The Australian market for neobanks is less than a year old, but the new entrants have big ambitions to change the way consumers bank — putting the pressure on Australia’s biggest and most established banks.
The newcomers have already cleared significant hurdles by appeasing Australia’s regulators to secure their banking licences, raising millions from investors and assembling the underlying technology to deliver on the promise of digital banking. But will their value proposition resonate with consumers and entice them to break up with their banks?
So far most of the neobanks — which are all still largely in the launch phase — are just asking customers to try out their services. Here’s the pitch: Download the app and find out how a bank built by a team of customer-focused digital natives differs with the one that’s currently on your phone.
The newcomers are committing to competitive rates, very low or no fees, and helping people to better understand and manage their money, which some argue delivers a more significant saving than discounts the big banks can provide.
But to become a fully-fledged bank, and a genuine alternative to Australia’s Big Four banks, the insurgents need customers to move their savings and salaries into their virtual vaults to get both sides of their ledgers operating at scale.
“Having the licence requires that bank to operate on both sides of the balance sheet, so it requires them to have deposits and lending products,” explained Gerd Schenkel, who founded NAB’s Ubank in 2008.
“Therefore the business model is to raise deposits as a cheap source of funding for your loan book — the classic banking business model.”
Schenkel, who is now the leader of the digital practice at consultancy Partners in Performance, argued that the neobanks will find it challenging to attract deposits, especially in today’s low-interest rate environment.
“This is where the major banks have a huge competitive advantage. They have the ability to raise cheap deposits because they facilitate people’s salaries and spending. But if you can’t attract those deposits into your bank then the banking licence is kind of useless.
“I think the value proposition boils down to: why would large numbers of consumers go to their employers and say can you deposit my salary into this new bank, as opposed to one of the existing banks. I haven’t seen a really good answer to that.”
It’s a challenge that Ubank didn’t have to overcome when it launched — its operations were integrated into NAB’s balance sheet.
Schenkel explained, “We used NAB’s treasury so we could get cheap deposit funding using NAB’s established balance sheet and then we would provide lending back to the treasury on the other side of the balance sheet.”
The cash rate was also at seven per cent a decade ago, so Ubank was able to attract customers with a high-interest term deposit and keep them with high levels of customer service, he said.
“I don’t think the interest rate is a credible lever [to acquire customers] in a low-interest environment, and we are in a low-interest environment for the foreseeable future.”
With little room to move with rates, the neobanks are leveraging technology to deliver a competitive advantage — but those features are expensive to build and require marketing dollars to get the message out.
“The feature pathway to a value proposition is possible in theory, but in practice it’s not easy to do,” he said.
Countdown to launch
There’s an ambitious group of bankers and technologists keen to prove the value behind their models, like the team at Australia’s newest bank, 86 400. It was granted its ADI licence from APRA in July and plans to launch with a transaction and savings account for customers on its waitlist within a week or two.
86 400 CEO Robert Bell said within 120 seconds customers will be able to sign up by downloading the app and receive an account number. In another minute they’ll have Apple Pay (or any of the other Pays) set up and ready to use immediately.
“It’s a very low-friction experience, the kind of thing you can do when you’re on your commute sitting at the train station. That’s how quick and easy it is,” Bell told Which-50.
The bank also plans to roll out mortgage products in two to three months. It will use three sources of funding, including retail deposits. However, on day one, the loans will come from a $300 million warehouse facility the bank has secured from another financial institution. It is also in the final stages of due diligence with two more warehouse facilities.
“The combination of those three sources gives us the funding to be able to make home loans,” Bell explained. “Obviously over time as we grow and become more recognised the retail funding — retail customers putting deposits with us — becomes more important. But it’s not required on day one to start.”
The value proposition
Similarly, the bank isn’t asking customers to move their salary to 86 400 when they join, Bell said.
“We’re saying, we’ve built a really great digital smart bank — try us.”
Backed by Cuscal, the bank says it will use data and analytics to help customers gain a better understanding of their spending and savings habits and take control of their finances.
“Australia doesn’t need another bank that’s the same as everyone else. It needs a different bank,” Bell said. “We are really excited about launching what we think is the first smart bank.”
Bell argued that banking hasn’t really changed much in the last 50 years and our apps are still a record of past transactions.
