Australia’s digital-only challenger ‘neobanks’ have laid out a key element of their strategy to barnstorm the market, offering savings interest rates that make the Big Four’s offerings meagre by comparison.

Digital-only neobank Volt – which was granted its full banking license a year ago – has been followed into the market by the likes of Xinja Bank Limited, 86 400, and Up Bank, creating a cohort of challengers fighting to win over newly-empowered customers from banks that, they argue, are no longer meeting consumer requirements.

The interest-rate announcements are one of the first concrete measures the new organisations have launched to lure customers across from more-conservative banking establishment, with offerings such as Xinja’s 2.25 per cent per annum (p.a.) interest rate on a Stash bank account product that the company says it is aiming to make “bloody brilliant”.

Xinja is pushing hard on the freedom of its “no strings” account, which it says has no introductory period and requires no minimum deposits or payments.

That rate puts Xinja in line with competitor 86 400, which cut its rates from 2.5 per cent p.a. last October; however, 1.85 per cent of this is bonus interest and customers must deposit at least $1000 per month to earn it, with a maximum balance of $100,000.

Volt, by contrast, offers 2.15 per cent p.a. on balances up to $245,000 – but offers “no hoops, hurdles, tricks or conditions designed to stop you getting that rate.”

Up Bank, for its part, offers 2.25 per cent – but 1.75 per cent of this is bonus interest, with the maximum allowable balance is $50,000 and customers required to make five or more card purchases per month.

Freedom to bank

The savings rates put the neobanks at the higher end of available savings rates, and are well ahead of those offered by the Big Four banks: Westpac, for instance, offers 1.65 per cent p.a., 1.20 per cent of which is bonus interest that require the balance to increase every month.

The high ongoing rates are a major structural change from the strategies of past Big Four challengers like Rabobank, AMP, HSBC and Citibank, which favour short-term investors by offering slightly higher introductory rates that revert to much lower rates after four months.

Neobanks’ newly announced interest rates kick off the run-up to the introduction of the ACCC-led Consumer Data Right (CDR) regulations, but there is less consensus about the potential fate of a new breed of ‘neobanks’ that have emerged to challenge the Big Four in the increasingly competitive environment.

Activation of CDR has been pushed back repeatedly but the regime is now set to come into effect on 1 July – at which point consumers will be able to instruct their banks to provide all the details needed to allow them to easily switch to one of the higher-interest neobank accounts.

Because they are free from expensive branch networks, ATMs and the like, neobanks can balance the financial risks of their aggressive pricing against their lower overheads – promising ongoing benefits for consumers that have seen savings returns plummet with each Reserve Bank of Australia interest rate cut.

A recent EY analysis of global fintech trends noted the importance of the reinvented value propositions that digital-only neobanks are enabling.

Yet despite their founders’ breathless enthusiasm for headline rates and the thumbs-up from financial analysts that believe the neobank market is “ripe” for success, some observers worry whether the neobank movement – which has an estimated 39 million customers globally – will stumble as incumbents fight back and the desire for profit growth potentially pushes neobanks to chase fiscally riskier customers.

Neobanks are losing $11 per user, one analysis notes, and low-profile neobanks have had to rely on expensive long-tail marketing campaigns to build awareness of the “flashy features” that make them stand out.

“There’s no universal path to profitability for neobanks,” the analysis concluded, noting that neobanks would rely on a combination of ‘freemium’ pricing, multi-tiered subscriptions, and successful targeting of niche customer demographics.

“The same features that have helped neobanks catch on have pushed profitability further out of reach.”