What’s happening with Australian neobanks in 2020?
A new wave of Australian neobanks are coming to market with savings and lending products. The question is, will they offer enough to stand out in a small and crowded market?
But that doesn’t mean the sector has been completely inactive. Over the past few months, the country has introduced key regulations and seen the launch of several prominent competitors to the Big Four incumbents. Xinja, 86 400 and Volt have each put products into the market since September, and there’s already another potential new entrant in the form of Hay.
Add in Up, and you’ve got quite a few neobanks for a country with about 25 million people. That means each of these companies will have to work hard to make names for themselves in the country while relying on a much smaller base of potential customers than, say, the UK. That said, a new set of rules have just come into force that could help them along the way.
The Consumer Data Right
The introduction of the Consumer Data Right (CDR) rules in February is among the most notable developments in the Australian fintech community recently.
Issued by the Australian Competition and Consumer Commission (ACCC), the nation’s financial regulator, the rules set out the details of how the wider CDR will actually work. They’re intended to apply not only to financial services, the first segment where CDR has been implemented, but also to segments affected by future phases of the CDR rollout including utilities and telecoms.
Each part of the CDR is expected to spur neobank activity in the region
Under current CDR rules, Australia’s Big Four must share up-to-date product reference data, which includes interest rates, fees and charges, eligibility information and more. Come July, banks will also need to provide consumer data, such as credit card details and deposit account information, to accredited recipients. Data-sharing for mortgages and loans will follow in November.
Each part of the CDR is expected to spur neobank activity in the region. Once these companies can access open financial data, they’ll be able to use it to build out their own propositions.
Progress on that front has been slow but steady so far. So, let’s take a look at where the major players are now, and what might be on the horizon for each of them.
One Australian neobank that has already found early success with an initial offering is Xinja. It launched its “Stash” savings account back in January, offering a 2.25 percent interest rate that attracted $100 million in deposits within its first 19 days, which has since risen to $300 million.
While that rate was always impressive, it never seemed particularly sustainable, especially at a time when big banks are cutting interest rates to one percent on their most popular accounts. Sure enough, Xinja put a freeze on new “Stash” openings after the Reserve Bank of Australia cut interest rates by 0.25 percent last week. Considering the accounts cost Xinja about $7.5 million per year, and the likelihood of further rate cuts to come, the company will need to find significant sources of revenue to maintain the rate.
... [Xinja] will have to move fast, especially since it faces stiff competition from rival neobanks
To that end, it recently opened its latest funding round to sophisticated investors with a minimum $20,400 buy in. It plans to use that money to launch lending products, including mortgages, which should not only bring in more revenue, but leave it in a better position to face future rate cuts.
That said, while the mortgage market is huge – the Australians may be even more obsessed with owning property than the British – it’s also highly competitive, and thus far Xinja has moved into it at a slower pace than many expected. The new funding should help it pick up the pace on that front, but it will have to move fast, especially since it faces stiff competition from rival neobanks...
Like Xinja’s “Stash”, 86 400’s “Pay or Save” accounts offer a market-leading 2.25 percent interest rate on deposits over $1,000.
Unlike Xinja, though, 86 400 has already launched its home loans. In fact, it’s been branded as the first Australian institution to offer mortgages without paperwork – though users still need to visit brokers to actually get the loan. That doesn’t seem to have put customers off, as 86,400 has written $10 million in loans since it launched the product three months ago.
While [86 400 has reached] the market quickly, there’s still a lot to play for
The speed with which 86 400 has introduced its lending products is thanks in part to its organisational structure. The bank is backed by Cuscal, a payments consortium partially owned by Mastercard and Bendigo and Adelaide Bank.
While that support has helped 86 400 reach the market quickly, there’s still a lot to play for. It may have launched some products ahead of Xinja, but it would be unwise to count the latter neobank out just yet – or indeed any of the country’s other players in this space.
Volt was the first Australian neobank to gain a licence, but it’s in a closer position to Xinja than it is to 86 400. The company rolled out its savings account to 400,000 customers back in December, and it’s planning to launch mortgages in the latter half of this year.
The difference lies in the details. At 2.15 percent, the interest rate on Volt’s savings account is lower than that of both 86 400 and Xinja but CEO Steve Weston suggested to Business Insider Australia that it will remain in place indefinitely. Just how Volt intends to pay for this rate while maintaining its plans to attain profitability by 2021 remains to be seen.
Up is a bit of an anomaly on this list, as it’s operated in partnership with Bendigo and Adelaide Bank. Its app is also among the most complete offerings from a new bank, offering novel features such as spending insights and bill detection.
Launched in 2018, over a year before its competitors entered the market, Up only serves about 800,000 customers at the moment which could be considered slow growth. On the other hand, you could argue that it was ahead of the curve, coming to market before consumers were ready to embrace new providers. Its peers will certainly have been helped by the interim successful entrance of fintechs such as TransferWise into the market, which has helped ease consumers into the idea of using financial products from less well known brands.
If the other neobanks on this list are already running the race, Hay is still at the starting line. The company has already launched a mobile banking app, but is currently waiting on a restricted deposit-taking licence from the Australian Prudential Regulation Authority (APRA).
Whether it will secure that licence remains to be seen. Although a new wave of challengers has entered the Australian market, getting a banking licence is still no easy task. Despite regulators’ calls for increased competition, there doesn’t seem to be a major rush to welcome new entrants. Hay may be ambitious, but it’s still got a difficult path ahead of it.
Even with TransferWise already on the ground in Australia, Hay still has plenty of room to play in that space
And those are just the obstacles it faces before it reaches the general public. One of the app’s key features is its travel mode, which eliminates foreign exchange fees. That’s a very similar proposition to TransferWise and Revolut, which has hired former Bank of Queensland CFO Matt Baxby as its Australian CEO ahead of a launch down under in the first half of this year.
With that said, Revolut hasn’t launched yet. Even with TransferWise already on the ground in Australia, Hay still has plenty of room to play in that space. It faces an uphill battle with regulators, but if it can make it through, there’s still a significant opportunity for it to catch on in the market.
One last company worth mentioning, even though it has a slightly different model, is Judo. Where other Australian neobanks have debuted with a host of similar savings products, Judo has distinguished itself by serving small- and medium-sized businesses. So far, it has granted over $1 billion in loans, establishing itself as a sensible solution that caters to an underserved market.
A few of these banks have made a strong entrance into the Australian market, but there probably won’t be a dramatic uptick in neobank activity in the near future.
This is partially due to the availability of funding in the region. Investment opportunities in Australia pale in comparison to those in Europe and the US, so there’s less money available to go around for start-ups.
Furthermore, regulators have been slow to open up the market to new entrants, and Australia’s Big Four still wield a significant amount of power. Beyond offering great introductory rates, neobanks are still struggling to distinguish themselves. Unfortunately, that trend seems likely to continue for the foreseeable future.