“[Currently] you are really just looking at the past — there’s no bank that’s currently using data and digital in a smart way to help you look forward,” Bell said.
He said the 86 400 app will give customers the ability to see when bills when are coming up and how much they are, as well as offering “smart insights” on their spending.
“It’s a change in how banking is done. It’s designed to help people, in a smart way, to get on top of their financial world,” he said.
When asked why they wanted to start a bank Bell told Which-50 that being a bank — rather than a digital lender or fintech with a prepaid card — allows 86 400 to solve customer’s financial problems more holistically.
“It’s significantly harder work and takes more time to become a bank, but having done that we can have a much better relationship with our customers and we can offer them a lot more products and services.
“Banking has become quite complicated. People already bank with multiple banks [so] someone who can provide a better experience and a better product is going to win customers. That’s what we’re aiming to do.”
Up & Running
In June, neobank Up announced that it had signed up 100,000 customers in just eight months. According to co-founder Dom Pym, “a single-digit percentage” of those customers have moved their salary deposits to Up.
“We see people who literally move their whole banking to Up, and they move their salary in there. But not everyone can do that because we don’t have BPAY, we don’t have joint accounts, we don’t have mortgages and we don’t have credit cards.”
Up has a public roadmap, which it calls The Tree of Up, with delivery dates for new services. Pym believes customers will switch more of their banking to Up as more services and products come online.
The second kind of Up customer uses their account for a specific purpose alongside their main bank — for example as a travel card or saving or spending accounts.
And the third cohort of customer will have relationships with half a dozen other sorts of different financial entities and use Up as their hub to manage their money, Pym said.
“I think what Up has proven, for all the neos, is that they can win customers in Australia and we can have a material impact.
“Sure it’s only 100,000 customers … but it’s 100,000 customers in eight months. We are the second-fastest-growing bank in Australia behind CommBank. We were in the top 10 of the app store for six months in a row.”
Up’s goal is to become Australia’s fifth-largest bank, which would require it to have two million customers. Pym said he’d like to get there in three to five years, but conceded that the task may take more than a decade.
Up has had a headstart on its neobank rivals because it operates under Bendigo and Adelaide Bank’s ADI — meaning it didn’t need to spend time convincing APRA to give it a licence. The bank had 2,500 customers participating in its public beta before its official launch in October 2018.
Pym put the bank’s success so far down to its ability to remove friction (the average time to sign up is two minutes and 12 seconds) and to deliver a better banking experience.
“One way we differentiate is making it awesome and easy to sign up. But also the customer experience throughout the whole process is better than any bank in Australia,” he said.
“We don’t think we’ll ever be able to compete on price because the big banks have big pockets … so our view is you have to deliver excellence in all the things you do. So customer experience, product, price, all those things have to be awesome.”
The bar the neobanks need to clear is already high — Australia’s current mobile banking products are considered world-class.
“The Australian banks are the best digital banks in the world already. So you can imagine that the Australian bar for digital apps is already exceptionally high. Our view is the banks are very good, so you have to have something better,” Pym said.
The art of the possible
According to Schenkel the neobanks are demonstrating what is possible in terms of technology and product features. This will raise the bar for competitors.
“The neobanks will demonstrate what is possible in Australia and therefore customers, boards and executives will ask management teams ‘if Bank X can do this as a small start-up, then why can’t we do it?’ So they will probably steal a bunch of good ideas from the neobanks,” he said.
That’s something Up’s CEO Pym has made peace with. “All the other banks will copy. And that’s okay — we have to stay ahead of them. It’s easy to copy one feature but it’s not easy to copy all the things. And it’s also not easy to copy the user experience.”
It’s still very early days for neobanks in Australia, but the market could shift quickly if the newcomers can earn consumers’ trust or if Open Banking makes it easier to move banks. Three banking licences have already been granted in 2019 to Judo, Volt and 86 400, and Xinja expects its full licence is imminent, having secured its restricted banking licence in December. The first international threat, Revolut, has also arrived with a beta product.
For 86 400 CEO Robert Bell, there are two key metrics he will be keeping an eye on when the app launches within a fortnight: what are people saying about us and are they recommending us to their friends and colleagues?
“Those two metrics are the most important — more than anything else. If we get those right then the business financials will take care of themselves,” Bell said.