By guest contributor Jake Jodlowski, Principal, Atchison Consultants
Given the continued reputational damage suffered by the big four Australian banks throughout and post the Banking Royal Commission hearings, bank customers and investors may be looking for alternatives. Whilst still in its infancy, Australia’s banking and credit start-up sector has grown leaps and bounds in recent years, with Afterpay Touch Group (ASX: APT) and Zip Co Limited (ASX: ZIP) being high-profile examples.
Although the “buy-now, pay-later” (BNPL) sector has received most of the media coverage, the development of so-called “neo-banks” has also started to gain momentum. Neo-banks are best described as traditional banks without a bricks and mortar presence, with their entire offering supplied through digital means, usually through an app and on-line platform. They are fully functioning deposit-taking institutions and therefore fall under the supervision of the Australian Prudential Regulation Authority (APRA). APRA must provide a license before an institution may accept customer deposits.
An unrestricted banking license permits a corporation to operate as a “banking business” and therefore an authorized deposit-taking institution (ADI) without restrictions under the Banking Act 1959. Part 5 of the Banking Act defines “banking business” as consisting of both taking deposits (other than as part-payment for identified goods and services) and making advances of money, as well as other financial activities prescribed by regulations made under the Banking Act.
The arrival of neo-banking in Australia follows the emergence of start-up banks like Monzo and Starling in the UK. Starling CEO Anne Boden told an industry conference in August 2019 that with 770,000 customers and almost £1 billion in deposits, the bank was almost profitable.
The main players in Australia (listed and unlisted) across the neo-bank sector are Volt Bank, Judo Bank, Up Bank and Xinja.