Mutuals eye new business models in the quest for reinvention

  • By Christine St Anne

Westpac’s recent move to roll out banking as a service highlighted that the business model will be embraced by the big banks amid the rollout of open banking and cost pressures, it’s a strategy also eyed by the second-tier banks.

It was a theme explored at the RFI Group Australian Banking and Innovation Summit in an opening panel on Thursday with Gateway Bank CEO Lexi Airey; Newcastle Permanent CEO Bernadette Inglis; Teachers Mutual Bank CEO Steve James and Heritage Bank CEO Peter Lock. 

The panel was chaired by Backbase regional vice president Malcolm Macnaughtan

It was only just this week that Westpac announced its BaaS platform.

Macnaughtan acknowledged that the trend was already emerging overseas particularly for smaller banks to use as a strategy to leverage their licence. 

It’s an approach that Gateway Bank’s Airey is also assessing. 

“It is definitely on our radar. We have been watching Europe and are starting to look at Starling Bank which as we know is a retail bank with a banking as a service offering.” Airey said.

Similarly she is assessing Solarisbank adding that it is a business that positions itself as a technology company with its Baas offering. 

For Airey platforms provide the an opportunity to develop a bank’s own revenue steam as well as the opportunity for partnerships adding that Gatway would most likely be a “fast follower than a leader”. 

Similarly, Heritage Bank’s Lock is also evaluating the options for the bank.

Currently the bank has developed its own platform and Lock admitted on the panel that the technology does pose some challenges.

“Heritage Bank has a homegrown system.  It has been on old ultra-data system from decades. We have had to chop and change it.  And now it's something that nobody else can work out at us, which is a problem. 

“So, we don't want to own, build, operate, maintain [systems] anymore. We want to go to software as a service. We want to go into the cloud. But we have a technology stack that needs to be reinvented,” Lock said.

It is definitely on our radar. We have been watching Europe and are starting to look at Starling Bank which as we know is a retail bank with a banking as a service offering, Lexi Airey, Gateway Bank 

“It is still robust. But it is a classic case of strip it out, add an enterprise service, but with API layers that can make it work while we search for the new answer.” 

A new answer could be in the form of a BaaS platform but at this stage it remains simply on the ‘interest’ radar for Lock and his team. Here the cautious approach is adopted because for Lock a rushed approach to reinvention can lead to a “road littered with roadkill”. 

Lock said the bank had been close to inking agreements with joint ventures but was "very cautious" with potential partnerships. 

He also recognised that some banks - in particular some of the neobanks have gone down the path of BaaS as a way to drive revenue, given that "traditional banking was proving hard to make a dollar from". 

“We will remain interested [in BaSS] but the road is littered with roadkill and we don’t want to hit another roo basically,”  

For Lock, he “will be sitting back and letting other people take the damage on the bull bar. And then we'll see what's survives. Now, that's very a crude way of saying it, but it is a strategy that is proving correct.” 

According to Lock, if the bank had jumped in a few years [with a tech overhaul], “we would have been in all sorts of problem.” 

“When you look at that reinvention, we are coming back to a more traditional way of doing things and for now the bank is focusing on revamping its core banking systems.” 

Lock also eyed a similar neobank strategy that is currently in the pipeline for Teachers Mutual Bank.

The strategy by TMB will see it double its investment spend and for James, the move was driven by the shift towards digital banking as well as open data.

While the Teachers runs a multi-brand strategy, James said the bank needed a pure digital platform.

“People call it a neobank. We are hoping to have the version of a neobank running by March 2021. 

Similarly, Lock said his bank was looking at developing a “H-Bank” – digital derivative of the bank.

“We wanted to create a new platform that allows for [technological] migration.” 

Again, Lock emphasized the importance of a prudent approach - he believes standalone neobanks face a difficult future. 

I'm not necessarily in the camp that the neobanks banks are the answer. I think we've seen some those brands struggle and will continue to struggle. COVID has proven the model may not be economic.

“These strategies can be tricky. If it is so easy, we would all do it," he said.

However, Lock was careful to emphasise that this view was based on standalone neobanks - not the models that have garnered buy-in from bigger players like Bendigo. 

Nevertheless, he added: "We are watching Steve and hoping very much that his bullbar works and he has a successful launch with his neobank.” 

We will be sitting back and letting other people take the damage on the bull bar. And then we'll see what's survives. Now, that's very a crude way of saying it, but it is a strategy that is proving correct, Peter Lock, Heritage Bank. 

Partnerships will also remain key for the sector. Newcastle Permanent’s Inglis spoke about the Athena partnership announced recently. 

Key to the tie-up was the importance that each partner’s values were aligned. 

We had to ensure we could partner with people that we believe had aligned values and busines models that also complements our core business and our core purpose. 

“Athena complements all those needs. It was a very positive relationship. 

According to Inglis, there will be more initiatives the pipeline. 

We will not rest on our laurels, never be satisfied. We will remain passionate on delivering exception service that is also sustainable, Inglis said.

“We have been here for 117 years. Our job is to make sure we have an organization that endures.”