In January this year, neobank Volt became the first Australian challenger to receive its full authorised deposit-taking institution (ADI) licence from the Australian Prudential Regulation Authority (APRA), marking the beginning of what was hailed as the year of the neobank.
In the months that followed, Xinja broke its own equity crowdfunding record, raising $2.6 million — although it’s still waiting on its own ADI licence — and small-business lender Judo Capital was granted its ADI licence, before re-branded to Judo Bank.
Up launched in October last year, with its neobank platform supported by Bendigo Bank, and 86 400, backed by payments provider Cuscal, is currently gearing up to a $250 million raise.
But, for all the activity going on in the market, there’s still no fully independent neobank offering banking services to the public.
Even Volt, which has been an ADI for nearly six months now, is yet to release a product.
So, is 2019 still the year of the neobank? Speaking to StartupSmart, FinTech Australia general manager Rebecca Schot-Guppy says ‘yes’.
“I expect that we’ll have three Australian neobanks up and running in the next month or so,” she says.
Volt has its ADI, she expects Xinja will get its own “sooner rather than later”, and Up is currently the fifth-most downloaded finance app in Australia, Schot-Guppy explains.
At the same time, European neobank Revolut is gearing up to launch in Australia, and has been beta testing on the ground, she says.
“I think we’re going to start to see more traction in this space in the next three months, and then it will be a race to see who can attract more customers.”
The new finance giants
Last week, an article in the Australian Business Review suggested Volt was planning on listing on the ASX, painting its $20 million Series C round as a pre-IPO raise.
However, speaking to StartupSmart, Volt co-founder Steve Weston said although the team has always had plans to take the neobank public eventually, it’s not their focus at the moment.
“We had to get the licence first and get well progressed in building products before we think about listing on the stock exchange,” Weston says.
“The key priority now is getting the product launched,” he adds.
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Volt does have a capital raise underway, Weston explains. But this kind of startup needs a lot of capital — just like any bank does.
“As a bank rather than a technology company we’re an interesting animal,” the co-founder says.
“We consider ourselves to be more of a tech or data company, but actually, from a capital perspective, we are very much a bank.”
In the future, when it needs significant amounts of capital, this is more likely to come from institutional investors, such as superannuation funds and fund managers, he says.
“Most of those can only invest in companies when they’re either listed on the stock exchange, or they’re within a one- or two-year period of listing,” he adds.
“We were always going to list on the stock exchange, we just need to work out the timing.”
Xinja is still waiting for its full ADI licence, having been approved as a restricted authorised deposit-taking institution late last year.
While founder Eric Wilson isn’t able to disclose any details of discussions with the regulator, he says he’s hopeful the approval “will not be too long away now”.
“I’m absolutely hopeful it will be well before the end of the year.”
While Wilson can see why Volt would have its eye on an IPO, saying the stance is “perfectly reasonable”, he doesn’t necessarily see Xinja heading in the same direction.
“We would only IPO if we couldn’t raise enough capital.”
Currently, the neobank is having no problems in that department, he says.
“For us, our strategy is to build a long-term bank that is both for-purpose and for-profit,” Wilson explains.
“Our job is, yes, to make money, but also to get Aussies out of debt and help them make the most out of their money.
“That’s harder when you’re working on a three-month short-term reporting cycle for a listed company.”
It’s not to say any one strategy is better than any other, and while there’s a sense of competition, Wilson told StartupSmart in January that Xinja welcomes this, saying “once you get a critical mass of neobanks, the customer base for all of them starts to increase”.
Schot-Guppy agrees, saying “there’s a big enough pie for each of them to be successful”.
At the same time, they each have different strategies for expansion, and Judo is focusing on a different market altogether, focusing on small-business lending rather than consumer banking.
“Everyone is quite complementary, and willing to cooperate, which I think is absolutely fantastic,” she observes.
She also doesn’t foresee a mass exodus from the big four just yet. On the one hand, the incumbents are building their own app products designed to be more user-friendly, or partnering up with neobanks and fintechs.
On the other hand, the neobanks won’t be able to offer all the services people need straight away.
“I think we’ll see consumers be savvy on where they use their money and how they spend their money,” Schot-Guppy says.
“Until the neobanks can offer the same product suite that the big four can, I don’t think you’ll see a mass exodus, I just think you’ll see consumers using different banks for different things,” she adds.
“What the neobanks are going to be competitive on is brand, transparency and accountability, and also speed to market.”
The race is on
According to Weston, from a regulatory standpoint, there’s nothing holding Volt back from launch. Rather, it wants to make sure it’s in good shape when it does.
Volt is taking the approach of speaking to prospective users, and getting a sense of what customers really want, before launching any products at all.
This is something that has worked well for some of the European neobanks, Weston explains.
Now, Volt has about 15,000 people on its waiting list, and plans to launch the first products to a test group in August.
“We’re building our waiting list off the back of the co-creation approach,” Weston says.
“Those people who have helped us do that become our initial customers, they become our test group, and really importantly they become our advocates to tell others.”
Throughout the course of this year and early-2020, Volt plans to gradually roll out its transaction accounts, savings accounts and personal loan products, and term deposits.
“Once we’re comfortable that the consumer range has bedded in well, then we’ll look to move into the SME space probably in early-2021,” Weston adds.
“Like any business, we will continue to test, to learn, to iterate, to add functionality, to add features … You don’t have it all singing all dancing on day one.”
At Xinja, on the other hand, Wilson says things are ticking along nicely, and the team should be ready to launch banking products into the market almost as soon as its ADI approval drops.
There are a few tweaks still to be made, he says, “but in terms of being able to take deposits, transfer money between accounts, make sure cards work … that’s all done and dusted”.
Once the licence is issued, Wilson says within a few weeks Xinja will be able to launch bank accounts for staff and early investors. Then it will become available for people on the waiting list, and those already using the debit cards.
It will be “a steady rollout”, he says, with measures in place to test it and make sure everything works.
“But you won’t see any long delays,” Wilson says.
In fact, he still expects to pip his competitor to the post.
“We should be the first neobank to actually get products into the market … we’re feeling pretty confident about that,” he says.
The year of the neobank?
While Schot-Guppy still believes 2019 is indeed the year of the neobank, saying “the next six months are going to be super exciting”, Weston warns this was never a revolution that was going to happen quickly.
“It’s complex to build any new business. A bank has an extra degree of complexity,” he says.
There has been a lot of hype around the new challenger banks, but only two full banking licences have been issued.
And, with the exception of Xinja, he says it’s unlikely many more licences will be dished out anytime soon.
“Even getting the banking licence, let alone building and running the bank, is really, really difficult,” Weston says.
“And whoever does get an unrestricted banking licence, you can be absolutely assured they will have earned it.”
However, he does believe gradual change is coming.
“I think more of the activity will come in 2020 than it will in 2019,” Weston says.
For Wilson’s part, while he stresses he can’t speak for anyone else, he is “hoping this will be Xinja’s year”.
He agrees there’s not likely to be any more neobanks coming out of the woodwork this year, especially those without affiliation to any other institution.
However, if both Xinja and Volt get to market before the end of 2019, that will be a significant step forward in changing Australian banking, he says.
“I’m not sure if 2019 is going to be the year of the neobank, but it’s certainly going to be the end of the beginning.”