Neo-banks, startups with an all-digital, mobile offering, are finally attacking the Australian market.
This has been a cozy, old-boys-network kind of place, with four banks hogging over 80% of retail banking market share. The environment is changing, however, and entrepreneurs have spotted a chance for neo-banks to make a go of it.
Aussie banks seemed to be riding high a decade ago, having avoided the global financial crisis. But what appeared to be prudent banking is now starting to look less benign.
A series of scandals, from price fixing to money laundering to blatant rip-offs, have led to a series of proactive government moves. In 2017 the treasury mandated open banking, which will arrive in July 2019, forcing banks to share customer data upon request. Just this February saw the launch of the New Payments Platform, enabling anyone to transmit money in real time via mobile wallets or emails, 24/7.
These changes created the opportunity for neo-banks, at a time when banks face out-of-control consumer debt and a runaway property market on the tip of deflation.
But the corker has been the government (reluctantly) convening a “royal commission” to investigate misconduct in financial services. This has brought ugly behavior into the public eye, providing a drumbeat of misdeeds throughout the year. It’s forced ANZ, CBA and NAB, three of the Big Four consumer banks, to announce they’ll sell their lucrative but tainted wealth-management businesses; the commission is wrapping up a look at lending practices to small businesses. What better time for fintech to mount an assault?
Indies versus instos
Neo-banks come in two types: those backed by independent capital, and those supported by smaller financial institutions.
The independents include volt Bank and Xinja, founded by executives from the traditional bank world.
Volt is furthest along, having obtained a restricted bank license that is basically permission to operate in a sandbox, with limits on customer assets; it hopes to open doors by the end of this year. Volt is in the process of applying for a full license, with the aim of providing a full retail offering: transaction and savings accounts, term loans, credit cards.
“Then we’ll get into small-business lending,” said Steve Weston, co-founder and CEO. “That’s a huge opportunity.”
They are joined by the institution-backed startups, namely 86400, owned by payments company Cuscal, and Bendigo Bank, a community bank that is transforming itself into a 100% mobile bank, starting with property transactions. 86400 is gunning for a full banking license, while Bendigo can use its existing one.
A Big Four bank’s head of payments reckons the instos have a better chance at success than the indies. But both types of challengers speak the same language.
“We plan to win customers from the Big Four,” said Robert Bell, CEO at 86400. “That’s where the customer experience—the digital experience—has been poor, or limited. The banks have been slow to adopt or change their offering, and no one’s taking advantage of all digital capabilities.”
Cuscal has been around since 1978 and provides the payment rails for Australia’s second-tier banks and credit unions, many of which Cuscal enabled to go live on the New Payments Platform on the day it launched (two of the Big Four have yet to connect). 86400 intends to leverage that infrastructure when it launches early next year.
These fintechs are influenced by the U.K. and its experience with neo-banking. Anthony Thompson, founder of Metro Bank and Atom Bank, is relocating to Sydney to serve as 86400’s chairman. Jason Bates, a co-founder of two U.K. neos, Monzo and Starling, is on Xinja’s board. Volt analyzed British neos’ experience to model its own offering.
This U.K. tie is partly because of similarities between the two markets and how they are structured; there’s also a natural cultural link. It’s also a means of learning what not to do: Atom and Monzo, for example, have been hamstrung by narrow product offerings, and the likes of volt and 86400 want to offer a full suite on Day One.
We plan to win customers from the Big Four
But Australia is not the U.K. Its banks are not loved, but nor are they loathed. New infrastructure also serves incumbents: the banks were forced by government to build the New Payments Platform, but it’s going to allow people to transfer money to any mobile number in real time. One reason why neo-banks took off in Britain was because they could offer seamless money transfers, but now Australia's challenger banks won't be able to claim a unique capability in that regard.
“How does a neo-bank compete in payments against that?” wonders Victor German, head of Australian financials research at Macquarie.
