction study reveals that over 90 percent of customers use digital channels to interact with their financial institution, with digital banking services positioned to replace traditional banking entirely by 2029.

The increasing consumer demand for smartphone apps and online services has created a banking convenience arms race, with neobanks making up the vanguard of the digital banking revolution.

Neobanks and digital banks both offer a range of services and features that differentiate them from traditional banking solutions, and often offer these services at significantly lower rates than traditional banks.

Some of the advantages offered by neobanks include:
• Cost reduction: Neobanks don’t maintain branch locations, which eliminates the cost associated with operating them. Lower overheads allow neobanks to offer Australian consumers lower rates and highly competitive fees.
• Improved user experience: Convenience is the key differentiator offered by neobanks in contrast to traditional banks. Both digital banks and neobanks invest significant resources in ensuring that the customer experience they deliver leverages their convenience advantage — neobanks offer instant loan approval, one-click account management, and personalized AI concierge services.
• Financial Analytics & Insight: Neobanks are able to provide customer with detailed insight into the way they spend their money. By tracking spending behaviour with AI, neobanks are able to predict the financial actions of customers and provide guidance on how to better structure finances.
• Balance tracking: You don’t need to physically send cash to send an online payment, so why should you need to wait for your balance to update? Neobanks offer live balance tracking in real time, eliminating pending payment worries.

Neobanks can’t provide all of the features offered by a traditional bank, however. There are a number of advantages you can only get via traditional banks:
• Industry tenure: Traditional banks have been providing banking services to Australians for a long Neobanks are obligated to go through the same regulatory processes as any other bank, but the years of operational experience and foundation of trust offered by traditional banks is a significant advantage.
• In-branch service: Many consumers prefer to deal face-to-face when negotiating significant financial business, such as the organization of business finance or a mortgage. Neobanks can’t provide a sit-down meeting at a physical branch.
• Broad service options: Traditional banks are able to offer an extremely broad spectrum of services, such as term deposits, transaction accounts, and home loans. Neobanks are rapidly expanding the services they are able to offer, but are currently unable to provide users with the depth of service offerings presented by traditional banks.

Neobanks are a relatively recent addition to Australian finance ecosystem lineup. While many of the neobanks currently operating in Australia are in developmental stages, many have already secured the necessary licenses to begin operation.

Here’s a breakdown of the digital banks and neobanks that are currently operating or in the process of launching in Australia:
• Volt Bank has recently secured a full banking license in Australia, making it the first neobank to be given the green light by the Australian Prudential Regulation Authority to begin accepting deposits from the Australian public, and has received a full licence to operate as an ADI. Volt Bank is currently accepting applications for early access, and plans to launch services in Q4 2019.Volt Bank currently employs over 100 staff and has raised $45 million in equity, planning to launch with budgeting and saving tools delivered via smartphone apps before expanding into small business banking. Volt Bank also boasts a unique partnership with PayPal that will allow PayPal customers to establish an account with Volt using their PayPal credentials.
• Xinja, another 100 percent digital bank, is currently waiting on ADI license approval. Xinja has already launched a dedicated smartphone app and a prepaid debit card, offering a streamlined user experience. Notably, Xinja raised over $2.5 million in an equity crowdfunding round in early 2019, boasting over 2,500 investors in total. Pending licensing, Xinja is currently aiming for a late 2019 launch.
• 86 400, like Volt Bank, has recently been granted a Authorised Deposit-taking Institution (ADI) licence from the Australian Prudential Regulation Authority after a lengthy two-year application period. Backed by IT giant Cuscal, 86 400 is currently accepting early access applications and focuses on offering completely fee-free “Pay and Save” accounts alongside smart payment integrations with Apple Pay, Google Pay, and Samsung Pay.
• Up Bank is backed up by Bendigo Bank, and is entirely digital. The entire Up Bank ecosystem is hosted on Google Cloud, and offers integrations with a wide range of smart payment options that include Apple Pay, Google Pay, Fitbit Pay, and other wearable tech. Up Bank is similarly focused on no-fee accounts, offering $0 fees on overseas purchases, no monthly fees, and competitive savings accounts.
• Pelikin is a smaller-scale Melbourne-based startup focused on payment cards. Squarely aimed at the millennial demographic, Pelikin allows users to store up to five currencies in an account that links to a travel debit card in order to help younger Australians manage finances while abroad.
• Archa is another Melbourne-based fintech entreprise that, like Pelikin, is based on a smart app-managed debit card that allows users to load and spend multiple currencies. While Archa doesn’t yet hold ADI licensing, it’s possible to apply for early access via an Android or Iphone app.
• Douugh recently went public on the ASX in July 2019, aiming to capture $10 million in order to fund the roll-out of smart app-managed debit cards in Australia by 2020. Offering consumers a Choice bank issued bank account and debit Mastercard, Douugh plans to deliver “Financial Health” diagnosis and automated financial goal tracking.
• Revolut is a UK-based digital finance platform that has recently launched public beta services to Australian consumers. Leveraging a European “electronic money licence” (EMI), Revolut is currently rolling out services to 20,000 Australian customers. Revolut features instant payments between Revolut users, smart card services, and competitive fee structures in comparison to traditional banks.

Trust is extremely important when it comes to the security of your money. Traditional banks benefit from higher levels of consumer trust, largely due to their tenure in the financial industry, but it’s important to remember that neobanks are obligated to jump through the same regulatory hoops as traditional banks.

Both the Australian Prudential Regulation Authority and Australian Securities and Investment Commission operate with stringent standards when approving banking license applications, ensuring that neobanks are safe for Australian consumers. The Australian government protects the customers of Neobanks that possess a Australian authorised deposit-taking institution license, covering up to $250,000 for each customer in the case that a neobank ceases operations.

While the services offered by Neobanks are attractive, they aren’t ready for large-scale consumer migration just yet. Most Neobanks are waiting on ADI licensing or have only recently received approval, with leading neobanks such as Volt Bank and 86 400 currently only accepting early access applications. If you’re interested in getting on board with a neobank, it’s best to select a bank that already possesses an ADI license and join the wait list.