What will success look like for the neobanks?
The entry of challenger or neobanks in Australia was among the key defining trends for the year. As the wider banking sector confronts a number of challenges on the regulatory and growth front, Christine St Anne assesses the outlook for these budding banks.
New banks receiving a green light in 2019 by the prudential regulator APRA saw a number of neobanks make a splash on the local market. Think Volt Bank, 86 400, Judo Bank and Xinja.
Driven under the remit of the then Treasurer Scott Morrison, the initiative was aimed to bring greater competition to a market characterised by an oligopoly of the four big banks. Indeed, as each new bank launched into the market their narrative was very much around disruption.
“It’s time Australia's very old banking model was disrupted. We are 100 per cent digital, and we want people to have a real alternative to the incumbent banks,” Xinja CEO Eric Wilson said at the time.
“We want to give customers a real choice to be able to be with a bank that looks after them.”
Frictionless and faster banking are at the heart of the propositions of these new banks. Upon launch, the newly minted bank 86 400 promised a 2-minute onboarding experience.
Importantly each of these banks entered the market with the consistent aim of putting the customer at the forefront of everything they would do. A worthy aim amid the backdrop of an industry still struggling with the aftermath of a royal commission- more on that later.
It’s still early days to gauge the success of these budding Australian banks. However, there are some key learnings from their peers in the UK market who have garnered a solid track record.
UK gave the green light to challenges back in 2005. Since then a myriad of challenger banks have come into the market, the dominant players today include Monzo, Revolut, Atom Bank and Starling Bank. Metro Bank has also entered the UK market; however, its business is not a pure digital play, having rolled out a number of branches.
RFi Group managing director Victoria Bateman acknowledges that UK’s challenger banks are continuing to gain traction particularly among the millennial segment as well as Generation X.
Monzo, Starling and Revolut are the stand outs in terms of scale and attention, according to the UK-based Bateman. RFi Group data shows that 7 per cent of UK consumers have used Monzo, and this has grown significantly in the last 12 months.
For Bateman, the challenge for these banks now is translating this momentum of account building into a tangible profit by getting these customers to see them as their main financial institution.
And here lies the sticky challenge for UK’s challenger banks.
“There has been lots of traction in account opening but these challengers haven’t yet successfully converted this to profitability,” Bateman said.
“Despite increased penetration, low proportions of consumers are using these providers as their main financial institution.
“They tend to have secondary accounts with these challenger banks. UK’s big five [Barclays, Royal Bank of Scotland, HSBC, Lloyds and NatWest] still retain the primary bank relationship, generating the lifetime customer value,” she said.
RFi Group data shows that while 16 per cent of consumers in the UK have used a neobank, just 1 per cent use them as their main bank
Source: RFi Group
For Bateman, customer inertia is at the heart of this customer stickiness.
“Whilst challengers are gaining some ground, in the grand scheme of things in the UK customer inertia still prevails.
“The majority of customers are generally happy with their existing relationships and comparing the customer experience of challengers to the traditional banks shows little differences.
“Therefore, mass dissatisfaction and the promise of a substantially better customer experience proposition are not drivers of change. Challengers will also need to appeal to a wider variety of future customers in order to achieve scale,” she said.
Breaking the banks?
Closer to home, Accenture Australia and New Zealand banking lead Alex Trott sees a number of lessons for the Australian market based on the UK experience.
“The interesting trend in the UK is how quickly some of these banks have grown. However, the question here is how you would qualify success,” Trott said.
Here he echoes Bateman’s view around customer acquisition and profitability,
“The industry is looking at the customer numbers which of course is a key indicator of market penetration, but is this the only measure of success?
“Is it also about turning around a profit or widening the number of products offered? On customer numbers, some of these banks are acquiring customers quickly but are also losing them just as quickly,” he said.
Again, it will be about who can win the main bank relationship
Servicing a niche is also a strategy that could play well for growth, an approach adopted by Australia’s Judo Bank whose focus is on small to medium enterprise (SME) banking.
“There is more opportunity to drive greater returns and margins in commercial and SME banking and therefore the opportunity to drive greater profitability,” Trott said.
“Judo has got a good proposition in that market and are also focused on attracting good quality customers.”
Another key driver will be around building scale.
He highlights Revolut as a case in point. The neobank is building up its business by expanding into successive markets. Launched in 2015, Revolut, has plans to launch in the US, Canada, Singapore, Japan, New Zealand and Australia.
“By offering a similar proposition across markets, this bank is building a global base to create scale and get to a point of profitability,” Trott said.
He also sees niche players also scaling up, the caveat here is that they need a unique proposition in order to drive up that scale.
For example, TransferWise’s niche is fast and secure cross-border payments.
The business’s proposition has resonated with both the new players and incumbents. Not only does it have a joint venture with Starling but recently secured a partnership with Up.
It is also eyeing a number of bank partnerships in the Asia Pacific region.
Catch phrases such as ‘breaking the banks’ and ‘eating the lunch of the big four’ were part of the media narrative as successive neobanks were launched in Australia.
Going forward, Trott does not see these new players taking a combative stance.
As with profitability, scale will also be a key measure of success and here the concept of collaboration and partnerships will be key.
“It depends on what the objectives are. If you look at some of the original fintechs, a lot of them were about disruption with a view that they were going to introduce a new way of banking to compete against the incumbent banks.
“What we have found is that the model around that is very much around collaboration.
“There has been a movement from competition to collaboration with neobanks now assessing how they can work with the big banks,” Trott said.
Indeed, UK’s Starling Bank which got its banking licence in 2016 has partnered with several online companies to offer its customers a full banking service that it describes as a “banking experience fit for the 21st Century”.
Customers of Starling Bank now have the ability to access mortgage advice through the platform Habito, manage their investments through Wealthsimple and apply for insurance through Kasko. The bank has also added digital pension provider Pensionbee to its line-up. All these services are available through a bank app.
The bank has also expanded into small business lending. SME focused peer-to-peer lender, Growth Street is now part of the neobank’s marketplace.
Most recently it was revealed that the Royal Bank of Scotland will use Starling Bank’s services to build its own digital bank.
Starling Bank CEO Anne Boden has previously told RFi Group that she sees her bank play more in an “ecosystem” that includes both fintechs, non-banks and even the more established players.
The strategy seems to be paying off the for the bank. In a letter to customers in August, Boden said that the bank aims to break-even by the end of next year and has a “clear path to profitability”. It is also on track to reach $1 billion in customer deposits.
According to RFi Group’s Bateman, marketplaces and third-party partnerships are the big buzzwords in the UK at the moment.
This will be particularly amplified as the younger generations become increasingly multi-banked. In fact, millennials are a key market for these banks – a sector expected to grow to $27.1 billion in Australia by 2025.
In terms of what success will look like for these banks in the future, perhaps the last word belongs to Boden who attempted to answer this question in her August letter.
“Great companies today ought to be more than the near monopolies of Google and Facebook.
“They should have a social conscience and a mandate to address injustice and promote fairness, as well as having the global reach and influence that allows their voice to be heard.
“Today, Starling is no longer a start-up and a lot more than a full scale-up. We are in rocket ship mode, looking forward to our future as a great company with fairness at its core.
The full report is included in the AB+F Magazine December/January edition.