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Neobanks are sweeping across the financial services landscape

by Alexandra Cain | 30 Oct 2018
Neobanks are sweeping across the financial services landscape with three more set to open next year.

Volt was the first neobank to be granted a restricted authorised deposit-taking institution licence by the Australian Prudential Regulation Authority (APRA). 

Other neobanks including Xinja, 86 400 and Judo are expected to be licensed early next year.

Many in the industry call the newly created, restricted banking licences ‘P-plates’. The restricted licences require a minimum $5 million in assets, $3 million of which must be liquid to meet APRA’s full prudential framework. Directors must meet a fit and proper test and start full-scale banking within two years of being granted a licence.
Xinja CEO Eric Wilson is pleased by the approach taken by regulators including APRA, ASIC and AUSTRAC. “They are encouraging innovation and competition through new entrants into the banking industry,” he says.
He hopes the neobank experience will prove to be similar to other start-ups in fintech, allowing new entrants, “to start, learn, iterate and grow and secure additional funding in line with meeting regulatory milestones.” 
Michael Phillipou, CEO of Lodex, which scores people for loans based on their social media footprint, believes there is a market among the neobanks for younger, more digitally-savvy clientele.
All the same, he says competition with the majors will be tough. Restricted banking licences may not be enough to enable new entrants to compete.
“The neobanks simply don’t have the marketing budget, nor can they afford to comply with the stringent capital and licensing requirements of holding a [full] ADI licence – let alone acquire one,” Phillipou says.
In contrast, Wilson says the regulatory climate has so far been amenable. APRA and the Australian Securities and Investments Commission’s (ASIC’s) regulatory sandbox approach, which allows start-ups to test market ideas, is helping to ease neobank entrants into the regulatory environment.
“That’s what good regulation does. It should give start-ups the option to test and validate the product market fit with customers first, before seeking further investment into the licensing process,” Wilson says.
Neobanks, fully digital banks that can be accessed and worked entirely from a mobile app, are poised to hit the consumer banking frontlines.
Hailing from Europe, neobanks claim cheapness and nimbleness as their twin strengths. They also lack a branch network, allowing them to charge lower interest rates on loans and pay superior rates on deposits.
Neobanks push the line that consumers have only really experienced old types of banking in digitised form, not real digital banking. Banks may have digital channels, but neobanks are 100 per cent digital and based on mobile platforms which work entirely with new technology and without legacy systems.
They offer tools to help customers to track spending and identify the businesses with which they have relationships. They prepare reports and claim to offer almost instantly-approved loans based on credit records and long-term spending habits.
They are also keen to exploit the current malaise around Australian banking since the interim findings of the Financial Services Royal Commission were handed down.
But it’s not just new players in the market. Bendigo and Adelaide Bank claims to have the first, fully digital bank. Bendigo says its offering, Up, has recently finished a two-month beta trial using 1500 customers to test the banking app, processing more than $2.2 million.
Elsewhere in the technology-driven side of finial services, fintechs have seen their growth up 125 per cent in the past year, according to a new survey. 

Fintech start-up Xinja is building an independently-owned digital bank, partially backed by equity crowd-funding. It is planning to offer home loans since winning an Australian Credit Licence from ASIC. It has already launched a pre-paid card.
Xinja says that when fully up and running, its new technology will allow it to offer customers a completely approved mortgage, without the pre-approval rigmarole and paperwork normally associated with loans, in around 20 minutes.


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