There’s a new way of banking that’s challenging the traditional big 4, and young savers are the first to be riding that wave.
Like many other aspects in our lives, banking is becoming increasingly digital. Digital banks, also called neobanks, are revolutionising the financial industry through the use of online virtual services and digital technology.
So what exactly are neobanks and why are they so popular with the younger crowd aged 18-30? Like the name suggests, neobanks are just like your typical normal baking service, except it operates completely digital and away from a physical branch or office.
They don’t use any existing legacy systems to operate unlike traditional banks which are tied by existing financial operating systems. This gives neobanks more creativity to be developed from scratch and focus on the user rather than the infrastructure.
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A neobank could exist as a financial product developed just for a particular market group (such as students or young families), or simply as an organisation tool so the user can easily keep track of different accounts from multiple institutions. Digital banking can be designed from the ground up to be completely customer centric. But not just any customer. Young, connected customers are drawn to using neobanks as they are useful for those who do not have significant savings accounts or mortgages just yet.
In Australia, the main neobanks are:
- Volt bank – Volt is the first digital bank that was granted a full banking licence. The company will be launching exciting new features for their users this year, including a savings account, with home loans and credit cards offerings to be expected.
- Xinja – They’ve been granted status as an authorised deposit-taking institution, with increasing users every year.
- 86400 – A neobank founded by Anthony Thomson, a UK banker who is the founder of Atom Bank and Metro Bank.
- Up – The child digital bank between Bendigo Bank and fin-tech group Ferocia
- Douugh – Douugh was founded by Matt Symons who is also the founder of Society One. Douugh aims to list on the ASX rather than grow through venture capital.
- Pelikin – Pelikin is a neobank that focuses on a mobile driven, multi currency account. It aims to deliver a better money experience with travellers.
- Archa – Also targeting travel-focused Australians
- Revolut – A newer neobank that just launched, offering a pre-paid transaction account rather than taking deposits.
Unsurprisingly, this new added convenience has attracted the younger crowd, with offerings that include quick sign ups, digital payments, recurring bill reminders through an app or email, grouped transactions and even personalised budgeting tools, so they can track how much they’re spending. Some neobanks will soon also roll out utility bill analysis services, recommending smart saving solutions.
Rebecca Schot-Guppy, general manager of FinTech Australia remarks, “Young Australians are extremely credit savvy and have a willingness to pay for items through ‘buy now pay later’ services, which have often been integrated into these neobanks, while also providing them valuable insights into their spending habits,”
Digital banking will not only change the way in which Australians bank, but it will open new insights to their relationship with money and financial management.
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There are several features that neobanks possess that could potentially shape how we bank. With neobanks being heavily consumer centric, the experience will be optimised to allow for new customer transactions and applications. This will inevitably remove barriers that customers face right now with traditional banks. There are also lower costs and fees associated with digital banking apps. Most neobaanks have adopted a lower cost model thanks to efficient digital processes and platforms. This means they can pass on these benefits directly which results in lower fees for their customers. Perhaps one of the biggest benefits of neobanking is that it could potentially lead to more digital innovations as it’s more flexible than the traditional institutions. A new way of banking means more ideas, focusing on solving human problems when it comes to money management.
Neobank company, Up, says more than half of its 200,000 customers are those aged 16-24 and its account balances are currently up more than 400% than that of the past year. Up’s head of product, Anson Parker, comments that this is due to the younger demographic being “app connoisseurs”.
“They expect more from their apps and aren’t afraid to try something new. We’ve made saving less onerous and boring, using fun features like ‘pull-to-save’ by making it possible to round-up your spare change or automatically set up pay-splitting.”
Xinja Bank, which just launched their services just a month ago, are showing very similar results with more than 21,000 customers and $245 million in deposits. CEO Eric Wilson has said the launch was twice as successful as forecasted. “Young people are sick to the back teeth of the banking industry,” Wilson says. “They don’t appreciate having a new brand stuck on an old bank and trying to call it something new.”
Although digital banking is a revolutionary change, there are still several challenges to be aware of. Funds deposited into netobanks may or may not be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF) coverage. Before joining a neobank, ensure that deposit insurance exists or know the risks if you’re planning to enter into a neobank without one. Another thing to note is that the current laws and regulations may not act fast enough for digital banking. If there’s a problem with how the app, it’s functions or any of its services, it’s unclear who should take responsibility for resolving the issue. Whereas traditional banks have set regulations to follow when services go wrong, it may not be as simple for neobanks.
Regardless, neobanks are still evolving and for the most part, they have a positive impact on financial management, especially for young adults. Phillip Vassalo, for example, is an 18 year old just out of high school and working part-time in retail, with plans to study finance at university. He’s banked with the big four before switching to Up a couple of months ago.
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“The sign-up process took a couple of minutes, and the debit card I ordered arrived in a colourful package, which was cool. They’re just different, which I like,” he says. Phillip joins the surge in young people joining neobanks, known as the “nomad” banking customer. Those who identify as “nomads” prefer digital channels with the way that they bank, and are not loyal to a single brand. Findings of an Accenture survey also estimates nomads will become a $2 trillion market in the next few years.
To get started with a neobank, all you need to do is download their app and follow the instructions to join. These apps are free to download and once you verify your identity, you’ll receive a physical debit card in the mail. In the meantime, you can start using the account right away to manage your money and explore other features on the app. Digital banks need the same banking licenses and approvals as all other Australian banks before they’re able to offer their services, so you can rest assured your information and identity will remain safe on the apps.
Words by Joanne Ly
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