Australia’s neobank sector promised to disrupt traditional banking by offering digital-first experiences, lower fees, and customer-friendly features that incumbent banks allegedly couldn’t or wouldn’t provide. Several years into the experiment, outcomes are mixed. Some neobanks have established sustainable positions, others have failed or sold themselves, and the overall impact on Australian banking competition remains modest.

The neobank story illuminates challenges that technology companies face when entering highly regulated, capital-intensive industries dominated by entrenched players with structural advantages. It also reveals what kinds of fintech innovation succeed versus what remains largely rhetoric.

The Survivors

Up, the neobank partnership between Bendigo Bank and Ferocia, represents perhaps the most successful Australian neobank. Up benefits from banking license through Bendigo while operating with distinct digital-first approach and brand. The model acknowledges that establishing new banking license is difficult and that partnering with established bank provides regulatory and capital advantages.

Up has grown to over 700,000 customers and continues attracting new users. The product emphasizes user experience, with well-designed app, real-time notifications, and features like automated savings that resonate with target demographic of younger, digitally-native users. Profitability isn’t publicly disclosed, but sustained growth suggests viable business model.

86 400 was acquired by NAB in 2021 and merged into NAB’s operations, representing partial success: the founders and investors got exit, but independent neobank didn’t survive. The acquisition suggests NAB saw value in 86 400’s technology and team but preferred acquisition to ongoing competition.

Judo Bank operates differently from consumer-focused neobanks, targeting SME lending rather than retail banking. The bank achieved profitability and listed on ASX in 2021, making it arguably the most successful Australian challenger bank. However, Judo operates with full banking license and substantial capital, more like traditional bank with digital distribution than pure neobank.

The Failures

Xinja returned its banking license in 2020 after failing to raise necessary capital. The bank had attracted over 50,000 customers and raised substantial venture funding but couldn’t achieve scale necessary for sustainability. Customers received deposits back, but Xinja’s failure demonstrated challenges facing undercapitalized neobanks.

Volt Bank returned its banking license in 2022, similarly unable to raise capital needed to continue operations. Volt had raised over AUD 80 million but struggled with rising customer acquisition costs and capital requirements. The bank’s failure highlighted that even with substantial venture funding, neobanks face difficult unit economics.

Several other neobank and fintech ventures that stopped short of full banking operations also failed or pivoted. The pattern across failures is similar: high customer acquisition costs, difficulty achieving sustainable unit economics, and capital intensity that venture funding alone couldn’t support.

Why It’s Been Difficult

Banking is highly regulated, and prudential requirements create substantial barriers to entry. APRA’s requirements for new banking licenses include minimum capital, governance standards, risk management capabilities, and operational requirements that are expensive to establish. Neobanks need tens of millions of dollars just to achieve regulatory compliance before acquiring first customer.

Customer acquisition in retail banking is expensive. Australians are relatively satisfied with existing banks, and switching banks involves friction. Neobanks need to provide sufficiently compelling value proposition to overcome inertia and justify switching cost. Many attempted to compete on fees, but most Australians don’t pay substantial banking fees if they maintain minimum balances and avoid penalty charges.

Revenue models in retail banking are challenging. Net interest margin is banks’ primary revenue source, requiring lending activity. Neobanks starting with deposit accounts and transaction services need to develop lending capabilities to become profitable. But lending requires capital, credit assessment capability, and risk management that take time and money to build.

Incumbent banks responded to neobank competition by improving digital offerings. Commonwealth Bank, NAB, Westpac, and ANZ all invested substantially in mobile apps and digital services, narrowing experience gap that neobanks initially exploited. Once incumbent banks provided reasonably good mobile experiences, neobanks’ differentiation diminished.

What Neobanks Got Right

Despite challenges, neobanks demonstrated that better user experiences are possible in banking. Features including real-time notifications, instant payments, spending analytics, and automated savings resonated with users and pushed incumbent banks to improve offerings. The competition effect, even from relatively small neobanks, benefited consumers.

Digital onboarding processes that allow account opening in minutes rather than days represented improvement over traditional banking. Neobanks proved this was possible within regulatory requirements, and incumbent banks subsequently improved onboarding. Again, competitive pressure drove improvement.

Specialized products targeting underserved segments showed some success. Judo’s focus on SME lending identified market segment where incumbents’ service and products had genuine gaps. Volt’s interest rate products attracted savers seeking better returns than major banks offered. Focusing on specific segments rather than attempting to be full-service banks for everyone proved more viable.

