Volt Bank will return more than $100 million in deposits to customers and hand back its banking licence to the prudential regulator, marking another unsuccessful attempt by a start-up to break into the Australian banking market.
Volt said the decision was made by the board after it failed to secure enough additional funds through a capital raising to support its plans to write mortgages. Volt told its 140 staff on Wednesday morning that they were out of a job.
The bank, which was licensed by the Australian Prudential Regulation Authority in January 2019, was seeking to raise $200 million in a Series F round that started in February, after financial markets started to sour.
The plan was to tap large, global institutional investors to provide regulatory capital to support its growth plans, which involved offering mortgages and deposits through partners. But dozens of potential investors sounded out through advisers Rothschild declined to invest, citing market conditions.
“In this raise, we needed to bring in new, larger investors and for us, the timing just didn’t work,” Volt chief executive Steve Weston toldThe Australian Financial Review. “We just couldn’t raise the level of capital we needed to.”
Volt was the first of a new breed of challenger banks that won APRA licences, which also included Xinja, 86400 and Judo. Of these, Xinja has also shut down, 86400 was sold to NAB, and Judo Bank made it to an ASX listing, but its shares are near a record low.
“I sincerely hope that we do see disruptive competition because we need it, but banking is a capital-intensive game, and we can’t sway away from that,” Mr Weston said.
“I don’t think this is the end of the neobanking experiment, but we were at a very unhelpful time to raise capital. If you want to be a bank and you want to scale up, you are going to need a lot of capital and if you don’t [raise it], you are not going to be able to grow.”
Judo Bank has raised $1.8 billion in capital, including $653 million during its initial public offering in November 2021. Volt’s capital raising had been more modest; all up, it had raised $212 million over seven private rounds.
The additional $200 million it had been seeking would have carried it through this year, but an additional $1 billion of capital would have been required to back its planned mortgage growth through to 2024. Volt was expecting to break even at the end of next year.
Volt’s model was different to the other neobanks, as it was also building “banking-as-a-service” infrastructure, to allow it to provide loans and deposits to partners such as mortgage brokers AFG and Mortgage Choice and BTC Markets.
This required a capital-intensive technology build. It is understood that Volt was spending $1 million a week on its people, systems and strategies to acquire new customers.
Mr Weston said demand for the banking-as-a-service offering remained strong with Volt testing with 12 partners and with 100 potential customers in the wings. Many of these were due to go live if the Series F raising came in.
‘It tears your heart out’
“I heard so many times from large global investors that they liked the Volt story and thematics including banking as a service and the team, and if we had been before them before September last year, we would be making a different decision,” he said. “We tried. We went around the world talking to investors. It tears your heart out.”
Volt hopes to sell its technology system, which approves mortgages quickly, to recover shareholder funds. “In reaching this difficult decision, we have considered all options but ultimately, we have made this call in the best interest of our customers,” Mr Weston said.
According to April’s APRA statistics, Volt Bank had $113 million in deposits. That number is understood to now be about $106 million held by 6000 customers. The deposits were reinvested with other banks. Deposits up to $250,000 are protected under the government’s Financial Claims Scheme but Volt is expected to return all deposits in full, so the scheme will not be triggered.
“Volt’s decision to exit the banking industry and pursue other business opportunities is a commercial decision for Volt,” APRA said in a statement. “As Australia’s financial safety regulator, APRA will closely monitor the process to ensure funds are returned to Volt depositors in an orderly and timely manner.”
Volt never opened the deposit book to anyone among the public; it was using a waitlist system and bringing on depositors to support the lending book. In a statement on Volt’s website, customers were told to withdraw their funds by July 5.
“Volt has taken steps to reduce all expenses and staff numbers, other than those required to support the orderly return of deposits and pursue a realisation of the value of our remaining assets.”
Taking on giants
The planned Series F raising followed a capital raising last year in which Australian Finance Group participated in an upsized $100 million funding round. In 2020,Volt attracted $50 millionin a cut-price raising. Pepper Money was also a strategic investor.
Its plans to provide “banking-as-a-service” got more difficult when Westpac entered that market via a partnership with 10X Banking and snared Afterpay as its first customer in October 2020.
It was also a victim of timing – its capital-intensive lending assessment and core banking system that it spent years building is now available via an array of alternative providers. One of these said Volt had made a strategic mistake in building its own system instead of looking to partner with specialists.
“Obviously, there are many reasons that a neobank’s business strategy can fail, but it’s important to be looking at the technological decisions being made,” said Paul Apolony, general manager at Mambu, a cloud-based banking ledger provider.
“Many neobanks are taking a very technologically conservative approach, selecting eye-wateringly expensive core technology that simply reproduces the capabilities of existing banking platforms, rather than being open to the opportunities that innovative cloud core banking platforms can deliver. By replicating the existing tech foundation, these banks subsequently face similar challenges to traditional banks in terms of the inability to scale effectively, lack of innovation and being able to pivot when necessary.”
Volt was the first neobank to gain a banking licence in 2019 after the rules were loosened to encourage competition. Its decision to shut shop and return deposits to customers makes it the second-high profile neobank to fail to build a sustainable competitor.
It follows the collapse of neobank Xinja, which APRA chairmanWayne Byres called a “successful failure”.Xinjahad rapidly accumulated depositsthrough an ambitious marketing campaign and an attractive interest rate, but it struggled to deploy the funds through loan products. That neobank was shrouded in controversy after it claimed tohave raised $433 millionfrom investors in the Middle East in mid-2020.
Another neobank, 86 400, wasacquired by National Australia Bank in January last year.
Mr Weston said Australia’s prudential rules and capital settings for new banks were appropriate, and he laid no blame for the failure with APRA. “APRA couldn’t raise capital for us,” he said.
He did say the requirement that no single investor in a bank could own 20 per cent of it was a complicating factor during the latest attempted raising, and that some shareholders were concerned could hit that ceiling if they were forced to take higher allocations in future raisings.
“The entire Volt team is deeply disappointed to have reached this point. We are enormously grateful to everyone who believed in what we were trying to achieve and worked tirelessly to make Volt a success,” he said.
