Finance Market Update - 12 February 21
New banks and old banks have the same differences. In this fortnights update we talk about the first wave of neo banks, their differences to old banks, and how tech companies might be their main competition in the future.
New banks old differences
What makes banks different?
Technically and legally speaking what makes a bank a bank mostly comes down to their authorisation from the government to hold people’s money (deposits) but in reality it is more than that.
They play an integral role in the transference of money through an economy, help to grow the economy through the creation of credit and lending and facility payments between people and businesses. Banks are critical pieces of economic and social infrastructure.
But from a customer perspective the principals of what makes a bank a bank has not changed in centuries.
You go to a bank to borrow money, hold your money, and transfer your money.
In that regard, from a customer point of view banks can look like utility providers but they all have mobile apps that make these things easier, and new age “neo” banks are generally improving the UI and UX further to differentiate themselves.
The problem is that most banks have the same differences.
What I mean by that is the differences between them are marginal because you go to them for the same things.
Those same things are to borrow, save and spend. Evolving that core offering is challenging. But it is evolving, the experience of those things is changing and who provides the experience is changing.
Over the past few years, the Australian government regulator for banks ‘APRA’ started issuing brand new banking licenses. This followed on from recent moves in the UK that saw wildly popular and successful start up “neo” banks launch as fresh competition to the high street banks.
Here in Australia, the first wave of neo banks that launched were Xinja, Judo, Up, Volt and 86400.
Each of them took a different approach to building a bank from a scratch and some methods have proven more successful than others.
Arguably, the two most successful cases are Judo and 86400.
Judo is focused on SME lending and banking and has the largest loan book by value and highest valuation as a “unicorn” >$1 billion-dollar valuation. While 86400 was until last week owned by Cuscal which is one of the largest payment companies in Australia, but have entered into an agreement to be bought by NAB and will see them combined with the digital arm of NAB call UBank.
It is a shame to see 86400 joining one of the big four as it goes against one of the core tenets of new banks to disrupt the market and be a genuine challenger to the big banks.
The big four Aussie banks CBA, NAB, WBC and ANZ have the lions share of basically every corner of the banking and finance market in this country and to see them buy smaller potential threat banks reduces the chances of competition driving better outcomes for customers.
Fortunately, there are a handful of other neo banks in the early stages and we can expect to see quite a few of them come to market in the second wave over the next few years.
We are also seeing successful foreign neo banks like Revolut and Oak North setting up in Australia.
Of the first wave of home grown neo banks none is more of a failure than Xinja.
They were early to receive a banking license but failed a core principal of banking, capital management. They offered exceedingly high deposit rates which burned through their capital and cash reserves and they could not raise money fast enough to avoid shutting their doors.
One of the issues they faced, as will many start up banks, is raising capital from investors.
Being a bank is not like being a technology start-up. There are huge capital requirements and costs. They operate in a complex and highly regulated marketplace and if they lost peoples money there are very painful and real-world consequences for everyday citizens.
Banking is a tough game with strong entrenched incumbents with a lot of money, so when a new start up bank goes around to investors rattling the tin for money they better have a good plan on how they are different from the existing banks.
That is one of the core reasons Xinja, and most likely others in the future, will fail, they do not differentiate themselves enough or offer a genuinely different experience.
In this regard to being unique and different, the neo bank Up is doing very well. Their app and services is very user friendly and very easy to use with many useful and thoughtful features like automatic round ups, multiple saving accounts (and new ones that can be opened in less than a minute, compared to a week at old banks) and more. But they also have their drawbacks and in their case they are not a full bank but rather they use Bendigo and Adelaide Bank’s banking license to offer services effectively rendering them a user interface overlay on a traditional banking platform.
Any new or old banks are going to need to think, act and be different in the future.
Utility of banks
Big tech is coming for the banks and financial services industry and could very well dominate in the future.
One of the other new banks is Volt, who has yet to launch many products and seems to be working in the shadows. They are likely to take a slightly different tack yet again and focus on building a banking platform that can be rented out by other companies.
This is called ‘Banking as a Service” (BaaS) and is effectively what Up is doing on top of the other bank.
BaaS will become a big deal.
Of the big old banks Westpac has already partnered with a company called 10x Future Technologies to start building out their capability to rent out their banking license through a BaaS platform and their first partner to do this is Afterpay.
Depending on how successfully Afterpay can get its users putting money into an Afterpay branded Westpac bank account could lead to many more of these deals being done. Watch this space for CBA and Klarna.
Unfortunately for both the old and new banks, big tech is coming for them both. Apple has launched a credit card, Google is updating G Pay and Facebook will soon have its own digital currency.
We talked about in an earlier update about how tech companies are already taking over the customer experience for banking.
For example, if you use Samsung Pay or Apple Pay, you are using the tech companies user interface, that is your experience, you are not experiencing the bank or their app in front of you, the banks just process the transaction in the background like a utility provider.
To counter becoming a utility it is likely we will see banks mobile apps try to become hyper personalised and connect to other aspects of your life. Such as including AI to give you recommendations and feedback on spending habits, offer discounts and even gamify the savings experience. Banks will need to be embedded into your life through tech to be stay relevant or risk being pushed to the background.
The biggest banks or at least companies who provide the banking experience, of the future will probably be big tech companies like Apple, Facebook, and Google, so they are a real threat for any bank, old or new.