Startup News & Analysis

Startups with $3 million in capital could soon be allowed to challenge the big banks: What does this mean for the fintech sector?

Angela Castles /

New FinTech Australia chair Alan Tsen

New FinTech Australia chair Alan Tsen. Source: Supplied

The hurdles that startups have to overcome to become authorised banking institutions may soon be lowered, with the Australian Prudential Regulation Authority (APRA) encouraging competition from disruptors looking to challenge the big banks in a discussion paper released on Tuesday.

The APRA discussion paper proposes revisions to the existing licensing framework that governs which organisations can be classed as authorised deposit-taking institutions (ADI), and these revisions would see a “phased approach” taken in the ADI authorisation and licensing process.

This would allow financial startups with $3 million or more in capital to “begin limited operations” before possessing a full banking licence, according to the paper. 

Designed to make it easier for applicants to navigate the ADI licencing process, this phased approach would be an attempt to stimulate increased competition within the banking sector, and would see a new “Restricted ADI” licence introduced. This licence would allow applicants to begin restricted operations while they are still in the process of developing the required resources to gain a full ADI licence. 

Holders of these restricted licences would still be “strictly limited” in their activity, according to the paper, and a startup “would not be expected” to actively conduct banking business during the period it holds this restricted licence. Rather, it would act as a safeguard that reflects the relative infancy of the businesses using this licence.

The regulator is also proposing to open up the bank licensing process even further, allowing startups with “innovative or otherwise non-traditional business models or those leveraging greater use of technology” to apply for this restricted ADI licence.

The discussion paper and its proposals will be open to public feedback until November 30 this year, after which APRA plans to release its final regime early next year.

What startups would need to qualify

Startups hoping to secure these restricted ADI licences would need to have $3 million or more in capital — a big step down from the current requirement that requires ADIs to have $50 million in capital to be considered a bank.

The directors and senior managers of a startup looking to secure these licences would need to meet APRA’s “fit and proper” standards, and the startup would need to also provide evidence that it has reliable record-keeping systems, according to the proposals.

Startups operating on a restricted ADI would also not be able to take deposits of more than $2 million, or individual deposits greater than $250,000. Under the proposed scheme, the government would also guarantee deposits up to $250,000 for customers who have deposited funds with a startup under this licence, according to the paper.

These restricted licences would also only be available for two years, after which time APRA would have the ability to revoke the licences if the business is not adequately developing its “capabilities and resources”.

What this means for the future of fintech

The local fintech sector continues to gain prominence in Australia, with new startups disrupting pocket moneytackling payments fraud, offering POS financing schemes and creating crypto-currency-secured digital wallets. Even parliamentarians have jumped on the blockchain wagon, heralding innovation in fintech as a key way to secure Australia’s financial future.

Alan Tsen, general manager at Stone & Chalk’s Melbourne-based fintech hub, believes APRA’s proposed regulation changes are “incredibly positive” and represent the “final frontier of fintech” in Australia.

“Being able to be a deposit-taking institution is really a big deal — this going to spur fintech innovation,” Tsen tells StartupSmart.

“Having the chance to open up a bank is a huge opportunity to stimulate innovation,” says Tsen, who says the UK went through a similar process of relaxing licensing requirements, which was successful in boosting competition from startups in the banking sector.

“If you look at the UK experience … it generated a huge amount of interest and bank challengers that managed to push traditional banking to think about innovation strategy and how they should be more current,” Tsen says.

Tsen notes the requirement that startups would need to have $3 million in capital to be granted these restricted licenses “seems reasonable”, however, is quick to add that, as with all proposed regulatory changes, it “depends on the detail” and “will turn on how it ends up coming to bear in the market” if passed.

This proposed changes from APRA are just one of a suite of moves to encourage the growth of the fintech sector in Australia, following the introduction of a regulatory sandbox last year to allow startups operating in the financial services space to trial their offerings with customers for six months without obtaining an licence from the Australian Securities and Investments Commission.

Australian consumers have also been keen to embrace the sector, ranking fifth in global fintech adoption, while the prevalence of fintech hubs such as Stone & Chalk’s fintech hub and the proposed hub in Melbourne’s Dockland’s precinct are geared towards encouraging the growth of startups in the space.

For Tsen, government support in relaxing financial restrictions has played a large role in fostering the emergence of fintech industry disruptors.

“The Treasury has been very active in this space; the most recent budget saw a lot of the things geared around encouraging innovation in fintech,” Tsen says, which he believes shows the government is actively considering the question: “What is an appropriate regulatory environment for supporting challengers, startups and innovators?”

Tsen hopes to see more “neo-challenger banks” arise from this proposed relaxing of licences. These startups would have the ability to “offer a more modern take and layer on better customer experiences” in comparison to what traditional banking institutions can offer, he believes.

“Australians are early adopters — it’s the right market, it’s the right place to be really trying to push the envelope for innovation,” Tsen says. 

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Angela Castles

Angela Castles is a former StartupSmart journalist.

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