The truth about Australia's neobank revolution

Australians are hard-pressed these days to find a bank branch or ATM in their local village or shopping mall. Between 2017 and 2021, 575 bank branches were shuttered Australia-wide, according to a 2022 report by the consumer advocate Choice.

CommBank alone has closed 354 branches in the past five years - along with 2297 ATMs - while the Big Four banks combined (ANZ, CommBank, NAB and Westpac) have closed 1446 branches since 2018, according to data compiled by S&P Global Market Intelligence.

Branch closures are partly a response to a changing customer base that has come to rely strongly on digital and mobile services (assisted by COVID lockdowns in 2020 and 2021), coupled with improved technology that has enabled the online migration of many traditional banking services, such as transfers, deposits and account openings.

But while existing banks now have the capability to offer online services, they still rely on traditional infrastructure and legacy systems set up to support them as customer-facing institutions.

Banks without physical branches - think ING, ME Bank and Ubank - also offer fully digital banking services to Australian customers, but they similarly rely on existing banking infrastructure (ING is owned by multinational Dutch bank ING Group, ME is a subsidiary of Bank of Queensland and Ubank is owned by NAB).

What is a neobank?

Purely digital banks that have never operated with physical branches and that leverage modern technology to offer services through mobile apps and/or web platforms are known as neobanks.

Since 2018, a handful of these shiny new mobile offerings have appeared on the market, but in the years since, most have been gobbled up by existing banks - or have disappeared completely.

What happened to the promise of Australia's new banking landscape?

How did neobanks take on the Big Four?

Following the 2018 royal commission into misconduct in the banking, superannuation and financial services industry, the Australian government and regulators were keen to promote a new business model to take market share from the Big Four.

After a loosening of rules for new banking entrants, Volt Bank become the first neobank in Australia to be granted a licence as a restricted authorised deposit-taking institution (RADI) in May 2018. In January 2019, it was granted a full licence to operate as an ADI.

Led by former Barclays and National Australia Bank executive Steve Weston, it launched with $15.7 million in equity capital and a neon logo. But in June 2022, Volt announced it would be permanently closing its deposit-taking business and voluntarily returned its banking licence.

At the time of closing, Volt had 5730 customers with deposit accounts totalling $107 million.

Other key local players to emerge around the same time include Xinja, Revolut, Judo, Hay, Tyro and 86 400, most of which were launched by former Big Four bankers and whose claim to fame was a more streamlined, efficient, customer-friendly experience.

Xinja has also returned its ADI licence, discontinuing its popular bank account and Stash account.

The visual identity and technical capabilities of 86 400, named for the number of seconds in a day, have since been adopted by Ubank. Unlike overseas neobanks, which are operating in far larger markets, Australian neobanks just don't seem to be able to cut it alone.

Are big banks buying out disruptors?

Indeed, several traditional banks have recognised the disruptive potential of neobanks and are incubating or investing in them as a way to stay competitive.

AMP plans to launch a new digital-only bank in April next year targeting small business and personal banking clients, in partnership with UK-based neobank Starling.

It has invested $60 million over two years.

Likewise, the Australian-founded, US-based neobank Douugh has its roots in a technology incubator run by Suncorp.

By adopting digital-only platforms, traditional banks can experiment with new technologies and business models and be seen as innovative and adaptive, without risking their core operations.

"Collaboration like this allows established banks to leverage new technology and accelerate their digital transformation, achieving efficiencies and leaving clunky legacy systems behind," says Tom Gunson, clients and markets leader at PwC.

"In addition to capabilities, they also get access to new, often younger, tech-savvy customers."

Why is Australia a challenge for neobanks?

It's a strategy that has worked for the neobank Up, launched in 2018 as a collaboration between software development company Ferocia and Bendigo and Adelaide Bank. After existing on its own for a couple of years, Up was acquired by Bendigo Bank in 2021 for $116 million.

Anson Parker, part of the founding team of Up, remains the company's chief product officer and says the bank is close to reaching a million customers in 2024.

"When we launched, we were kind of in a wave of neobanks," he tells Money.

"There were a number of competitors we had at the time and none of them is really around today. The challenge is that in Australia, the general standard [for banks] isn't as low as it is in places such as America or the UK or South America.