Indeed, Australia’s Big Four aren’t sitting still. They are already on the counterattack.
The incumbents strike back
Incumbents retain many advantages, not least their own technological capabilities. For example, CBA now reports 30% of its consumer business is done digitally. And banks are upping their game.
“Three years ago, digital was about transaction banking, just moving money,” said Pete Steel, executive general manager for digital at CBA. “Now it’s moving to a conversational model, helping other channels pivot around digital,” such as branches, call centers and relationship managers. “It’s about supporting customer self-service using data and personalized experiences.”
CBA is regarded throughout the industry as the most tech-savvy of the Big Four, but all of the banks are addressing digital now, and are increasingly confident in their ability to retain customer loyalty—and identify which customers they want to do business with.
We can do customer experience too
“The battleground is data, digital engagement, and payments, underpinned by risk management,” said Nigel Dobson, banking services business domain lead at ANZ.
Bank executives acknowledge the misconduct unearthed by the royal commission has been embarrassing, but the climate is also creating new opportunities for incumbents.
Open banking, for example, means that banks will now be able to request information about customers applying for credit cards or loans – and thereby reduce their exposure to people likely to default once they run out of new sources of loans.
“Banks are becoming more careful about who they lend to,” Dobson said. “Open banking means we can be better informed, and ask clients to share their full financials.” Neo-banks have yet to prove they can do a better job of spotting bad credits or lending to them at sensible rates.
The battleground is data, digital engagement, and payments
Banks are also learning to collaborate and experiment. CBA, NAB and Westpac jointly launched BeemIt in May, a cloud-based, peer-to-peer payments wallet, modeled after U.S. fintechs such as Venmo and Zello.
CBA’s Steel says the banks are aren’t charging for the service: first they want to see how consumers use it—whether it becomes a social payments platform for millennials—and continue to adapt it. “We can do customer experience, too,” Steel told DigFin.
Challengers realize their C.X. must exceed expectations: “It has to be a Wow,” said volt’s Weston. If easy onboarding, interesting partnerships and cheap cloud-based computing are put to the genuine interest of the consumer, neos could make a run of it.
Banks can reinvent themselves, to an extent. But despite having talked about investing in robotics and digitization for years, there’s been no appreciable reduction in their headcount or cost base.
Their legacy systems are too deeply interconnected to everything banks do, and to date, only CBA has actually managed to replace its core banking system with a modern one. Banks are, however, moving their middleware onto the cloud, to enable them to launch new products more quickly.
What banks do have is funding. For fintechs to make inroads, they need more than just tech and attitude. They need to offer higher deposit rates and lower borrowing rates, which has to be financed. One tool in the fintech box is dynamic pricing, which big banks struggle with. But it won’t be enough: neos must also quickly build brands, without blowing their capital on marketing spend. Neos hope their offer will go viral via social media and word of mouth, but is that going to be the case for all of them?
“Fintechs can build a new stack and do online mortgages, but the problem isn’t what they charge the customer: it’s their cost of funding,” an incumbent said. Incumbents may not have great mobile U.X., but “Unless fintechs reinvent the product set, it’s not clear how they win.”
How does a neo-bank compete in payments?
So what is winning?
Volt’s aim is to win 1% of market share over 10 years. That doesn’t sound like much, but 1% in wealthy Australia is a multi-billion dollar business. Now imagine if two or three other neos also achieve similar targets. That suggests neo-banks could win 3-4% of the market by 2028. And if these are today’s 20-30 year olds, and tomorrow’s fortysomethings, it’s hard to imagine the incumbents winning back that cohort, nor the Gen-Z kids on its heels.
Weston is confident that enough people will make the switch, including mobile-savvy older people. Once people see instant comparisons of deposit and lending rates, with the ease of open banking and new payment rails, inertia will lose its sway, and incumbents will see deposits leaving their coffers. “One swipe,” he said, “it’s gone.”