A number of neobanks in Australia, such as Volt and 86 400, are trying to make dents in an extremely consolidated banking market dominated by the four major incumbents – CommBank, ANZ, Westpac and NAB. Comparisons may be drawn between this digital banking
shakeup and that which occurred in the UK in 2014-15, but Australia’s incumbents have set a higher bar than their UK counterparts.
With Australia’s crop of neobanks still in their infancy, there will be concerns that the coronavirus pandemic could derail this movement before it really gathers pace, as an incredibly uncertain economic environment sets in around the world.
After the Reserve Bank cuts its base rate in March, 86 400, Volt and Up, all responded by slashing the competitive rates that had been integral to their appeal. The decreased rates are however still comfortably higher than customers will find at any of the
Big Four banks so there is some consolation to be taken there.
Nonetheless, challenges are sure to be thrown up that may prove difficult to navigate for challengers and startups without the balance sheet robustness of the established players. Back in the UK, Monzo and Starling
furloughing some employees is one indication of this.
Rob Bell, CEO of 86 400 however, believes that neobanks are altogether better equipped to adapt to working in an entirely different way.
“We’re 100% cloud-based so we were able to move the entire bank from office space to working from home within a few hours,” he tells Finextra Research.
“Despite the turmoil, we’re operating at the same speed and efficiency as were four weeks ago. That we can still process mortgages and so on, I think, will be a massive advantage.”
Bell believes that these challenging times will expose the inefficiencies of large incumbent banks.
Open data
The Australian banking market is arguably even more consolidated around its traditional banks than the UK, with the Big Four holding around 80% of the retail market share.
It is against the backdrop that Australia prepares for its own version of Open Banking, the Consumer Data Right (CDR) which is intended to go live in July. However, given current circumstances, do not be surprised to see this delayed.
It was originally intended for launch in February, but the implementation of the new open banking rules was pushed back owing to the major banks’ security concerns relating to data sharing.
For banks like 86 400 and Volt, one of the most important considerations will be the quality of the data that gets shared under CDR. There are concerns that the initial data sets from the major banks are quite limited, omitting fundamental details such as
account numbers, direct debits and merchants.
“These are considered to be voluntary data sets,” Bell says. “So, you can imagine nobody is going to provide these if they’re not mandatory.”
It may be expected that Australia’s big banks do the bare minimum in implementing Open Banking, owing to the anti-competitive behaviour they have been accused of undertaking.
The Australian fintech industry complains that big banks are able to essentially self-regulate and implement legislation at a glacial pace. This is detrimental to fintechs that have developed products and services with particular regulation in mind, as the
delays caused by incumbents' casual approach can prove fatal to a startup.
At the end of January, Australian fintech bodies called on the Government to clamp down on incumbents’ anti-competitive behaviour, such as blocking their customers from using services of startup investment apps.
One of the key battlegrounds between incumbents and challengers in Open Banking’s rollout is the desire of the big banks to see screen scraping banned. The Australian regulators - the Securities and Investments Commission (ASIC) and the Competition and Consumer
Commission (ACCC) have recently announced that this will not be happening, declaring it a valid way method of data sharing.
“They acknowledge that screen scraping plays a valuable role in competition and will do for some time until open banking is fully available,” Bell says.
Consumer groups cite screen scraping's ban in other markets and argue that customers providing their online banking details to third parties runs counter to the data protection that CDR is supposed to instill. It can also allow nefarious actors such as payday
loan companies to use data for predatory marketing purposes.
The Australian fintech industry will however argue that screen scraping will remain a necessary safeguard against incumbents who hang on to the legacy systems because of how expensive and cumbersome they would be to replace.
"Major banks are right to say that they're concerned with data security, but they should look at firms they are dealing who screen scraping and how long they have been around," Steve Weston, founder and CEO of Volt, says to Finextra Research
"Look at Yodlee for example who have been around for 20 years and worked in many countries around the world."
Higher expectations
With uncertainty over the effect that Open Banking legislation will have paired with the economic turmoil that the world is heading for, Australian neobanks’ task looks a complex one.
It is likely that 86 400, Volt and their peers will have looked to their historic homeland as a basis for how they can build a distinctive brand and acquire healthy market share.
Weston says that Volt’s business model is modelled on that of Starling Bank and has recently hired its co-founder
Julian Sawyer as an adviser.
Weston says: "We will look to license our platform out to other banks - initially in Australia, but also overseas once we have proven the model works at home - which we see as being similar to Starling."
An example of Starling's platform-as-a-service offering is its reported partnership with RBS in 2018, aimed at assisting the banking group with its own digital banking ambitions.
This is where Volt would choose to depart from Starling, with Weston ruling out entering into partnerships with Australia's major incumbents.
It should be expected that the big Australian banks are offering a better digital proposition than the UK’s were at the time Monzo, Starling and Revolut emerged. Votl and 86 400 therefore may have more to lose in a trade-off with a Westpac or an ANZ, and
so should look elsewhere for partners with which to collaborate.
Weston says: "We would look to work with big banks overseas - we have many of them visiting us now - and in Australia, we are looking to smaller players who don't have significant market share or the investment capability to do what we're doing."
Having previously partnered with PayPal to simplify the sign-up process for would-be customers, Weston tells Finextra Research that he regards such partnerships as fundamental to the business model of a neobank.
“We think this will be the most obvious point of difference that you will see in Volt Bank,” Weston says.
“Our platform has been architected to enable us to provide banking products to partners.”
Volt recently announced a partnership with Cotton On, Australia’s largest retailer, whose staff and customers will undertake the bank’s savings challenge to promote and encourage greater financial literacy, through setting themselves weekly savings goals.
“You will see us begin to announce more partnerships with firms that have access to large customer numbers and want to offer banking products without actually becoming banks themselves,” Weston says.
Bell says that 86 400 also looked at the UK closely in its research but realised that believes that Australian banks had set a higher digital bar than their British equivalents.
"The UK is a great example of a market where there weren't any genuine alternatives to the big banks and saw the success that the new entrants had,” he says.
“However, we saw that the large banks in Australia were a bit more advanced than the incumbents in the UK.
“This is why we had to go with a much stronger Day One proposition. It isn’t enough just to create a slick app - we have to deliver a much better experience and offer features that you can’t get anywhere else.”
Bell’s two examples of this are a tool for aggregating all financial relationships within the 86 400 app, and using data to predict upcoming bills, helping customers see what they can expect to leave their accounts in the near future.
“This is a feature that nobody would expect of a big bank,” Bell says. “Customers are using it and going, ‘Wow, we never thought of a bank doing something like that.’”
So, despite a comparable retail banking landscape to the UK, Australia’s new entrants have the tougher task of piercing an even more consolidated market, and one dominated by more digitally advanced incumbents, as 86 400 and Volt recognise.
That they also now have to navigate the turbulence caused by the Coronavirus pandemic will not make this challenge any easier.