Eric Wilson was a senior executive at NAB, getting nagged by his father-in-law, a former bank manager for the Bank of New South Wales when he decided he’d had enough.
“He used to always say to me ‘Eric, why is banking like this? It used to be about people but now it’s just about screwing people for as much money as they can,” Wilson tells Your Money.
“Eventually I had a bit of an epiphany when I was at work one day and began thinking that banks really can do better than this.”
Convinced he could do things differently, Wilson did something radical. He threw in his job and started building a new neobank called Xinja (pronounced ‘zin-ja’).
“I quit my job and began to raise money to start a neobank two and a half years ago, long before anyone in Australia knew what a neobank even was.”
Banks but not as you know them
While the word ‘bank’ conjures up austere mental images of faulty pens chained to desks and long lunchtime queues, neobanks (also called digital or challenger banks) boast to be anything but.
That’s because they’re purely digital entities, existing entirely on your smartphone.
“We have an oligopoly here, where four banks control 85% of the market”
Neobanks promise to provide you with all your banking services at the touch of a button, 24 hours a day, with no need to track down a physical branch or deal with baffling opening hours.
“We have no branches to run, no crappy legacy systems, and no staff serving those branch networks,” Wilson says. “That makes it much cheaper to run a neobank and those savings get passed on as lower fees for customers.”
That inherent customer-centric focus is going to provide a much-needed shake up of the banking sector Anthony Thomson, another neobank founder, says.
He should know.
When he founded Metrobank in the UK, the country hadn’t had a new bank in 150 years.
They’d also never had a neobank when he started Atom Bank (its first) several years later.
Now he plans to start one in Australia, called 86400 (pronounced 86-400), and says it’s just what Australia has been missing.
“Neobanks are about using technology to create a more efficient bank that gives better value products and services to customers,” the 86400 chairman tells Your Money.
That’s not to say traditional banks aren’t embracing technology. Many are pushing their own digital products, while some like Citibank Australia have already begun shutting down branches as they recognise the future of banking is online.
But if the big four banks already have a website and an app, how are neobanks any different?
“Old banks going digital is a bit like putting lipstick on a pig,” Thomson laughs. “You can create these fairly attractive front-ends, but they can’t actually do much because they’re plugged into these archaic, antique platforms.”
Therein lies the important distinction between new wholly digital banks, and old banks who are simply digitized.
“Old banks going digital is a bit like putting lipstick on a pig”
It’s something that hasn’t escaped the notice of the big four giants, who have woken up to the new intruders ready to plunder their gold.
One of them, Westpac, earlier this year boldly (and with a hint of condescension) claimed that there wouldn’t be more than 50 to 100 thousand Australians “who think it’s cool to bank with a challenger”.
It’s commentary that doesn’t stand up to scrutiny Wilson says, pointing to the success of Monzo, a UK neobank.
“Monzo has been running two and a half years, has a million customers, and they’re growing at 7 per cent a month so neobanks clearly have something to offer that normal banks don’t,” he argues.
A brave new world
For neobanks, what goes on behind the screen is just as important as what you see on it.
While dissatisfaction with the banks may be what prompts Australians to turn to neobanks, it’ll be what they can offer that will make them stay, Thomson says.
“We have got what we call the ‘digital working memory’ that enables us to look at customers’ data with their permission, every second of every minute of every day and use data analytics, AI and big learning to give them a really differentiated experience,” he explains.
What’s more is that, with your consent, neobanks will be able to view all your financial information in one place, meaning they can offer you what you need when you need it, instead of “trying to flog a mortgage to a customer who already has one with them”, Wilson says.
“Why can’t we let technology and the data make all the easy, smart decisions for you?” he asks. “For example, we’ll be able to suggest that you should take money off your credit card and put it in your mortgage because it’s a lower interest rate and makes sense.”
The new kids on the block
So, who is going to set up shop in Australia?
Wilson’s Xinja is the first cab off the rank, having already released its mobile app and rolled out a prepaid card to over 6,000 customers.
It made waves earlier this year when they launched Australia’s first retail crowdfunded equity campaign to great success, raising over $2.4 million.
Like the others, Xinja is still waiting for the banking regulator, the Australian Prudential Regulatory Authority (APRA), to approve its full banking license to be able to launch its other offerings, including home loans.
volt is another testing the waters. Like Xinja, volt was also started by a former-big bank exec, Steve Weston, who cut his teeth at NAB before working for Barclays, one of the biggest banks in the UK.
“I haven’t come to Australia to build a small bank”
The neobank was the first to be granted a restricted licence allowing them to test on family and friends before they hope to launch properly at the end of 2018 with term deposits and transactional accounts.
Thomson’s 86400 is trailing not far behind, with hopes to be live in the Australian market around March 2019, and steadily unveil its products thereafter.
“Everything I’ve learnt tells me you don’t try to do everything on day one,” he says.
The strategy appears to be mutual as each hopes to steadily expand their offering to match the products of older banks, while beating them on delivery.
Neobanks: Why now?
Digital banks aren’t a brand-new idea.
They operate in countries around the world, including Germany, Brazil, South Korea and Vietnam, and have particularly thrived in the UK, something that bodes well for Australia.
So, given that Australia has long been dominated by the big four banks (ANZ, NAB, Westpac and the Commonwealth Bank), why is it only just now that neobanks are getting a look in?
“The idea that the market won’t be hugely disrupted by neobanks is crazy.
One reason is that in 2017 the then-treasurer Scott Morrison dramatically simplified the application process to enter the deposit market (AKA the banking market). Within months of the reforms, new digital banks had announced their intention to set up in Australia, submitting their applications to APRA.
Between them they hope to be the answer to what Wilson says is Australia’s dire competition problem.
“We have an oligopoly here, where four banks control 85 per cent of the market,” he says. “They’re high-cost, high-margin businesses, and to say that they aren’t terribly well-behaved is an understatement,” he explains.
That misbehaviour was most-recently documented by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services, and highlights the opportunity for digital banks in the country.
“It’s just astonishing how every day another story emerges of how these customers have been ripped off by those banks over a long period of time,” Thomson agrees. “That’s partially where the opportunity lies, to create a bank that consumers think genuinely does put them first.”
Prepare for takeoff
Those three digital banks, Xinja, volt and 86400, may be contending to compete with the big four, but they say that the rivalry between themselves remains friendly.
“What we’re going to do is to take customers from the incumbents and not each other,” Wilson says. “What we saw in the UK is that once you get to a critical mass of three or four neobanks, customers increase for all of the neobanks because people get familiar with them and see that we’re safe and not weird.”
Nor are they going to be content with remaining small fish in a big pond.
“I haven’t come to Australia to build a small bank,” Thomson says. “It’s an opportunity to build a substantial bank using technology, state-of-the-art data analytics, using artificial intelligence that will enable us to give a completely different experience to customers.”
Given these advantages, Wilson says it’s only a matter of time until neobanks become the new normal.
“This is going to happen, and you can question whether or not it’ll be Xinja but the idea that the market won’t be hugely disrupted by neobanks is crazy.”