Mobile-only challenger banks – Neobanks – will fundamentally disrupt Australia’s traditional banking oligopoly if the four pillars remain status quo
It is likely that the four pillars policy (includes Commonwealth Bank of Australia, ANZ, National Australia Bank and Westpac) has contributed to the problem of an overly-concentrated banking system in Australia, which is also attested to prevent competition. The Productivity Commission has found that the banking system can pass on costs and set processes to boost profits without any fear of losing market share through every stage of the economic cycle.
An enquiry report by the Productivity Commission suggests that Australia’s “oligopolistic banking system” is where the biggest banks are constantly exploiting the inertia of existing customers to maintain market share with laboriously opaque pricing, lack of easily attainable information and intricate advice and financial arrangements – forcing upon the population a proliferation of financial products that are impossible to comprehend.
Amid this distressing backdrop, mobile-based banking startups, dubbed “Neobanks” (see Figure 1), have finally marched into the Australian market and are being hailed as potential revolutionaries.
A raft of new players such as Xinja and Up have already completed their applications with the Australian Prudential Regulation Authority and is currently awaiting full license approval. Volt was the only Neobank that obtained a full license, creating another bank in Australia after 28 years.
These new players pose a growing challenge to the country’s traditional banks as they are able to provide lower operational costs and typically offer incentives such as fee-free accounts and personal financial banking.
Despite their popularity amongst early adopters, how disruptive are Neobanks to the banking landscape in Australia?
Although Neobanks have more flexible infrastructure, not much business has been won over the traditional banks. Traditional banks require a huge amount of capital to operate and account for exceptional risks. Hence, a certain amount of collateral would still be required to reassure consumers that the bank would be able to absorb losses without affecting them. The suspicion emerges when Neobanks shift their business models to offer traditional banking products. It is unlikely that they will absorb the costs long enough to gain sufficient traction. “Essentially, the math won’t work” said Daniel Teo, Executive Director at DesFran.
For traditional banking, profits are fundamentally earned from acting as an intermediary between borrowers and savers, and whilst shareholders – essentially bank owners – are remunerated for overseeing the credit, liquidity, market and operational risks.
Although regulatory scrutiny holds an amount of barrier to entry for Neobanks, their future business model is still undetermined. The addition of more accounts might only increase losses. Moven, a Neobank founded in UK, shifted from its initial strategy to offering white-label services to maintain profitability.
Another possible explanation is that it is notably difficult to persuade consumers to switch providers. According to MasterCard’s survey with 11,915 consumers across Europe, only 14% of UK consumers would consider using Neobanks as their primary banking provider. It could be argued that the lack of physical presence might be a concern for consumers (see Figure 2).
Daniel also stated that Neobanks are still under a trial-and-error phase. “Although they are able to operate at low costs, there isn’t any fractional reserve banking system in place,” he explained. “The younger generation will gravitate towards the best value and user experience, but the older consumers would still prefer to go to a physical branch.”
Truly assessing the viability of Neobanks is challenging – especially in the heavily regulated banking industry where positive earning is not a top priority, the business model is still undefined, and when deposits are suboptimally utilised. Neobanks could potentially provide faster services due to process efficiencies, however, once they gain full banking licenses and shift their business models to offering traditional banking products, regulatory scrutiny will increase. This could potentially disrupt their initial focus on user growth and technology, ending up being more balance sheet oriented.
Neobanks Have the Potential to Disrupt the Australian Banking Landscape
Neobanks will only present a serious threat to the biggest banks in Australia if they continue to ignore the voices of the consumers. While banks in Australia have already acknowledged faults and are taking measurements to improve future engagements, time will tell if they are able to demonstrate improvement and meet public expectations in the post-Hayne era of ever-increasing bank restrictions and caution on mortgage lending. Eventually, customer experience, innovation and brand trust will play a crucial role.
About the Authors
Daniel Teo is the Executive Director at DesFran overseeing DesFran’s operations in Hong Kong. He has more than 15 years of experience working in the financial services industry across portfolios involving sales, client management, product development, and strategic planning and execution. His last role with BNP Paribas Securities Services spanned across a decade, taking on several roles from Treasury Management to Head of Operations. He was tasked with setting up the first branch in Asia, as a Network Relationship Manager to manage other banks servicing relationships, and as Senior Product Manager in charge of all custody product offerings and P&L in APAC.
Daniel holds a Master’s Degree in International Business from the University of Sydney, and a Bachelor’s Degree in Commerce from the Australian National University.
Jenna Foong is a Business Development Manager at DesFran. With keen interests in the finance industry and business development, Jenna was previously a commodities trader, and held positions related to business management and development. Jenna holds a Bachelor’s Degree in Commerce, specializing in Accounting and Finance from the University of Melbourne.