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Australia’s first bank opened its doors to customers in 1817 from a small building that was previously a pub, at Macquarie Place in Sydney. The Bank of New South Wales — now Westpac — rented the premises from a convict turned businesswoman named Mary Reibey, who is pictured on the $20 note.
Some time next month, Australia’s youngest bank is opening to the public, but there won’t be a branch customers can visit, even if they want to. Instead, the unusually-named 86 400 will launch by making its app available to people with iPhones and Android smartphones.
Steve Weston, co-founder of Volt Bank who was previously head of mortgages at Barclays in the UK, points to a survey that found one in four consumers in that country under 37 had an account with a digital-only challenger bank. And 61 per cent were considering opening a digital bank account. He is hoping to get a similar sort of response from Australians.
“That sort of penetration level is significantly higher than what even the most optimistic digital bank founder would have thought,” Weston says.
Aside from tech-savvy young people, he says the bank will target retirees in search of a better return on their savings, and people refinancing their mortgages. “Our bank will absolutely be targeting millennials, but we also expect non-millennials to use it,” he says.
'A lot of tears'
Yet, for all their optimism, the neobanks are going up against uniquely powerful incumbents.
In a sign of their remarkable staying power, Westpac, NAB and ANZ were all in the 10 largest listed Australian companies in 1917, and they are still in the top 10 today, a recent Reserve Bank paper found. (CBA was not listed in 1917, but it is the largest of the four today).
More so than other industries targeted by start-ups, banking is hugely capital-intensive. One industry observer estimates a neobank will need to raise more than $500 million in capital to get the business to a respectable size.
The big four banks have the in-built advantage of being able to access money more cheaply than their smaller peers, by tapping wholesale funding markets at lower cost, or drawing on transaction accounts that pay no interest. In contrast, it’s likely neobanks will need to pay higher rates to get people to open up accounts, squeezing profit margins.
And the established banks have deep pockets to fund a technology war with upstart banks.
For these reasons, some observers are sceptical about the wave of capital flowing into neobanks, highlighting differences between Australia’s market and the UK.
"All industries need disruptors, because the incumbents become lazy and generate super-normal profits, and the Australian banking industry is no different," says Rajeev Gupta, partner at Alium Capital Management.
However, unlike in the UK, Gupta says the incumbent big four have responded "relatively well" in terms of their apps and products.
"It looks to me as though some of the neobanks that we have in Australia are not sufficiently differentiated as a consumer opportunity."
In a sign of the resources banks are throwing into the disruption threat, CBA last month unveiled an app it said would give customers tips on sensible financial management, even suggesting how they might use a tax refund.
Lance Blockley, managing director of The Initiatives Group, predicts there will be "a lot of tears" for investors when there are so many neobanks all targeting a similar market — and when the big four have much more sophisticated apps than those of the British banks.
"There is really only room for one or two winners, and the rest are likely to fail. This will then provide the major banks with the opportunity to acquire a completely new digital platform at an “in receivership” price," Blockley says.
There are also questions over just how “disruptive” the neobanks really are.
Andy Taylor, chief executive of Douugh, a financial wellbeing app that he plans to float, says the neobank model still relies on selling products such as home loans or credit cards at a price point similar to the major banks. Douugh has a partnership with Regional Bank Australia, so it will not need its own banking licence.
“There’s no disruption in trying to be cheaper, you’ve got to change the business model,” Taylor says.
Plenty of others also show it's possible to pinch business from banks without becoming one. A prime example is Athena Home Loans, a non-bank lender backed by AirTree Ventures, that is on track to have settled more than $500 million in mortgages by the end of this year.
All the same, the neobanks themselves appear confident they can convince institutional investors to stump up the hundreds of millions of dollars they will need, and others in venture capital are more optimistic.
James Cameron, a partner at AirTree Ventures, says: “I would firmly expect that one or a few of the digital bank start-ups coming through in Australia at the moment should be able to break out of their niche market of early adopters and build a mainstream business.”
Whether the neobanks succeed as businesses or not, their ambitions underscore the massive changes facing banks in years to come, as technology transforms how we deal with money.
A recent report from KPMG in partnership with CBA attempted to peer 15 years into the future, and it argued key parts of banking would become “unrecognisable” compared with today.
It pointed to potential examples where customers could set up automated systems that may help with them saving, spending, or investing. It suggested that artificial intelligence would allow banks to give customers “nudges” to avoid making poor decisions with their money.
Whether that is a future in which banking is still dominated by incumbents, or names we have barely heard of, remains to be seen. But whoever is the winner, far-reaching and fundamental changes look inevitable.
“Over the next decade we will see more changes in the banking industry than we have witnessed in the past 100 years,” KPMG’s report said.
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