2018-19 was a tough year for Australia’s major banks who faced margin squeeze from lower interest rates, fierce competition in mortgages and customer dissatisfaction in the wake of the Royal Commission into Banking and Financial Services.
Though 80% of Australians still bank with the big four players - CommBank, NAB, Westpac and ANZ - challenger brands like ING, ME Bank or UBank and emerging neobanks see a big opportunity to test this loyalty.
Are neobanks really banks?
Neobanks are 100% independently owned digital banks. Just like traditional banks, neobanks have to go through the onerous and rigorous process of obtaining a full Authorised Deposit-taking Institution (ADI) licence from the Australian Prudential Regulation Authority (APRA) before they’re allowed to call themselves a bank and take customer deposits, including aligning to APRA’s stringent capital adequacy requirements. The Australian government protects the investments of customers with money held by an ADI to the tune of $250,000 per person, per ADI should the institution cease operations.
Major neobank players in Australia
Volt Bank was the first neobank in Australia to be granted a licence as a Restricted Authorised Deposit-taking Institution (RADI) in May 2018, and in January 2019 it was granted a full licence to operate as an ADI. In December 2019, Volt announced the beginning of the process of onboarding the 40,000 Australians on its waiting list. The process is expected to be complete in February 2020, at which point it will open to the public.
86 400, representing the number of seconds in a day, is one of Australia’s newest banks, having fully launched to the general public in September 2019 with a transaction account and savings account available through their app. In November 2019, 86 400 expanded into home loan products and in January 2020 announced it's launching an end-to-end energy comparison and switching service to allow customers to switch to a better electricity deal.
Xinja Bank launched in 2017 initially offering users a prepaid spending card but obtained their full ADI licence in September 2019 and have since launched a transaction account. They hope to release more products such as their savings account, personal loans, home loans etc. in the coming months.
What neobanks offer that traditional banks don’t:
- Low costs: By avoiding costs associated with running bank branches, neobanks can pass on these savings to customers by way of competitive rates and minimal fees.
- User experience: Neobanks invest a lot of time and resources into their online functions and develop mobile apps empowering consumers to sign up for an account in minutes, get instant loan approvals, access digital wallets etc, all designed to make the user’s life easier.
- Spend tracking: Neobanks use artificial intelligence to track spending, send reminders to pay the electricity bill and let you know how much you have left to spend according to a monthly budget.
Where traditional banks have the edge
- Face-to-face service: If you prefer human interaction in a branch, a neobank may not be for you.
- Operational experience: Neobanks don’t have the years of operational experience that traditional banks do; late adopters may want to take a wait and see approach.
- A large range of products: Most neobanks launch only with transaction and savings accounts. It might be a while before they offer home loans or the full range of services of a traditional bank.
According to a March 2019 report by Zion Market Research, the global neo and challenger bank market was approximately USD 18,604 million in 2018 and is expected to generate around USD 394,648 million by 2026, growing at around 45% per annum between 2019 and 2026.
FMD will be watching this journey in Australia with interest to identify any opportunities for our clients.
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General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.