For a long time, banks have been dominating the industry. With no competitors, they have monopolized prices and services. They make processes that are not only time consuming, but also overly complicated. Interest rates for loans can be high while the interest for savings seldom increases.
Competition is scarce in this field.
But, as financial technology has improved its services and products, physical payment methods have been declining over the past few years. With people looking for a faster and more convenient way for financial transactions, bank operating branches have shrunk.
An online banking system can capture customers who prefer convenience and reliability above all else. What’s even better is that the fewer the costs are, the less they can charge for fees, giving customers lower interest rates on loans while enjoying higher interest rates for their savings. And so this was how Neobanks was conceptualized.
Why a healthy competition doesn't hurt
Big banks have been dominating the market, having 75% if the country's deposits. If there's one thing to learn from high school economics, it's that if a market is making huge profits, new companies should emerge to make prices lower. This competitiveness will also ensure to improve products and services.
But breaking into the banking industry has not been easy. There's a huge barrier to entry in the banking sector. To be a bank, you will need up to $50 million for licensing fees. Loaning and explaining your business model is also not a tedious process that doesn't promise you'll be successful.
Good thing that the financial system regulator intends to disrupt this by adding competitors in the sector.
Here's where Neobanks enter.
They emerged in the UK about 5 years ago. One of the first players were Atom Bank and Monzo, promising to build a bank with customers for their customers. Apart from traditional fundraising, they also made a few crowdfunding campaigns to allow customers to have a share in the bank that was being created.
To promote their growth, legislation in Australia is being introduced to reduce restrictions to become a bank. As of 2020, the trajectory of Australian Neobanks has been impressive. For example, NAB has $424 Billion customer deposits. Now services like Up Bank, 86400, Xinja and Revolut are on local market.
What is a Neobank?
Neobanks are financial institutions that act as a bank. They mostly offer savings and checking accounts, which allows customers to have higher interest rates and lesser fees.
They don't have physical branches and operate through the internet only. It's targeted towards people who prefer using a mobile app to manage their money.
Because Neobanks don't have physical branches, this allows them to cut operational costs, allowing for lower fees.
How are they different?
Neobanks may act like online banks, but they are different in terms of structure and offerings. Here are some of the ways they differ:
- The process is mostly focused on mobile users
- Not chartered as banks with the state or federal regulators
- Credit is not extended
- Customer deposits are federally insured through their bank partnerships.
They provide competition for banks but not necessarily replace them. Some Neobanks allows customers to link their traditional bank accounts with Neobank so you can have the best of both worlds.
However, they offer limited services that are not different from credit unions and banks. Usually, they offer services like money transfers, savings and checkings account, and budgeting advice.
Take not that Neobanks may have different services. Some of them offer loans and deposits account through partnerships with credit unions and banks.
Generally, low-cost operation expenses allow them to be agile. This proves to be beneficial in the following areas:
- Less maintenance cost
- Fewer charges
- Fewer penalty rates
- Less burdensome loan approval
How does it disrupt the banking industry?
Apart from the lower operational costs, Neobanks typically offer high-interest rates and have products that are more affordable compared to what banks offer. They also serve underbanked populations.
It's also convenient to use. No need to line up and wait in the bank. All you need is a smartphone an internet connection to manage your account. The processing is also faster compared to traditional banks.
Neobanks makes use of the banking app's self-service nature and is a key factor in improving it. They have incorporated Artificial Intelligence and other new fintech services.
Rather than going through the time-consuming and complicated process in loan applications, Neobanks assess your credit score by checking your banking history.
AI can check not only your banking records, it can also learn your spending habits and determine how much you earn. All of these can be done without having to wait in line for hours. Your loan can be approved within minutes.
Not only that, Australia is keen on bringing competition to the table. The barriers that hinder Neobanks from penetrating the field have been reduced. The capital requirement of $50 Million has been severely reduced to $3 Million.
Current trends and future outlook
New rules such as the Consumer Data Right (CDR) has been recently introduced. It's one of the most recent developments in the Australian financial technology community. It's expected to stimulate the activity of Neobanks in the country.
It was issued by ACCC, Australian Competition and Consumer Commission, the country's financial regulator. CDR has been initially implemented in the financial services sector but it's being planned to be released to the telecommunications and utility industry.
Australia's Big Four has been required under the CDR to share their most recent product reference data. This includes eligibility criteria and information, interest rates, charges and fees. They will also be required to provide consumer data like deposit account information and credit card details, as well as information on loans and mortgages to the recipients that have been accredited.
All these data are intended to help Neobanks access financial data to create their propositions for products and services.
While Neobank's competitive interest rates for customers are driving their popularity, there's still room for improvement. As more features are being added by Neobanks, it is expected that their growth will be continuous and the Big Four will be forced to respond so they can retain customers.
Competition is surely beneficial for everyone. It makes institutions more efficient, lowers costs and most importantly, it improves the quality of the products and services. For a long time, banks have been able to operate without any threat to their business. Even if there are numerous banks available, this still allowed them to monopolize the industry instead of competing with one another. But this is slowly changing. Recent regulations have been updated to make sure every customer gets what they deserve.