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Alternative to the major banks: a look into the rise of neobanks

By Sophie Dicalfas, Albert Thai
18 March 2018

Exhausted after a full day at university, 22-year-old IT student Connor Rendoth wants a quick consultation with his bank. Waiting in the bank queue to speak to someone, he is approaching hour two.

“Thank you for your patience,” the floor manager bellows across the branch for the sixth time that evening. Considering whether to stick it out or try again tomorrow, Connor commits to the wait.

Scrolling through his phone to kill time he comes across an app, Xinja Bank, “independent, Australian, 100% digital & mobile”. He downloads the app and in under a minute he is talking with a person from Xinja, who is providing him with information about their neobanking service. By the time Connor reaches the front of the queue, he has requested to be sent a pre-paid Xinja tap-and-pay card. With this, he can load money from his existing account to the card to be able to track his spend, split bills with other users and request “I owe you” transfers.

Using innovative mobile applications to assist users with their banking experience, neobanks do not require physical branches or in-person consultations, therefore lowering the cost of operations and allowing for competitive rates and financings for the customer.

Disgruntled by his own banking experience, his personal IT knowledge and his awareness of the recent shortcomings within the banking industry, Connor is now a customer and investor with Xinja. In late 2018, Xinja created an equity crowdfunding initiative where contributors became investors, giving customers such as Connor the assurance a legacy bank could not.

Eric Wilson, CEO of Xinja said on their website “we want [customers] to be in this from the ground up. We want their feedback and input”. Wilson wants to restore confidence in banks in the twenty-first century by using “cutting edge digital, mobile based technology” to transform the customer’s banking experience.

“I was interested in [Xinja]… it’s much faster and easier instead of a traditional bank, where you have to close an account or something,” Rendoth says of the Australian neobank. “You can do this on your phone, which I feel like is where everything is going.”

The digitisation and mobilisation of banking follows in the footsteps of apps such as Uber and Airbnb, who have revolutionised their respective industries by providing their services entirely online.

The big four banks have progressed with this digitisation as they have adopted technologies that allow for internet banking and other online support services. Commonwealth Bank of Australia (CBA) has seen their user growth of mobile payments increase up to 35 per cent from June to September 2018, according to a recent press release. In those six months, CBA estimated tap and pay transactions to number 16.8 million among five million CommBank app users.

“I don’t think there’s much of a need, going forward, with brick-and-mortar stores in terms of teleservices,” said financial consultant for Nephew & Sons Adam Ho. “[However], traditional banks still have the operational scope and size to operate at a different type of level in comparison.”

There are six Australian neobanks that exist against the backdrop of the Banking Royal Commission in late 2018, which spawned much public distrust. As neobanks such as Xinja plan to eventually be a primary banking option, many are concerned about transitioning entirely to the digital, especially when it comes to something as significant and personal as banking.

Chief Strategy and Innovation Officer of Xinja, Van Le says that their neobank “recognises the imbalance of power between the larger banks and the individual consumer and it’s something that [Xinja] wanted to change from day one”.

“Rather than a bank asking, ‘would you recommend us’ and ‘fill in this 10-minute survey’, we talk to customers at the start of the whole process and say what’s really going to make a difference in your life,” Le said.

Xinja operates on a restricted banking license granted by the Australian Prudential Regulation Authority (APRA), the leading independent statutory that regulates and supervises institutions across banking and finance.

Under this license, they can provide pre-paid transaction cards that are managed through their app which allows customers to control their money from their device. As of March 2019, there are 10,000 Xinja pre-paid cards circulating Australia used in over 50 countries worldwide, which help track spending in both Australian and foreign currency. However, they are restricted from issuing large-scale loans, savings accounts and mortgages until they receive their full banking license, which Xinja predicts will arrive late this year. Volt Bank is the only Australian neobank that has recently been granted a full banking license, where they can service as any other legacy bank entirely online. Xinja plans to follow in these footsteps to provide another option for customers.

According to a 2019 Business Insider Report, 9% of the British population have opened an account with a neobank, but many are still skeptical of their ability to rival the Australian Big Four Banks in customer competition.

Adam Ho believes that an ease into neobanks should be performed in conjunction with a major bank to ensure security and safety of personal savings.

“Consumer and personal lending would work [in the neobank setting], but more your traditional and commercial lending will still go through a traditional bank,” Ho said. This sentiment mirrors the action of Xinja customer Connor Rendoth, who remains distrustful of legacy banks following findings from the Banking Royal Commission. Despite this, he still holds an account with a major bank until Xinja receives their full banking license.

The personability of neobanks such as Xinja have attracted many young people that are after an easy, attractive and friendly customer-service experience. With its youthful and aesthetic interface, neobanks are solidifying their place in the Australian market with millennials who are open to trialing alternatives to the traditional banks they were raised using.

Despite being entirely digital, Xinja assures that they put the customer first, with Le saying that when contacting Xinja, “you’re talking to a human being, not a robot and we talk like normal people who care about you and your money”. Rendoth confirms this experience and holds it in stark contrast to his in-branch banking experience.

However, in their approach to target young people, neobanks must also compete with existing finance apps such as AfterPay, where customers can purchase and receive their products first and pay later without any excess fees. Another app is Beem It, an intermediary platform supported by the big banks which allows users to send, receive and request money instantly.

Near-field communication (NFC) mobile payments, which allow users to pay for goods and services with their mobile devices, are also yet to be integrated within neobanks. However, Le says that Xinja is evolving their services based on the customer’s personal interests so that banking will be “quick and easy, painless, and even enjoyable”.

As neobanks continue to evolve they still need to convince comfortable legacy bank customers that they can trust them. Xinja’s plan is to encourage the utilisation of the early services they provide with the card and the app. The remainder of trust will come from Xinja’s rates of return which will need to outweigh the risks.

When asked the risks of banking with Xinja, Le said “the only risk is that you might never go back to your main bank again, so you might need to be prepared to have that breakup conversation”.