What is a neo-bank?

In the space of just a few years, ‘neobank’ has become one of the most frequently used – and least understood – terms in modern finance. These digital-first banks promise faster “onboarding” (setting up an account), smarter apps, and lower fees, but the distinction between a neobank and a traditional bank with a mobile app isn’t always clear.

Major Points to Learn:

Traditional banks often use decades-old “legacy infrastructure” – large, complex computer systems and software originally designed for in-branch banking. These older systems can be slow, costly to maintain, and hard to update.

Neobanks, by contrast, are built from scratch on modern technology platforms. They use cloud-based systems, automated processes, and digital verification tools. This lets them move faster, launch new features quickly, and keep costs lower – which is why they can often offer fee-free accounts, instant sign-up, and slick mobile apps.

Australia’s leading players include Up, Judo Bank, and Volt (which exited in 2022). Others like 86 400 were absorbed by major banks.

The difference between a “neobank” and a “digital bank” lies in technology architecture, regulatory status, and capital base. In essence, the difference lies in their foundations: neobanks are born digital, agile, and startup-driven, whereas digital banks are traditional banks that have modernised through technology.

What defines a neobank?

At its core, a neobank is a bank built from scratch using digital infrastructure, rather than retrofitted from a legacy core system. It operates primarily through mobile and web platforms, without physical branches, and uses cloud-based systems to process transactions and customer data in real time.

The crucial distinction is licensing and independence. In Australia, a neobank must hold an Authorised Deposit-taking Institution (ADI) licence from the Australian Prudential Regulation Authority (APRA). This means it can accept deposits and offer loans under the same regulatory conditions as traditional banks, but with a leaner cost base and modern architecture.

By contrast, “digital banks” – such as app-based offerings from Commonwealth Bank (CommBank app) or Westpac’s “bo” (since discontinued) – operate under existing banking charters and infrastructure. They may look similar to neobanks from the outside but rely on traditional systems and back-end processes.

The Australian neobank story: rise and reality check

Australia’s neobank wave began in earnest in 2018–2019, following APRA’s creation of a restricted banking licence designed to help startups prove their viability before full authorisation. This opened the door for fintechs such as Volt Bank, 86 400, and Xinja to challenge the ‘Big Four’ banks for market share.

Initially, momentum was strong. Consumers were drawn to intuitive mobile interfaces, faster sign-ups, and budgeting tools that gave them granular control over spending. Yet the path to profitability proved steep.

By 2022, the sheen had worn off. Volt Bank became the first neobank to hand back its license, citing an inability to raise sufficient capital to expand its loan book. Xinja closed in 2020, returning deposits after failing to generate revenue beyond deposit-taking. Meanwhile, 86 400, one of the most promising players, was acquired by National Australia Bank and folded into its digital offshoot, UBank.

Today, only a handful of home-grown neobanks remain active and independent – Up (owned by Bendigo and Adelaide Bank), Judo Bank (listed on the ASX, targeting SMEs), and Alex Bank, which operates under a full ADI licence focusing on personal lending.

How neobanks differ from traditional banks

The difference isn’t only aesthetic or technological. Neobanks’ value proposition lies in the efficiency of their infrastructure and the experience they deliver to users.

Most traditional banks are weighed down by decades-old core banking systems – often written in outdated programming languages and difficult to modernise. Neobanks use cloud-native cores, meaning updates and integrations happen in real time and at far lower cost. This agility enables faster deployment of new products and more personalised customer experiences, often powered by artificial intelligence and open APIs.

From a regulatory standpoint, the obligations are identical: both must meet APRA’s capital adequacy and risk-management standards. However, neobanks often operate on tighter margins, as they rely heavily on venture capital and need to scale quickly to survive. Their challenge isn’t regulation – it’s economics.

Major Australian players

The Australian neobank sector has seen rapid consolidation, but several key players continue to define the space:

• Up – Founded in 2018, backed by Bendigo and Adelaide Bank. Focuses on retail customers, offering strong app-based features like spending insights and savings automation.
• Judo Bank – Established 2016, publicly listed (ASX:JDO). Targets small and medium-sized business lending rather than retail deposits.
• Alex Bank – Gained a full ADI licence in 2023. Concentrates on unsecured personal lending with fast digital approvals.
• UBank – Technically not a neobank, but operates as a digital subsidiary of NAB after merging with 86 400, offering similar tech-driven experiences.

These examples illustrate the blurred boundary between neobanks and digital banks: independence, ownership, and infrastructure determine classification more than the user interface.

Funding models and why some failed

One of the least discussed aspects of neobanks is how they make money – and why many don’t. Neobanks typically earn revenue through interest margins (lending versus deposit rates) and interchange fees from debit-card spending. But unlike traditional banks, they lack large loan books, business banking divisions, and cross-selling opportunities like insurance or wealth management.

Moreover, with Australian depositors expecting high interest rates and zero fees, it’s difficult for digital challengers to attract deposits profitably. Many early entrants relied heavily on venture capital funding, which dried up after 2021 as global tech valuations fell and investors demanded a clearer path to profitability.

A subtle but critical insight: under APRA rules, banks must maintain a minimum capital ratio to cover lending risk. For startups, that means raising tens of millions before they can expand lending operations.

Technology and the future of banking

Despite consolidation, the influence of neobanks is profound. Their user experience design, open-data frameworks, and cloud architecture have forced Australia’s major banks to modernise faster than they otherwise would have.

Neobanks also played a catalytic role in Australia’s Consumer Data Right (CDR) and Open Banking rollout, which allows customers to share financial data securely between providers. This has enabled new entrants to compete on transparency and service quality rather than scale alone.

The next wave of evolution is likely to come from embedded finance – the integration of banking services into non-bank platforms. For instance, retailers, superannuation funds, and software companies can now embed payment and lending tools using the same technology that underpins neobanks. In this sense, neobanking isn’t just a sector; it’s becoming an infrastructure layer for the broader economy.

What’s next for Australia’s digital challengers

The future of neobanking in Australia will likely be less about standalone digital banks and more about partnership ecosystems. Traditional banks are adopting neobank technology through acquisitions or joint ventures, while fintechs use modular banking-as-a-service platforms to offer financial products without becoming banks themselves.

Judo Bank’s SME focus and Up’s success in cultivating a young, tech-savvy user base demonstrate that the model can work – but only when it aligns with a clear customer segment and sound capital strategy.

For consumers, the lesson is equally clear: a slick app doesn’t make a neobank. The strength lies in its licence, governance, and balance sheet, not its colour palette or emoji-laden push notifications.

Forward-looking insight:

In time, the term “neobank” may fade, much like “internet bank” did two decades ago. The technology that once defined them is rapidly becoming standard across the industry. What will remain is the underlying philosophy – transparent, agile, customer-led banking – a benchmark that all institutions, digital or otherwise, will need to meet.