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What are neobanks and how do they work?

Neobank home loan

With so many products and services available online it is no surprise that home loans are also accessible without the need to go into a branch. But is it safe to get a home loan through a Neobank? What are the pros and cons and are Neobanks better than traditional bricks and mortar financial institutions?

What are Neobanks?

A Neobank (also known as a ‘digital bank’) is a type of bank run solely online and without any physical presence, i.e. it does not have any branches.

Neobanks were first established in Australia in 2018, with just a handful of offerings at the time. In the years since popularity and competition have increased and there are now around a dozen Neobanks operating in Australia and attempting to disrupt the traditional banking sector.

How do you get a home loan through a Neobank?

As Neobanks is operated entirely online you will need to apply for your home loan accordingly. One of the key benefits of applying for a home loan with a Neobank is that they prioritize and have invested a lot in their user experience, so the online application process is optimized and the wait time for approvals can sometimes be shorter than traditional banks by a matter of weeks.

Mortgage brokers can also work with Neobanks, so if you are using a broker they may find that a loan from a Neobank is one of the most suitable options for you.

Are Neobanks better than traditional banks?

All products and services carry pros and cons, including Neobanks.

The major benefit of a Neobank is that it has smaller start-up and running costs and is, therefore, able to pass the savings on to its customers in the form of lower rates. On the other hand, one of the biggest benefits of traditional lenders is that they can provide associated products such as offset accounts because they have Authorised Deposit-Taking institutions, unlike a lot of neobanks. Customers who like to have all of their banking – including everyday banking, business banking, and credit products – with one institution will probably find that a Neobank is not the right bank for them.

Another downside to borrowing from a Neobank is that they are often unwilling to lend to applicants that they do not deem to be straightforward. Where traditional banks can be more lenient with the types of loans they offer, including cross-collateralization, Neobanks tend to offer one loan for one asset. Those who are self-employed may also run into difficulties being approved by a Neobank.

Is it safe to get a home loan through a Neobank?

Neobanks are governed by the Australian Prudential Regulation Authority (APRA) and are therefore no more or less ‘safe’ than a traditional bank some Neobanks are even backed by Australia’s biggest and most well-known banks.

The risk of a Neobank failing is, in theory, no greater than that of a traditional bank because they are subject to consistent governance by the same regulator and must operate under the same strict Banking Code of Practice. However, longstanding traditional bricks and mortar banks inherently instill confidence in most consumers because of their name, reputation, and the consumer’s ability to physically enter the premises, which is impossible to do when you bank with a Neobank.

No matter what type of financial product you are aiming to be approved for, or what type of lender you would like to work with, you should always shop around and seek independent financial advice before locking yourself in to ensure it is best suited to your current and long term financial objectives and aspirations. Working with a mortgage broker is a great way to take the grunt work out of looking for the best deal on a home loan.

If you are in the market for a property and need advice about which home loan is best for you, our experienced Mortgage Brokers can assist. Give them a call today at (07) 4052 0700.

 

Five examples of Neobanks

Nubank:

Brazilian neobank founded in 2013, serving over 70 million customers across Latin America. Focused on leveraging technology and machine learning to simplify financial services, foster financial inclusion, and empower individuals and SMEs.

 SoFi:

Established in 2011 to assist students with college tuition, SoFi has evolved into a comprehensive fintech offering savings, investments, and financial protection. With almost six million users, SoFi emphasizes responsible lending and provides cash management, investment platforms, and advisory services.

Chime:

Chime aims to reduce overdraft fees by partnering with regional banks and prioritizing customer-centric financial products. Following a $750 million funding round in 2021, Chime was valued at $25 billion, emphasizing its commitment to offering lower-cost options for Americans underserved by traditional banks.

Revolut:

A UK-based neobank founded in 2015, Revolut has over 35 million personal users and 500,000 business users. With a mission to simplify financial transactions, it offers a range of services, including currency exchange, debit cards, virtual cards, stock trading, and crypto processing up to 250 million transactions per month.

N26:

German neobank founded in 2013, focused on making money management easier and more secure. Operating across 24 markets, N26 has over eight million customers and processes more than $100 billion in transactions annually, offering digital banking solutions to European and international customers.

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