What is the Difference Between a Traditional Bank and a Neobank?

February 26th, 2020

Traditional banks have long held a monopoly over the Australian banking sector. In an effort to modernise, most have released digital banking apps so customers can bank at any given hour of the day. 

However, a new dawn in banking is coming – 100% digital banks, or neobanks, are making their mark on the Australian financial sector to provide individuals with personalised banking powered by artificial intelligence. In vast contrast to traditional banks, neobanks operate without brick and mortar locations, with a digital approach and a focus on app-based technology. This provides customers with a new and more efficient way to bank. 

What are neobanks?

Neobanks are just like normal banks. They’re a place to put your money, a place to borrow money from and a place to hand over interest repayments to. Except, neobanks are 100% online. Not associated with any traditional bank, neobanks have no branches that customers can walk in to – in other words, they exist solely online. 

Designed from the ground up using new technology, neobanks operate on platforms that allow for the incorporation of artificial intelligence. This in turn enables neobanks to offer customised app and personal banking experiences. 

Popularity of neobanks 

Two years ago, neobanks such as N26 were documenting 300 downloads a day. Fast forward to today, and N26 is recording downloads in excess of 3000 per day, as noted by Trimplement. 

Despite starting as an overseas trend, neobanks are proving to have a market share in Australia too. The neobank* Volt has become the first digital challenger bank to be granted a fully-fledged banking licence. Until now, Volt was operating with a restricted licence which meant, among other things, that it could not accept more than $250,000 in a single deposit. 

The full licence now enables Volt to commence plans to roll out savings and transactions accounts along with term deposits, personal loans and home loans. By the year 2020, Volt is estimating that they can branch out into small business banking. This move highlights just how popular the prospect of neobanking will become. 

What neobanks can offer 

Through the use of artificial intelligence in their technology operating systems, the services that neobanks can offer become quite broad. Artificial intelligence is a computer system that can perform tasks that would normally require human intelligence. As such, through the use of this technology, neobanks are creating personal service to customers engaging with the bank on their phones. 

Artificial intelligence also helps neobanks look at customer’s pain points and develop practicable and possible solutions. Helping customers will come in an array of forms, from tracking spending and curating spending reports, to helping customers save enough money to get by until payday. 

This technology also means that application processes like the ones used for banking registration or loans can be completed almost instantly. As customers don’t have to walk into a branch, they can register to be a neobank customer in minutes in the comfort of their own home. Furthermore, artificial intelligence can determine your spending habits and past credit (and thus your viability to receive a loan) in a matter of minutes. This in turn helps customers make life plans quickly and painlessly. Due to the benefits present in this approach, traditional banks have now also moved to adopt this technology.

Prices and fees

The fact that neobanks do not need physical locations, staff to work in their stores and money to pay rent for their spaces all mean good things for customers. The savings that neobanks experience due to their business model have been pledged to benefit customers, allowing neobanks to offer lower home loan interest rates and competitive savings accounts rates with minimal account fees. 

Comparison to traditional banks 

When looking to compare traditional banks and neobanks, the similarities end with the fact that both banking types mean dealing with money. Where traditional banks operate out of branches, neobanks exist solely within a customer’s smart device. Even though the majority (if not all) traditional banks offer online banking portals, these can differ in ways to neobanks as these banks were not established to be digital/mobile/app first.  

Digital banking portals offer banking at any hour of the day. However, they are often a division of a bigger bank or union. For example, ING is owned by ING Bank and Me Bank is owned by industry super funds. 

In comparison, neobanks have no affiliation with a bigger, more secure bank. There are usually no ties to the bigger banks, which in Australia have made more than $29billion dollars in profit in one year. 

At the end of the day, no matter what a customer is after, be it payday loans, personal loans, credit cards or cash loans, banking in the modern era should be efficient and seamless. 

Traditional banks and neobanks 

With the rise of neobanks, consumers are now afforded a wider choice when it comes to who they want handling their money. In an increasingly digital world, the shift to online banking seemed inevitable, but with technology upgrades, switching to neobanks might make for an easier and more efficient banking. However, traditional banks and their digital portals will always remain, as long as there are customers who crave human interaction. 

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