Will Australia’s Neobanks Endure?
(06 April 2021 – Australia) With Xinja and 86 400 both out of the picture - albeit in very different ways - the Australian Prudential Regulatory Authority (APRA) is moving to raise the sector's barrier to entry. Australia's digital banking honeymoon is winding down as it becomes harder to acquire a banking license.
Under the revised regulations, Neobanks will have to be better capitalised and launch both an income-generating asset product and a deposit product in order to be approved for a full license.
APRA is rejigging Australia's rules around Neobanks to guide the disruptors down a more sustainable path. Without changes to the regulations, the temptation to focus on growth metrics rather than profitability would be high, especially in retail banking. Indeed, of Australia's Neobanks, one closest to reaching profitability thus far has focused on SME lending: Judo.
Indeed, Judo has a strong niche with its focus on SME lending. The Melbourne-based firm has nearly doubled its loan books during the pandemic and will reportedly soon reach A$3 billion in loans. Many of its customers were unable to secure the necessary credit to grow their businesses from Australia's incumbent banks. In its third SME Banking Insights report conducted by East & Partners, Judo found that the gap between what SMEs can borrow and what they want to borrow had risen to A$94 billion from A$89 billion a year earlier.
Judo will likely remain an outlier among Australia's Neobanks. The company has signalled it has no intention to team up with incumbents - the path taken by 86 400.
"The whole objective around Neobanks is creating competition. You don’t create competition by partnering with major banks” commented Judo co-founder Joseph Healy. Healy has a point. It is not exactly "disruptive" to join forces with one of Australia's largest lenders.
Another option is to pivot to banking as a service, which is Volt's strategy. The company had to nix a planned initial public offering (IPO) in 2020 after the COVID pandemic hit, and has twice been forced to raise funds at a lower price. It is now betting that corporate customers will want to use its banking license and infrastructure to offer banking services to their customers.
Volt in March announced it would partner with the British fintech Railsbank. The tie-up with Railsbank comes as the Australian Neobank is preparing to enter the home loans market. Volt reportedly has about A$87 million in deposits and plans to write roughly A$50 million in mortgages in the coming months.
Volt CEO Steve Weston stated "the lion’s share of our deposits are going to come via our partnerships, including those introduced by Rails"
Written by Kapronasia
Subscribe