Australian challenger bank 86 400 has appointed Morgan Stanley advisor to help it raise funding, with a goal of gaining A$250 million of investments over the coming three years, says Anthony Thomson, chairman.
The company, which is still awaiting its full banking license from local authorities, needs capital to kickstart operations as well as to meet regulatory obligations from its current shareholder to sell down its stake.
Robert Bell, CEO at 86 400 in Sydney, says the organization is up and running with transaction (checking) and savings accounts, with mortgages likely to begin within months of receiving a license.
He says the bank had hoped to get the green light from the Reserve Bank of Australia earlier this year, but now is crossing its fingers for June.
Unlike British and European digital banks, which began limited to debit cards and savings accounts, 86 400 will be ready with current accounts too, along with real-time payments via Apple Pay, Google Pay and Samsung Pay. “Put money in your account, and away you go,” said Bell.
The challenger is wholly owned by Cascul, a domestic payments company whose rails are used by most local credit unions, local banks and other financial institutions outside of the country’s Big Four lenders. By law, however, once 86 400 transitions into a fully licensed bank, Cascul won’t be able to hold more than 20%.
So it will need to sell down. Morgan Stanley’s job is to find A$250 million worth of investment to take its place – and more.
We're not inventing new forms of funding; we're starting off as more efficient
Anthony Thomson, 86 400
That figure is just an estimate, as it will depend on how quickly 86 400 grows its balance sheet.
Thompson says new money will go to three things. First will be meeting the bank’s regulatory capital requirements, in order to allow it to run a mortgage book.
Banks fund their operations one of two ways: via deposits, or via wholesale or interbank-lending markets. Australia’s big-four lenders tend to rely mostly on their deposit base, whereas more European banks fund operations through the wholesale channel.
Thomson, who founded Atom Bank in the U.K., says he doesn’t have an idea of what ratio of funding sources 84 600 will arrive at, but expects it will be more on the wholesale side versus the Big Four.
We want to be a real alternative to the Big Four
Rob Bell, 86 400
Other uses of capital will be, to a large extent, paying for expected losses, as the new bank will likely need two and a half years to break even; it will need funds to back higher interest rates on deposits and lower lending rates on mortgages in order to compete against bigger consumer banks. To a lesser extent, some funding will also go to iterating products.
Debt and equity
The team has already been setting up loan facilities that it can draw on to the tune of A$300 million, but it needs tier-1 equity capital backing to ensure the business’s credibility and stability.
“We’re not inventing new forms of funding,” Thomson said. “We’re starting off as more efficient, with a lower cost-to-income ratio.”
To make 86 400’s products more financially attractive to consumers will, he concedes, decrease the bank’s net interest margin (a measure of how effectively a firm invests its capital versus its expenses). But the idea is the challenger bank, operating on a cutting-edge tech stack with a small team and without the overhead of branches, will have such low costs that its margin will still be positive.
As the company will need six months of operating track record before investors open their wallets, Thompson says the plan is for Morgan Stanley to begin capital raising at the end of this year, assuming the license comes through by the end of June.
Raising capital will be key to 86 400 being able to provide a broad range of consumer products within its first year. “There’s no ambition here to create a small, niche bank,” Bell said. “We want to be a real alternative to the Big Four. But the reality is we have to start somewhere, which is transactions and savings accounts, with mortgages to come.”