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What are neo banks and what’s their role in the banking system?

by Alexandra Cain | 14 Sep 2018

A neo bank is an independent, built from the ground up, digital bank. It has no existing legacy systems and it isn't attached to an existing bank. They are an important part of the emerging cohort of fintechs challenging the status-quo in financial services. 500 What are neo banks and what’s their role in the banking system

“Neo banks puts customers at the centre of everything,” explains Eric Wilson, CEO and founder of neo bank Xinja.

“It’s not just old school banking done through an app or the web, it’s a new way of thinking about what a bank can be and do,” he says.

This is also the Productivity Commission’s view. In its January 2018 draft report, Competition in the Australian Financial System, it acknowledges, “there is some debate as to whether a neo bank refers to a digital-only bank with its own banking licence, or a digital-only customer interface without a banking licence that is partnered with a traditional bank. This report uses the former definition.”

Wilson shuns the notion neo banks are a rebranded marketing smokescreen for an existing bank. “A number of these are popping up, and while not unexpected, it is disappointing because this is not a new approach to banking. It’s the same old banks, providing the same old services."

He says neo banks have an important role to play in the financial services sector. “Neo banks are about servicing customers better and cheaper than the existing high-cost, high-margin bank business models.

“We want to ensure we are transparent and ethically sound and that we bring real competition to the market.” 

Anthony Nantes, CEO of peer-to-peer lender Wisr, has additional insights into the neo bank space. “Neos are set for huge growth worldwide as they continue to reinvent the practices and processes associated with traditional banking, alongside the growing demand for non-traditional lending services.

“As they evolve and become more prominent in the Australian financial system, neos are proving to be the real competitor to the traditional banks. Neo banks and neo lenders will provide the competition to the big four the community banks have failed to deliver.”

According to Nantes, the advanced technology neos use enables them to complete long and complicated processes much faster than traditional banks.

“This eliminates lengthy forms and applications and allows them to determine income, spending habits and determine creditworthiness instantly, meaning loans can be approved far quicker than traditional lenders. This same technology also allows fast account opening, free debit cards and instant payments.”

Neo banks have a slight different business mode, explains Wilson. “Like any bank, we still make money from the margin between lending money out and what we can get money in at. What we do, however, is entirely change the way that happens.” For instance, Xinja doesn’t have a branch network, which reduces its costs.

Says Wilson: “We don’t have tens of thousands of retail bank staff, so the customer doesn't pay for that. We have high levels of personalised services driven by technology, which is great for the customer. Xinja is for profit, but also for purpose.”

For instance, Xinja seeks to help customers to get out of debt as fast as possible and advises them on how to pay less interest.

While Xinja and its neo bank counterparts have big ambitions, it’s unlikely the major banks will allow them to take their market share without a fight. Nevertheless, Wilson intends to try.

“Australia has a very stable, secure banking system and regulation, with barriers to entry gradually and carefully being eased. It is a classic market waiting for disruption. The opportunity for Xinja is to provide an amazing, modern, customer-led digital banking service that blows everyone else in the market out of the water.”

Wilson says Xinja's mission is to become the global bank for the world's digital natives. “But before we can get there we have to establish and stabilise the Australian business. We are seeking to add to the 20,000 customers who have signed up for a Xinja products, and try to increase the 15 countries in which our card is used on average every day.”

Xinja is also working towards scaling up the home loan business and satisfying the regulator it can be trusted to take deposits. “It's going to be a busy 12 months,” he says. 


  • | Jan 09, 2019

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