Neobanks Shaping Post-COVID Relationship Banking

Competition in Australian business banking was a hot topic before the COVID-19 pandemic brought the economy’s remarkable three decade recessionless run to an abrupt halt. The Big Four’s extraordinary double digit return on equity (ROE) outcomes achieved since the four pillars regulation was introduced in 1990 has not gone unnoticed by bold Neobanks entering the market at increasing frequency.

Tyro, Judo Bank and now Avenue are all targeting the 85 percent Big Four share of transaction banking and credit as nominated by business owners, CFOs and corporate treasurers directly interviewed by East & Partners.

It is not just peripheral products in the sights of nimble new entrants emboldened by the new Open Banking regime either. The incumbent major’s bread and butter strongholds are also under threat as evolving customer expectations see transaction banking, cash management and payments fall into the cross hairs.

Too Much Competition is Never Enough

In response to the Hayne Royal Commission identifying a lack of legitimate competition in banking broadly, the government was urged to elevate one of the country's main regulators to become a ‘champion’ of competition in financial services. What followed was the first new authorised deposit taking licences issued in decades (ADI) with more to follow.

"We see some very bad commercial decisions since we've had the four pillars policy. We need one of the regulators to be a competition champion, to take the primary responsibility for putting the case for competition ” - Productivity Commission Chairman, Peter Harris

The majority of the challenger bank sector is targeted at retail banking with the remainder focused on the small to medium sized enterprises segment (SME). Small business owners have been crying out for more attention for many years and although barriers to entry are high, the opportunity is there.

East & Partners primary research reveals sharply declining customer satisfaction, particularly around perceptions of value for money, and a low preparedness to advocate their bank positively to friends and colleagues. In fact, most small businesses are highly antagonistic and searching for alternatives. Customer switching intentions have reached recorded highs for SMEs and corporates alike.

The latest Neobank offering, Avenue, is seeking a full banking licence by Q4 2021. Headed up by former CBA executive George Confos as CEO with founders Dale Hurley and Colin Porter of CreditorWatch fame, the group has raised A$11.4 million in funding buoyed by the success of Judo’s A$1 billion valuation following a series of successful raisings. Since inception in 2016, Judo now has 55 bankers servicing 650 customers, amassed A$1.5 billion of deposits and written A$1.6 billion in loans.

The sector is also marked by the increasing presence of non-bank finance providers led by Scottish Pacific along with Prospa, Lumi, recently Enova acquired On Deck and peer-to-peer lenders such as SocietyOne.

So what is the most critical pain point identified in global Onboarding and RFP research leading to churn away from incumbent banks? Practical real world solutions with defined day-to-day operational benefits that save time…shouldn’t digitisation have solved this already?

Overdue Digitisation

All banks face the daunting task of overcoming remote customer dealings for complex relationship banking engagements never before conducted online. Improved digital capability has been at the forefront of investment and strategic planning since smart phones revolutionised mobile banking in 2007.

In theory COVID-19 enforced remote dealings should strongly position leading tech savvy offerings to take advantage. In reality, execution does not always meet reality and it is here where Neobanks are poised to pounce.

The main reason corporates are unwilling or unable to adopt new standards and processes are largely misunderstood. Trade Finance arguably presents as the area of banking most resistant to change, continuing to rely on archaic paper heavy processes.

East & Partners data shows seven out of ten trade finance customers report system integration difficulties as the main reason preventing them from shifting operations to ‘paperless’ document matching and digital accreditation capability.

One in three customers cite complex supplier relationships as a key barrier to eTrade adoption, seemingly failing to align unique supply chain characteristics with an appropriate eTrade solution. One in three enterprises suffer from a lack of advice from their trade bank along with a further one in four that feel the cost of system transition is too inhibitive (26 percent).


What is holding back your business from 'paperless' trade finance process automation?
% of Total

Source: East & Partners Australian Trade Finance Program (N = 1,881)

Note: sum to over N count due to multiple responding allowed


Global Best Practice

The example set by the United Kingdom (UK) provides a clear path forward, with a vibrant Neobank sector rapidly emerging alongside the state backed British Business Bank. Digital lenders such as Starling, Funding Circle and OakNorth are building their presence against high street lenders such as Barclays and Lloyds, even qualifying for the Coronavirus Business Interruption Loan Scheme (CBILS).

“The challenger banks have got a real opportunity here. We try and build in a way to get help to customers as quickly as possible. We’ve been set up that way; we’re a technology-led bank”
- Starling Bank Chief Banking Officer, Helen Bierton

Australia’s ‘opening up’ of the banking sector is running five to ten years behind Britain yet interestingly predates other major banking centres such as Singapore. Anecdotal evidence suggests major Singapore corporates are surprisingly holding out on acquiring new products and services as they wait for new digital banking licences to be assigned before they make their next move.

The MAS announced in 2019 that it would issue two digital/retail full bank and three digital wholesale/small business bank licenses. The move is set to allow technology and non-bank providers to challenge traditional incumbent majors including DBS and UOB.

The banks are not shirking the challenge however, evidenced by DBS Digital Treasurer research which confirms increasing uptake of application programming interfaces (APIs) catered to by DBS supporting Skyee, a cross border payment service provider that serves merchants in China and Hong Kong to collect sales proceeds from platforms such as Amazon, and Chinese companies to make payments to overseas vendors.

Evolving with Customer Expectations

As corporates grapple with the once in a generation coronavirus pandemic crisis, key issues banks and challengers must address are what remote relationship management needs from corporates will look like in 2021 and beyond.

Will COVID-19 curb rising customer churn as evidenced during the global financial crisis (GFC)?

More importantly, how will incumbents convert on this artificial relationship “stickiness” into enhanced wallet share?

Has the pandemic caused customer demand to build up and if so, when do treasurers anticipate the dam will burst?

Attracting and retaining new customers was exceedingly difficult preceding the crisis, the proficiency with which banks adapt to the ‘new normal’ will determine whether challenger banks will succeed in winning valuable share away.

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