Australia has a new bank on the scene that is trying to thread the needle between the big high-street banks and buy-now, pay-later fintechs to become a leading consumer lender.
Brisbane-based Alex Bank was granted a provisional license by the Australian Prudential Regulatory Authority on July 7 and is starting to build a balance sheet based on wholesale funding.
“The Big Four [consumer banks] have invested heavily in payments, regtech and mortgages, but not consumer finance or SME lending,” said Craig Fenwick, co-founder and CFO at Alex. “This is why BNPL has flourished. Australians like using credit. But are they getting access to credit at the right price?”
Funding consumer loans
Fenwick and his co-founder, Simon Beitz, who is Alex’s CEO, worked together running the innovation effort at Suncorp, a large wealth and insurance provider. They found it hard for a big institution to build solutions that meet customer desires. Inspired by examples such as Brazil’s NuBank and Goldman Sachs’s Marcus offering, they decided to create something from scratch.
The ambition is to run a full-service, digital bank for retail and SME customers, providing deposits and loans. To start off, they are focused on lending to consumers, and have used their banking connections to secure a wholesale funding facility – giving them access to commercial paper, mortgage-backed securities, and other securitized assets traded among financial institutions.
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It’s an expensive way to fund a lending operation, but they believe they can balance it out from deposits over the next few years. Most banks’ funding is around 70 percent deposits and 30 percent wholesale. “We’re targeting 80/20 over the medium term,” Fenwick said.
A big reason Fenwick and Beitz wanted to set up a bank rather than a fintech was to secure low-cost deposits. Over time, this should give them a pricing advantage against AfterPay and other BNPL rivals. Because BNPL has a higher cost of funding, the business model gravitates to lending to higher-risk customers – young people, for example – whereas Alex should cater to a broader, more middle class clientele.
They will however have to work to convince Australians to open an account for such lending. Incumbent high-street banks pitch retail customers to tag a consumer loan on top of a mortgage, which is convenient – but saddles the loan with the mortgage’s long payout, ultimately costing the borrower more. And they have to fight against the super-convenience of getting an installment loan from a fintech.
“We can execute,” Beitz said.
The bank is relying on its tech stack to do a lot of the heavy lifting, by making everything fast and affordable.
It is using Temenos’s Banking Cloud System for core banking and front-end solutions. “They saw value in our ability to scale,” said Phillip Finnegan, managing director at Temenos in Sydney. “Our software as a service supports all their operating requirements, including reporting and compliance.”
The new bank is also using Microsoft for analyzing real-time data, and Carbon Black for cybersecurity.
The heart of its offering is its proprietary credit scoring system, using artificial intelligence to validate a person’s identity and connect to a loan applicant’s various bank and other accounts. The system delivers a decision within about three minutes, and Alex can fund an account within a few hours. “That would take other banks about 10 days,” said Beitz.
One of the startup’s biggest up-front costs is buying access to data, but Beitz hopes this cost will gradually decline as open-banking norms take hold in Australia – although so far, this is nascent at best.
Some aspects of the bank are human, notably its call centers. The co-founders emphasized the need for people to speak to humans. They are using A.I. to make the experience faster and more friendly, but have no intention to automate the service side.
Ultimately it will take growth to reduce what are currently very high unit costs of doing business. Right now Alex’s balance sheet is about A$8 million. Fenwick reckons now that they have the provisional banking license, they can ramp this up to A$100 million to A$200 million over the next 12 months. That will improve the net interest margin, and begin to reduce the weighted average cost of funding.
“By the time you hit A$1 billion, you reach cash profitability and real return-on-equity,” Fenwick said.
Alex has also raised A$35 million in venture funding and expects to soon close a Series C round for another A$20 million in the coming weeks.