"I don't think I would say that traditional banks here are perfect by any stretch, but I think when you look globally Australia has a pretty decent standard. It means you can't just launch a neobank with a decent app on a smartphone and immediately succeed."

Vincent Turner, founder and chief executive officer of UNO Home Loans, a digital-only mortgage broker, agrees.

"If your definition of neobanks is a bank that is not connected to the major banking system and is a brand new standalone bank, I don't think any of those exist anymore in Australia," he says.

"In the past 10 years, since the neos came along and said, 'Hey, there should be a better mobile banking experience', the major banks and the delivery of their digital banking experience have got a whole lot better."

Turner cites CBA and Westpac as two traditional banks with standout digital experiences, along with investment bank Macquarie.

"They've become really good at client opening and account openings and transfers, user interface, transactions and basic budgeting tools - they're all playing to their strengths," he says.

"It would be hard to argue that there aren't compelling offers and user experience from the major banks. If someone said today, 'I'm going 
to introduce a new neobank', I'd be like, 'What could you offer?'"

What are the advantages and disadvantages of neobanks?

The premise for a neobank is that by avoiding the costs associated with running bank branches, they can pass on the savings to customers through competitive rates and minimal fees.

Neobanks invest a lot of time and resources into their online functions, offering instant loan approvals, real-time spending analytics and savings goals. They also use artificial intelligence to track spending, send bill reminders and help users create budgets.

Many neobanks prioritise transparency, making it clear how they earn money and what fees are involved, says Up's Anson Parker, who adds that they are particularly popular among younger, tech-savvy customers.

Some of the cons are that neobanks may not offer the full range of banking products, such as loans or mortgages, there are limited or no options for cash deposits and withdrawals, and some customers may still prefer the perceived safety of established traditional banks - or prefer in-person banking with an experienced and friendly teller.

However, Parker believes that as neobanks grow and gain customer trust, they may broaden their product offerings to include loans, mortgages and investment products, effectively transitioning into full-service banks.

Why do neobanks appeal to younger Aussies?

As with online retail and grocery shopping, and booking flights and holidays online, neobanks appeal to consumers who spend a lot of time on their phones - namely everyone. According to Reviews.org, Australians spend an average 5.5 hours a day on their phone, with Gen Z (born 1997-2013) spending 7.3 hours.

"Ninety per cent of our customers would be under 35," says Parker, who says Up's popularity has grown through word of mouth.

"You do start to earn that trust over time through sticking around and being seen as reliable, but also just the fact there are so many people saying, 'Hey this is a great experience'. Being able to write a message to your bank and get a response within a minute or two - it's a convenience thing."

Up uses terminology such as 'pay your mates' and 'kill bills' and refers to split payments among friends as 'slices'.

"We want to maintain that connection to youth and that's ultimately where we feel we can help people: getting your first job, learning those hard lessons about how to deal with money, when you start to become responsible for paying bills and wanting to save or travel," says Parker.

"But we don't want people to feel like, 'Oh, I'm too old for Up now; I need to leave and find a grown-up bank'."

Older Australians are using the platform, albeit as an add-on to their preferred bank.

"We are very popular at the moment for travel," says Parker.

"We don't charge any foreign exchange mark-ups or fees so we actually do have our fair share of baby boomers coming on and going into the wallet for overseas travel. Over the past year or two, it's really taken off."

What is the future of neobanks?

As for whether it's likely we'll see more neobanks launching in the near future, it's hard to say.

From a customer point of view, bank loyalty plays a large role. "The stickiness of people's primary financial institution, where all the direct debits and stuff are set up, is super, super high," says Turner.

"It's incredibly hard to shift that."

For entrepreneurs, the banking industry remains highly regulated and "very expensive to operate", says Parker. "You need a large employee base of bankers to run a bank and I think that makes it really challenging to start a neobank."

Parker believes there are other ways to start a bank.

"If you look at Cash App in the US, which is run by Square, they still wouldn't call themselves a bank but they started out just as a way to make payments between people and gradually it's moved more in the direction of banking. That's certainly a way to eat the chocolate elephant one bite at a time."

One of the key differentiators for Up is its inbuilt budgeting system, which enables people to manage their budgets much like a 50/30/20 or Barefoot Investor-style scheme.

"I guess we built the bank that we always wish had existed."

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