Is Australia Undergoing A Banking Sector Transformation Through A New Breed Of Banks?

  • Oct 02, 2018 AEST
  • Team Kalkine
Is Australia Undergoing A Banking Sector Transformation Through A New Breed Of Banks?

More "neobank" or "challenger banks" are coming up: The Australian Prudential Regulation Authority (APRA), an independent statutory authority that is into the supervision of the institutions across banking, insurance and superannuation is expected to give approval to three new banks by Christmas this year. Under policy leadership of new Prime Minister Scott Morrison, the three start-ups of less than a year old, namely, Volt Bank, 86400 and Judo Capital, showing how fast the regulatory environment is changing, have been said to be taking charge. Only one banking licence was provided to a niche player, known as Tyro in a decade and this entity is a payment disrupter penetrating into the business banking space. Primarily, new entrants were allowed to enter the financial sector market and this happened before Morrison’s 2017 budget through better application procedures being set. The start-up banks, Volt and 86400 were initially focused on retail banking, and now, they intend to have home and personal loan offerings while Judo is exploring the business lending space.

On the other hand, restricted banking licence led to some limits to the aggregate amount of deposits (i.e., around $ 2 million) for Volt; and thus the group aims to receive full licence by this year end. 86400 ("86-400" that indicates number of seconds in a day), which is owned by payments processing group, Cuscal, is also targeting for an unrestricted licence from APRA by the end of year. By getting their own licence, it will be allowed to introduce new shareholders and operate separately. The go-live launch date set for 86 400 is Q1 2019 after getting APRA approval and the new bank will be available on iOS and Android app from launch. On the other hand, Judo that lately grabbed attention through nation’s second-largest fund-raising round announced in Australian start-up history this month, aims for a full licence in December. The group eyes a new model for SME business banking; and as per Judo, small to mid-sized businesses, or SMEs are sizeable market, but it's fallen off the radar of the big banks, that are focusing on household mortgage lending at the moment. Further, Judo is placing emphasis on human capital, which is a specialised approach.

Generally, about 80 per cent of the time of bankers is linked with managing complexity along with bureaucracy of the organisations, while 20 per cent of the time goes in actual dealings. To cater to this, another model of budding neobanks makes things easier through online mode. One example cited is Xinja, that is already in the market with a pre-paid card. The group is also trying to grab an APRA licence; and is designed to work entirely from a mobile phone. In this, it is very different than other banks as you design an entire bank branch to work from the mobile app and nothing else. Since there will be no physical branches, low cost will be involved. However, the timing remains uncertain. As of now, the neobanks seem truly motivated to create a whole new experience of financial services that puts the customer at the centre of everything. 

The banking royal commission and ongoing regulatory scrutiny: The big four banks of Australia have almost 85 per cent of the home loan market share and receive more than $30 billion in profit every year. They have started taking the upstarts or neo banks seriously. Further, these banks are already facing scrutiny due to the royal commission. According to a new government report, Australia’s four biggest banks have used their dominant position to exploit customers, deliver inferior products, charge large fees and block competition. Now they are facing the hurdles of their own, like persuading people to make the switch. All the four banks are facing a series of scandals related to "misleading financial advice, insurance fraud, and interest-rate rigging," that has led the government to respond to public dissatisfaction with the banking industry, and ultimately open an inquiry on competition in the sector.

Neo Banks or Challenger Banks are innovative: Neo banks are digital banks which are set to take on Australia’s big four, by investing heavily in proprietary technology and shunning bank branches. Lots of new entrants will provide payment services, access to the payments system with new technology, electronic wallets and a whole range of other types of facilities, including things like debit card arrangements. Therefore, they have low operating costs, the new banks will be able to have lower fees, and be able to offer lower interest rates.

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