Neo Banks look to take advantage of Financial Services perfect storm
Updated: Feb 4, 2019
There has been a perfect storm brewing in the financial services sector for a while now, with key events triggering a shift in Australian banking as we know it. These events have shifted the consumers view of financial services, with a large portion beginning to question the ethics of their banking and financial advice providers. Some of the events included:
- The productivity commission's inquiry into competitiveness in the Australian Financial System.
- The Hayne Royal Commission into Financial Services
- APRA releasing guidelines and allowing for the licensing of restricted Approved deposit taking institutions (ADI's).
These have spurred a new generation of ‘Neo’ Banks to enter the market in an attempt to swoop in on legacy bank customers looking for a more consumer oriented business model.
Volt Bank and Equity Crowdfunded Xinja have become the front runners in this race. Volt Bank has become the first Neo Bank to receive a full ADI license with Xinja hot on their heels having been issued a newly established restricted ADI. This follows on from APRA’s release of an information paper outlining Restricted ADI framework and creating a clearer set of guidelines for company’s seeking ADI approval.
Restricted ADI licenses are issued by APRA to companies that demonstrate clear intentions and ability to become a fully operating bank. The approval of a restricted ADI license in itself is a huge vote of confidence from APRA that the company is well on its way to clearing the hurdles necessary for it to become fully operational. “These eligibility guidelines appropriately balance APRA’s objectives of enhancing competition and efficiency in the banking industry, while maintaining high levels of financial safety and financial system stability and a broadly competitive neutral regulatory framework.”
Restricted ADI’s are limited to a number of business capabilities and functions that they can perform. There are limits on aggregate deposits ($2 Million). As well as a $250,000 limited for any one individual. As well as have limitations on the services that they can provide. Restricted ADI’s have to conduct limited ‘lower risk’ business that does not expose themselves to market risk, concentration risk or allow funding of speculative activity such as property development.
With this framework Xinja aims to be granted a full license within the two year timeframe allowed by APRA. The company is currently hosting a capital raise through the Equity Crowd Funding platform Equitise in order to secure the capital needed to satisfy capital requirements and perform the operations needed to own a full license. Xinja plans to create competitive advantage through “Leapfrogging antiquated traditional banking technology (...) being 100% digital”. This offers customers higher interest savings account and lower interest mortgages through the transparent business model of removing any of the physically cumbersome costs associated with being a physical Bank.
The major competitors that Xinja have in the legacy subsidiary space include MEBank (Industry Superfund) and UBank(NAB). With the current Royal commission in process, the potential for a independent online bank with no ties to the current legacy banking system has a chance.
One must ask themselves if Xinja and Volt, little known startups, have the capacity to compete in the technology playing field with the major banking institutions.
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