What Makes a Bank a “Neobank”?

Neobanks promised to rip up the rulebook. No branches. No cheque books. No waiting in line while someone deposits coins in a plastic sleeve. Just fast, app-first banking designed for people who live on their phone. But what actually makes a bank a neobank – and why did so many arrive with hype, only to fade or fold a few years later?

A neobank is not just a bank with a good app. Traditional banks now have polished apps too, and most of them work well enough. A neobank is built differently from the ground up. It doesn’t run on legacy systems or decades-old software. It doesn’t operate a branch network. And it doesn’t rely on the old model of cross-selling credit cards, insurance, super and investment products just to stay afloat.

A neobank starts with one idea: the phone is the bank. Everything else works backwards from that point.

Built on modern rails

Most banks are still sitting on enormous, expensive, decades-old core systems. They work, but they’re slow. Adding new features often requires lengthy upgrades, risk committees, testing windows and layers of bureaucracy. Neobanks built their entire core on modern cloud infrastructure, which lets them ship new features in days rather than months. That speed created their biggest drawcard – instant updates, clean interfaces and real-time tracking.

If you’ve ever used a neobank, you’ll know the difference as soon as you open the app. Spending is categorised automatically. Transfers hit in seconds. Savings goals update instantly. You don’t have to go hunting for information; it’s all laid out clearly because the entire bank was designed around a phone-sized interface. There’s no “internet banking” and “app banking.” There’s just the app.

A banking licence – or not

Here’s where it gets technical. Not all neobanks are true banks. Some hold a full authorised deposit-taking institution (ADI) licence from APRA. Others operate as fintechs that partner with an existing bank for the licence and balance-sheet support.

Customers don’t always notice the difference, but it matters.

• A fully licensed neobank holds your deposits on its own books.
• A fintech-style “neobank” holds your deposits with a partner bank behind the scenes.

Both models are legitimate. Both need to meet strict safeguards around customer money. But the second model is cheaper to run, which is why so many well-known brands overseas operate this way.

No branches, no overheads

Cutting out the branch network slashes costs. A big four bank spends billions running buildings, staff, ATMs, security, compliance teams and legacy IT. A neobank doesn’t. That’s why, when they first launched, neobanks were able to offer punchy interest rates, free international transactions and accounts with almost no fees. They weren’t burdened by physical infrastructure and they didn’t need to recoup those costs through pricing.

This also changed the relationship between customer and bank. When you contact a neobank, you aren’t put on hold for half an hour. You get a message interface, or a callback, or in-app chat. There’s no bouncing between departments. Staff handle fewer products and fewer complexities, which means they can respond quickly.

The neobanks who folded

Several neobanks arrived in Australia with fanfare, only to shut their doors far sooner than expected. Their closures weren’t the result of one single failure, but a mix of funding pressure, and the tough economics of running a bank in a small market.

The most prominent collapse was Xinja, which shut down in late 2020 after burning through investor capital far faster than expected. Xinja launched with high expectations and an eye-catching bonus rate on its “Stash” savings account. But it had no lending business to support those rates. Without loans, a bank can’t earn interest margin – its main source of revenue. Xinja tried to plug the gap by building a fintech-style investment platform, but it never launched. When a major funding deal fell through, the bank couldn’t continue, even with strong customer enthusiasm.

86 400, another early neobank, didn’t fail in the traditional sense – but it didn’t survive independently. It was acquired by NAB in 2021 and folded into the UBank brand. The issue wasn’t the tech or the customer interest; both were strong. The problem was scale. A digital bank needs a critical mass of deposits and lending to cover its fixed costs. Australia’s market is limited, and competing with the big four for home loans is expensive. Rather than raise more capital and push for rapid expansion, the founders accepted NAB’s buyout.

Volt Bank reached a similar end. Despite being the first new Australian bank to receive a full licence since the GFC, Volt struggled to convert sign-ups into meaningful deposits. Many customers signed up out of curiosity but didn’t move their salary or savings – which meant Volt couldn’t grow its loan book. In 2022, after failing to secure a major funding partnership, Volt handed back its licence and returned customer deposits.

These cases reveal the same structural challenge. A neobank needs scale, lending, and stable capital to survive. Attractive apps and low fees draw attention, but they don’t generate revenue. And in Australia, where four big banks dominate lending and funding costs are high, building a fully independent digital bank is a harder task than the hype suggested.

Designed around spending behaviour

Traditional banking was built around the idea that people get paid, save, spend, repay, and invest in fairly predictable ways. Neobanks assumed the opposite. They understood that modern spending is messy – buy now, pay later instalments, overseas merchants, subscriptions that renew in the background, food delivery, split bills, and international transfers.

So they designed tools around how people actually spend.

• Real-time insights
• Spending breakdowns
• Automatic bill detection
• Subscription tracking
• Round-up savings
• Multiple savings buckets
• Instant fraud notices

These features weren’t just nice touches. They made people more aware of their own behaviour, and that transparency drove loyalty.

Why some neobanks stumbled

You can build a great app, but you still need a sustainable business model. That’s where early neobanks hit trouble. Cutting fees attracts customers, but it doesn’t generate meaningful revenue. Offering high savings rates is appealing, but someone has to fund it. And running a bank – even a small one – requires capital, compliance, risk management and a strong balance sheet.

A neobank also needs to scale fast. Without scale, it becomes an expensive niche product. And scale requires a large, sticky customer base willing to move their main income deposits across. Many Australians opened neobank accounts out of curiosity, transferred small amounts, and kept their real banking relationship elsewhere. The result: strong sign-ups, weak deposits, and a business model that couldn’t grow.

Regulation also matters. APRA is rightly cautious with new banks, especially after the global failures in 2008. Neobanks in Australia have found the path to profitability harder than similar players overseas because the regulatory bar is high – and the market is small.

What remains after the hype

Even with closures and consolidations, neobanks changed banking in Australia permanently. They forced the big four to clean up their apps, upgrade their systems and match features that were once considered niche. Categories, instant payments, slick design and in-app card controls are now industry standards.

That’s the legacy: neobanks reset expectations. They shifted the centre of gravity away from branches and towards phones. They showed customers what a modern bank could look like, and the big institutions had to respond.