With Australia's major banks stumbling in the wake of the Royal...

With Australia's major banks stumbling in the wake of the Royal Commission inquiry, there have been many reports of consumers starting to look elsewhere as their trust in the biggest lenders dwindles.These stumbles from the big players have opened the door for a wave of new banking startups, many of which believe that they are able to combine technology and transparency to deliver an approach that better suits changing user habits.Xinja is now set to join the big leagues after receiving confirmation of its license from the Australian Prudential Regulation Authority (APRA), although it will start off with a restricted authorized deposit-taking institution (RADI) license.This means that the neobank can officially take deposits. Overall, 22,000 customers are already on the books, and they will now be able to use card facilities offered by the bank.Eric Wilson, Xinja's Co-Founder and CEO, said that the bank's success has so far come from "not only local and overseas professional investors but our staff and thousands of cardholders who have invested as part of our equity crowdfunding." He added that Xinja’s aim is to "revolutionize banking."Chairperson Lindley Edwards added that the banking market has generally been "stagnant for too long when it comes to looking after the interests of ordinary Australians." She said that the neobank’s executives have "built Xinja from the ground up," which gave them the opportunity to learn what customers are seeking. Edwards added that she and her cohorts "listened to people who want to bank with us and used their feedback to help us build a better bank."Xinja and other up-and-coming banks, such as Revolut, have made their name by offering interesting new ways of managing finances and spending money abroad.These banks have made it easier to track how much it costs to spend in foreign currencies. Xinja can show its users how much an item costs in either Australian dollars or the currency of whichever country the purchase is from so that customers know the exact price and the exchange rate to expect.Other features that Xinja offers include allowing its customers to track daily spending more easily, split costs with friends and family through the bank's app and top up their accounts through any debit card or other major bank account.These developments are important for consumers, who are becoming savvier and more aware of what is available on the market. There is also a growing belief that the increasing potential of technology should benefit users and that banks should be using it to offer a better service. Xinja and similar neobanks have seen traction through such endeavors.Edwards pointed out that there have been plenty of other tech disruptors in the scene and believes that it is only a matter of time before they become serious challengers to the big banking throne. Just last month, Xinja confirmed that it had launched its core banking infrastructure in record time in partnership with SAP.Xinja's efforts to fund its expansion have increased this year by A$17million in Series A and B funding as well as A$2.7million in equity crowdfunding.

On Tuesday (18 December), the prudential regulator announced that Xinja Bank Limited has been officially authorised as a restricted deposit-taking institution (RADI). 

Xinja is only the second Australian neobank to receive this status. Volt Bank was granted a RADI in May, literally days after APRA finalised the framework, which was created in response to the government’s push for greater innovation and new entrants to the banking industry. 

However, as its name suggests, a restricted ADI licence has significant limitations. A RADI is really a stepping stone on the journey to acquiring a full banking licence. It allows neobanks like Xinja and Volt to conduct limited banking capabilities for a maximum period of two years while they develop their capabilities and resources. It also gives them time to raise the significant levels of capital required to meet APRA’s demands for a full banking licence. 

RADI’s must hold a minimum $3 million in capital, or 20 per cent of adjusted assets, and can only hold $2 million worth of customer deposits. When you consider that Australia’s largest bank, CBA, holds more than $150 billion in customer deposits, you get an idea of the competitive dynamics at play here. 

However, the royal commission has severely damaged the reputations of the incumbent banks like CBA and customers are arguably more open to alternative offerings. Neobanks like Volt and Xinja could be poised to capture a decent share of the banking sector – provided they have their ducks in a row. 

Volt, led by former NAB and Barclays executive Steve Weston, is arguably the frontrunner in the race to obtain the much-coveted full banking licence. The speed at which Volt was able to secure a RADI is worth noting. Investor Daily understands that the group has been working tirelessly to secure a banking licence as soon as possible. 

The word on the street is that Volt could be given full ADI status by the end of the year after it brought in KPMG’s corporate finance team to facilitate a capital raise of around $40 million. 

Anyone looking to make a bet on whether or not a brand-new challenger bank can succeed in a market as oligopolistic at Australia’s needs to consider two things: how willing customers are to try them out and if they have succeeded in other markets. 

The customer demand is clearly there. The royal commission has provided the perfect platform for neo-banks tell their story, which is the antithesis of what we heard from the banks during the Hayne inquiry.

A quick look at Volt’s website shows the bank is tapping directly into the complaints of Australian banking customers and addressing them head-on. 

“We’ll always give you honest recommendations to protect your money and your data,” the company promises. 

“We’ll remove speed bumps and will use the best available tech to make things easy and simple.

“We’ll suggest ways to save you time and money, both when you borrow and when you spend.”

Where incumbents have been slammed for predatory lending tactics and high credit card fees, neobanks are looking at ways to harness technology to provide a disciplined approach to lending, saving, spending and investing money. Responsibility is high on their agenda. I’ve heard that one potential Volt Bank feature will allow customers to set parameters that lock them out of their account for a 24-hour period if they know they’ll be in a situation where spending could get out of control, like a pub or casino. 

