Yesterday, APRA (Australian Prudential Regulation Authority) granted the first local digital licence to Sydney based volt bank. Volt and rival startup Xinja are aiming to establish challenger banks in Australia following in the steps of the United Kingdom where challenger banks have been trying to disrupt the large incumbent banks for some time now.
By Stephen Findley, Relationship Manager, Compliance Quarter.
Scan the executive boards of these new banks and you’ll see bankers and executives with UK experience or UK advisory behind them. The concept of building a digital bank, as in the common UK version, involves bolting together a host of providers that plug into the digital eco-system created by the bank. This typically allows challenger banks to operate a “proof of concept” as they look for customers and prove the viability required to raise additional funding for a full banking licence or partnership with an existing licence holder to effectively “piggyback” their licence.
The successful foundation for such a bank is not only complex but probably more complex than you would initially think. Even the most basic of bank will require the provision of the following;
- Card Services (including support for cancelling, replacing, lost or stolen cards etc)
- KYC (Know Your Customer) – how does a digital bank verify it’s customers?
- Payments services – the UK already has a faster payment framework and Australia is following suit with the launch of the NPP (New Payments Platform) – https://www.nppa.com.au/
- Security – does the digital bank choose to build from the ground up or incorporate existing security providers?
And those are really the tip of the iceberg. The UK challenger banks have opted to try and carve off a segment of banking and concentrate on a high level of engagement, customer service and innovative digital features to prize customers from their larger counterparts.
Some banks have opted to go after the less profitable segments of retail banking, such as small business banking, and it will be interesting to see how this plays out in Australia. The biggest (no pun intended!) challenge for the challenger banks will be quickly establishing operations and defining their route to profitability. Cost of acquisition in the banking sector has always been high – traditional banks in Australia could expect to pay in excess of $600 per account so it will be interesting to see how digital banks can alter this model for their own benefit.
The challenger banks I worked with faced a race that many tech startups will be familiar with;
- Idea to proof of concept
- Seed or small fund raise stage
- Build out technology for larger audience
- Race to get customers before funding runs out, or;
- Raise additional funding to buy time and spend on marketing and customer acquisition
- Repeat until critical mass achieved or acquisition
And it goes without saying, the providers of the bolt in services I mentioned earlier will want their pound of flesh. KYC, card services, security, server space etc all cost money and it is no surprise that Australia’s digital banks look well accounted for in terms of funding for their operations.
So far, we have really only considered some of the basic operational and customer acquisition challenges that banks face. There has got to be some upside!
Challenger banks are very free from the constraints of legacy systems that the main banks know too well. They can design a bank that is truly customer focused and that delivers all the advantages that consumers should be getting in the digital age. For Australian consumers, this presents a unique opportunity to become early adopters and help challenger banks sculpt services that appeal.
Challenger banks can keep costs down in relation to their competitors by using software to automate tasks and manage a range of functions. Here at Compliance Quarter, we see advances in payments services through the NPPA mentioned earlier and financial institutions seem keen to explore and develop chatbots and NLP (natural language processing) services that could manage customer service and authenticate payments respectively.
Automation in technology will undoubtedly help to reduce the manpower required to fight money laundering and financial crime. The recent Royal Commission (check our coverage here) has highlighted the needs for compliance from financial institutions and we’re seeing this develop at a fast pace now.
So what does this mean for Australia? Well, hopefully, technology allows competition within the marketplace and that lends itself to better solutions, service and products for Australian consumers. It will also allow us to judge the reputation of the Australian banking sector – are there thousands of consumers out there ready to plunge into a digital bank just to stick a proverbial finger up at their existing bank?
If anyone is betting on that, it’s volt bank CEO Steve Weston “We acknowledge we are at the start of our journey, but the trust between many Australians and their banks has been broken and the path to repair starts with new market entrants who are willing to do things differently,”
Want to chat more about the licencing process for a challenger bank in Australia? Click here to contact the team or click here to book a call directly with us.
Sources;
https://finsia.com/insights/news/news-article/2016/03/29/aussie-banks-the-world-s-most-profitable
