Neobanks - A Glitch in the Matrix
Written by: Ryan Chan
Published: 8th July 2020
Overview of financial banks/why neobanks exist
You may have seen vibrant marketing campaigns of single-word companies promoting you to ‘challenge yourself’, ‘take control’ and ‘wisen up.’ No, there isn’t a new fad diet to chase. These are the calling cards of Neobanks, an emerging financial technology product aiming to entice digitally conscious consumers to support their cause. So what is a neobank, and what can they offer?
What is a Neobank?
Neobanks, also known as challenger banks, are exclusively online banks, meaning they operate without any physical brick-and-mortar branches for deposits. Consumers can access funds and ‘bank’ via each neobanks’ app, which is specifically designed for a user-friendly experience. Given their relatively recent emergence, the main neobanks operating in Australia have focused on growing consumer bases through aggressive marketing campaigns and higher interest rates compared to their competitors.
Current neobanks in Australia only allow their consumers to deposit funds and do not provide money lending services (except 86,400). The neobanks mentioned in this article all provide a ‘two-in-one’ service for customers, operating with simultaneous everyday accounts (accruing zero interest) and a higher interest rate savings account targeted at growing savings.
These neobanks are registered as authorised deposit-taking institutions (ADIs), meaning that deposits of up to $250,000 are protected by the Australian government’s Financial Claims Scheme.
A few examples of neo-banks operating in Australia can be seen on the right.
Models abroad and how they have fared (UK comparison)
In 2020, Neobanks is not a new and exclusive concept. Challenger app-based banks first appeared in the United Kingdom in the mid-2010s, with notable neobanks Monzo and Revolut launching in 2015. The two fintechs were established based on rising consumer doubt over the credibility of traditional banking methods following the GFC and EU Debt Crisis.
Although it is initially difficult for neobanks to acquire market capital and consumer bases, the UK model has seen immense growth in customer numbers since 2018. Revolut gained 5 million customers between 2018 and 2019 alone, a gain of 166.7%, and at the end of 2019, neobanks in the UK had 19.6 million customers. However, survey data from YouGov reveals that more has to be done to convert consumers to the ideology of digital-exclusive banking since only 23% of respondents were uncomfortable with online banking and 53% used banking apps of traditional banks. This figure is somewhat misleading since consumers can hold more than one bank account at once - in 2019 the number of UK individuals holding accounts with two banks surpassed the number holding accounts with one bank only.
Not surprisingly, neobanks are estimated to grow significantly, with the global neobank market holding an estimated CAGR (compound annual growth rate) of 46.5% between 2019-2026 (Zion Market Research, 2019). Prior to the coronavirus pandemic, Monzo was valued at £2bn and Revolut at £4.2bn.
Australia - What has been the recent market expectation (movement involving capital raising etc, introducing CDR)
CDR assistance following ACCC and Hayne report
The Australian Government in 2017 introduced the Consumer Data Right measures after consultation with the ACCC. In July 2020, this will extend to consumer data in the banking sector. What does this mean for neobanks? The increased transparency in information will allow neobanks to better compete and develop methods to attract consumers. This provides much needed competition as evident from the Royal Commission’s report into banking misconduct.
Investor sentiment towards neobanks in Australia has generally been positive - as outlined in the following examples:
86 400 partnering with ZIP co
The RBA’s confidence regarding inflation concerns may well be factually supported. Rather than focusing solely on short-term inflationary movements, the more pressing issue lies in adequately addressing the medium-term surge in labour force and its economic implications.
Xinja concerns (dubai investment, jobkeeper non-concern)
Xinja raised eyebrows as it attracted $433m in equity from Dubai-based World Investments in exchange for a 40% stake. The news came after Xinja had hit a rough patch in the Coronavirus pandemic. After accumulating more than $500m in deposits, Xinja was pressured by successive RBA cash rate cuts in March forced the bank to firstly freeze its 2.25% interest rate availability to new customers, followed by a reduction in its offered rate to 1.8%. Xinja was also reported to apply for the JobKeeper assistance, however this is not unusual given their revenue/customer base growth approach as opposed to profit seeking.
The equity raising is projected in several releases over 24 months, and may run into issues with the Financial Investment Review Board (FIRB) if World Investments is not found to be ‘fit and proper’ by APRA.
Volt equity raisings
Volt, which is currently in a ‘beta’ rollout to waitlisted users, has found success in raising equity. This was headlined by a $70m capital raising in January, which was oversubscribed (meaning demand for its shares was greater than the shares available). Volt had intended to raise an additional $50m in capital in conjunction with publicly launching on the ASX before the pandemic, however, they have suspended this due to poor market conditions. This has allowed Volt to work on improving its platform and loan services before launching to the public.
Conclusion
In an age where youth attention spans are diminishing rapidly, the excessive paperwork and protracted approval times consumers face at conventional banks, are ultimately being unsettled by the consumer-friendly approach that neobanks represent.