Challenger banks have made significant inroads in the UK, which is always a good market to follow for clues about what will happen in Australia. Our British cousins were a few years ahead of us on mortgage reform, macro prudential measures and the rise of the neobank. 

Groups like Aldermore, Atom Bank, Metro Bank and Monzo have cropped up since the GFC. Metro Bank launched in 2010, when the shocks of the financial crisis were still being felt by many, and became the first new ‘high street’ bank to launch in Great Britain in over 100 years. 

From a standing start less than a decade ago, the bank has grown customer deposits to over £11.7 billion ($20.6 billion) and recorded £16.4 billion ($28.8 billion) in asset in FY17. 

While Metro Bank competes directly with the UK’s high street incumbents like HSBC and Santander, Australia’s neo-banks will offer a completely digital service. 

With more and more Australians using their smartphone for everyday banking, a simplified customer-friendly approach to financial services could be the winning ticket for groups like Volt and Xinja. Particularly as the majors face the challenging task of transforming from large, slow-moving machines to nimble, more efficient operators. 

 

The rise of the neobank

James Mitchell

Last Updated: 18 December 2018 Published: 18 December 2018

On Tuesday (18 December), the prudential regulator announced that Xinja Bank Limited has been officially authorised as a restricted deposit-taking institution (RADI). Xinja is only the second Australian neobank to receive this status. Volt Bank was granted a RADI in May, literally days after APRA finalised the framework, which was created in response to the government’s push for greater innovation and new entrants to the banking industry. However, as its name suggests, a restricted ADI licence has significant limitations. A RADI is really a stepping stone on the journey to acquiring a full banking licence. It allows neobanks like Xinja and Volt to conduct limited banking capabilities for a maximum period of two years while they develop their capabilities and resources. It also gives them time to raise the significant levels of capital required to meet APRA’s demands for a full banking licence. RADI’s must hold a minimum $3 million in capital, or 20 per cent of adjusted assets, and can only hold $2 million worth of customer deposits. When you consider that Australia’s largest bank, CBA, holds more than $150 billion in customer deposits, you get an idea of the competitive dynamics at play here. However, the royal commission has severely damaged the reputations of the incumbent banks like CBA and customers are arguably more open to alternative offerings. Neobanks like Volt and Xinja could be poised to capture a decent share of the banking sector – provided they have their ducks in a row. Volt, led by former NAB and Barclays executive Steve Weston, is arguably the frontrunner in the race to obtain the much-coveted full banking licence. The speed at which Volt was able to secure a RADI is worth noting. Investor Daily understands that the group has been working tirelessly to secure a banking licence as soon as possible. The word on the street is that Volt could be given full ADI status by the end of the year after it brought in KPMG’s corporate finance team to facilitate a capital raise of around $40 million. Anyone looking to make a bet on whether or not a brand-new challenger bank can succeed in a market as oligopolistic at Australia’s needs to consider two things: how willing customers are to try them out and if they have succeeded in other markets. The customer demand is clearly there. The royal commission has provided the perfect platform for neo-banks tell their story, which is the antithesis of what we heard from the banks during the Hayne inquiry.A quick look at Volt’s website shows the bank is tapping directly into the complaints of Australian banking customers and addressing them head-on. “We’ll always give you honest recommendations to protect your money and your data,” the company promises. “We’ll remove speed bumps and will use the best available tech to make things easy and simple.“We’ll suggest ways to save you time and money, both when you borrow and when you spend.”Where incumbents have been slammed for predatory lending tactics and high credit card fees, neobanks are looking at ways to harness technology to provide a disciplined approach to lending, saving, spending and investing money. Responsibility is high on their agenda. I’ve heard that one potential Volt Bank feature will allow customers to set parameters that lock them out of their account for a 24-hour period if they know they’ll be in a situation where spending could get out of control, like a pub or casino. Challenger banks have made significant inroads in the UK, which is always a good market to follow for clues about what will happen in Australia. Our British cousins were a few years ahead of us on mortgage reform, macro prudential measures and the rise of the neobank. Groups like Aldermore, Atom Bank, Metro Bank and Monzo have cropped up since the GFC. Metro Bank launched in 2010, when the shocks of the financial crisis were still being felt by many, and became the first new ‘high street’ bank to launch in Great Britain in over 100 years. From a standing start less than a decade ago, the bank has grown customer deposits to over £11.7 billion ($20.6 billion) and recorded £16.4 billion ($28.8 billion) in asset in FY17. While Metro Bank competes directly with the UK’s high street incumbents like HSBC and Santander, Australia’s neo-banks will offer a completely digital service. With more and more Australians using their smartphone for everyday banking, a simplified customer-friendly approach to financial services could be the winning ticket for groups like Volt and Xinja. Particularly as the majors face the challenging task of transforming from large, slow-moving machines to nimble, more efficient operators. The rise of the neobank James Mitchell Last Updated: 18 December 2018 Published: 18 December 2018 related articles