The Economics That Don’t Work

Pure digital banking with no physical branches reduces some costs but doesn’t eliminate capital requirements or credit risk. Neobanks still need capital to support lending, still face credit losses, and still have significant technology and operational costs. The cost advantage over incumbents is smaller than neobank rhetoric suggested.

Customer acquisition costs through digital marketing are high and rising. Without branch networks for incidental customer acquisition, neobanks must pay for every customer through marketing, referrals, or partnerships. At scale, incumbents’ customer acquisition through branches, existing customer cross-selling, and brand recognition is more capital-efficient than digital-only acquisition.

Lending remains necessary for profitability, but lending requires capital and risk management capabilities. Neobanks face chicken-and-egg problem: they need capital to lend, but they need lending revenue to justify capital raising. Some neobanks attempted to partner with existing lenders to offer credit products without directly taking credit risk, but this limited profitability and created dependencies.

The Regulatory Perspective

APRA’s approach to neobank licensing has been cautious, requiring demonstrated capability and adequate capital before granting licenses. This conservatism is defensible given banking failures’ potential impact on depositors and financial system. But it creates high barriers to entry that limit competition.

Whether Australia’s regulatory framework appropriately balances stability and competition is debatable. More permissive licensing might enable more neobank competition but also risk more failures. Current settings allow neobanks that are adequately capitalized and capable, but exclude undercapitalized ventures that might have succeeded with more time to develop.

Open banking requirements that took effect in recent years provide infrastructure for competition by enabling data sharing with customer consent. This allows neobanks and fintechs to access customer data from incumbent banks, theoretically reducing switching friction. Implementation has been gradual, and impact on competition remains limited but could grow over time.

What International Comparison Shows

International neobank experience varies. Some markets including UK and Germany have seen substantial neobank growth, with companies like Revolut, N26, and Monzo achieving scale. However, most international neobanks remain unprofitable despite millions of customers, raising questions about whether business model works even at substantial scale.

US neobank experience has been mixed, with some growth but also questions about business model sustainability. Chime, the largest US neobank, operates as banking-as-a-service rather than holding banking license, partnering with licensed banks for regulatory compliance. This model has been successful in US but faces different regulatory treatment in Australia.

Australian market characteristics including high banking sector concentration, strong incumbent digital capabilities, and relatively satisfied customers create particularly difficult environment for neobank competition. Markets with worse incumbent digital services or more fragmented banking sectors provide better opportunities for neobanks.

The Future Path

Successful Australian banking competition from technology companies likely involves specialization rather than attempting to replicate full-service banks. Focusing on specific customer segments, particular products, or distinct value propositions creates viable niches without requiring scale and breadth of major banks.

Partnerships between technology companies and licensed banks, as demonstrated by Up’s model, provide path that acknowledges regulatory reality while enabling innovation. Technology companies provide user experience and product innovation, while banking partners provide license, capital, and regulatory capability. This seems more realistic than pure-play independent neobanks.

Banking-as-a-service models where technology platforms enable others to offer banking services represent alternative path. Rather than competing directly with banks for customers, BaaS platforms provide infrastructure that others use. This model is growing internationally and could develop further in Australia.

The Honest Assessment

Has neobank sector succeeded in Australia? By metrics of market share and profitability, mostly no. Neobanks remain small relative to incumbent banks, and most aren’t profitable. Several significant neobank ventures failed, demonstrating that competing with incumbent banks is harder than enthusiasts predicted.

But by metric of improving competition and pushing incumbent banks to improve digital services, neobanks had meaningful impact. Major banks’ mobile apps and digital services are substantially better than they were five years ago, partly due to neobank competition. Customers benefit from this improvement regardless of whether they use neobanks.

The venture capital returns from Australian neobank investment have been disappointing. Several neobanks failed, returning nothing. Some exits occurred but at valuations that probably didn’t provide strong returns given capital invested. Judo’s IPO provided successful exit, but Judo operated more like traditional bank than typical neobank. This will likely reduce venture appetite for future neobank investment.

Three years into Australian neobank experiment, the verdict is that building successful new banks is difficult. Technology alone doesn’t overcome regulatory requirements, capital intensity, and incumbent advantages. Niche strategies, partnerships, and focused propositions show more promise than attempting to recreate full-service banks from scratch. The neobank revolution didn’t happen as predicted, but it did spur improvements in Australian banking that benefit consumers. That’s meaningful even if it’s less dramatic than the disruption that was promised.