Neobank founders warn APRA red tape will shut down growth pipeline
Australian neobank founders have warned new regulations that make it harder to obtain a banking license for aspiring operators will hurt growth in the sector, as the prudential regulator raises the bar for new entrants.
The Australian Prudential Regulation Authority (APRA) updated its requirements for companies hoping to obtain a banking license on Thursday to include higher capital requirements and compulsory plans to develop revenue-generating products.
According to the regulator, the new regulations are designed to encourage new entrants to have a “greater focus on longer term sustainability, rather than the short-term ambition of receiving a licence”.
Volt co-founder Luke Bunbury said new regulations could stop new neobanks entering the market. Credit:Edwina Pickles.
The latest suite of regulations come after local neobank pioneer Xinja shocked shareholders and customers by becoming the first bank to return all deposits and exit the industry last year, following months of burning through capital on high interest paying deposit accounts.
Volt co-founder Luke Bunbury said raising capital as a neobank was “incredibly challenging” and while APRA’s new laws were “necessary”, they would be a deterrent to new players entering the market.
“A sceptic may say there are no new entrants from here on,” Mr Bunbury said. “I know how tough it is raising capital as a banking aspirant and if the hurdles go higher, it may end that opportunity all together.”
He added that it was likely the future of neobanking would be through partnerships with major banks or borrowing licensing rights through banking-as-a-service arrangements, an emerging business offered by Westpac and Volt.
“People may then become more creative with how else to skin that cat,” Mr Bunbury said.
Meanwhile, small business-focused Judo Bank’s co-founder Joseph Healy said the neobank sector does need more rigour to ensure that operators were better equipped to serve the public, which the new regulations should help achieve.
He also stressed that a successful neobank needs the three “must-haves” – significant capital, a clear competitive advantage and an experienced management team.
“The criticisms of the banks that have failed is they’re lacking in one or at least two of those must-haves,” he said. “The future will be in credible new entrants that satisfy the three must-haves.”
Mr Healy added that partnering with major banks, like in the case of the National Australia Bank’s bid to buy 86 400, undermines the purpose of challenger banks.
“The whole objective around neobanks is creating competition. You don’t create competition by partnering with major banks,” he said.
KPMG partner Ian Pollari warned APRA needed to apply a “careful balance” between helping new entrants find their feet and protecting depositors, with a greater emphasis put on ensuring neobanks were able to develop sustainable business models.
“We’ve clearly seen some models emerge where there has been a bias towards a liability-led deposit taking business without careful consideration for the asset side of the balance sheet.”
Xinja offered its customers high interest deposit accounts in order to attract new customers and claim market share but did not offer loans or other revenue generating products, causing it to breach APRA’s capital requirements and ultimately exit the market.
APRA’s new regulations also dictate new entrants must develop advanced planning for a potential exit, that includes a blueprint for safely returning customer deposits.
Mr Pollari said Xinja’s demise “was clearly a reference point” in APRA’s decision to tighten regulation, adding lessons from failed ventures both in Australia and offshore must be learnt.
“Being different for the sake of being different is not a winning proposition,” Mr Pollari said.
“APRA themselves have resource constraints, they need to apply scarce resources to those with a genuine intent to enter Australian and grow a sustainable, profitable business.”
“Any new players looking to bring new propositions need to think about how they’re going to be different and how they’re going to make money,” he added.
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