How Australia is banking on new competition

 Sarah Kocianski photo
Sarah Kocianski Head of Competitor Strategy
5min read

Until 2018 Australia hadn’t had a new, homegrown bank for decades. The Australian banking industry had been dominated by four huge banks who, facing no competition, rested on their laurels.

Then in 2017, following recommendations from a Government Bank Review, the Australian regulator APRA released a discussion paper that suggested the creation of a restricted bank licensing framework modelled on the one introduced by the UK’s FCA regulator in 2016. The aim was to boost competition in the banking market and after all, if it had worked in the UK, why wouldn’t it work in Australia?

They move fast down under

Fast-forward to 2018, and in May APRA formalised the new licensing framework which allows successful applicants to conduct some banking activities for two years while they build out their operations and capital. At the same time it announced the first firm to receive the license was digital-only player Volt, a startup that had only come into being after the 2017 discussion paper was released. This pace has continued, with the second license being awarded to another digital player, Xinja, a few days ago and 86400, likely to be app-based, hoping to be the third.

What next?

The approaches to launch taken by the three firms above mirror those taken by their UK peers. Volt has a license but is yet to launch a product, preferring to go through a “co-creation” phase with consumers that have expressed early interest first, much like the UK’s Tandem Bank did. 86400 meanwhile is taking expressions of interest but is awaiting its license before launching, a model used by Starling Bank. And Xinja launched a prepaid card ahead of winning its license in a bid to get a head start on customer acquisition, a strategy successfully deployed by Monzo. All in all, Xinja is the only one of the three that customers can currently get their hands on and start using.

Will it work?

APRA’s aim, much like the FCA’s, is to stimulate competition in a stagnant industry and it looks as though they will succeed.

The neobanks mentioned above are only three of a much greater number willing to take on the challenge. Many of them are led by ex-employees of the big banks who want to reform their industry or people who have worked on successful challenger bank brands elsewhere in the world. Australian consumers, and for that matter businesses, are tech-savvy and ready for banks that can meet their Apple, Google and Facebook-driven expectations.

The big banks have struggled to innovate, as so many do, and their protectionist policies, such as refusing to offer Apple Pay, have soured customer sentiment towards them. Additionally, a recent Royal Commission into the behaviour of the big four incumbents has uncovered spectacular misconduct, which can only work in the neobanks’ favor.

It may have taken Australia a while to get off the starting block in comparison to the UK and parts of Europe, but the Aussie neobanks are here now and likely to roar ahead if their current pace is anything to go. That makes Australia a market all fintech fans should be watching closely.

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