Making banks competitive

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Xinja was delighted to respond to the Productivity Commission's 'Inquiry into Competition in the Australian Financial System' as regards banking, and making it easier for new entrants to provide better services to Australians. See a synopsis of our response below + link to the full document.

It’s time for Australians to enjoy the benefits of banking competition, innovation and quality of service already enjoyed by customers in other parts of the world.

You need $50 million to start a bank in Australia, and then some.

Currently, to become an Authorised Deposit-taking Institution (ADI) - which is pretty important if you want to become a ‘bank’! - you need around $3-5m of capital and to comply with relevant regulatory standards. However, in order to apply to APRA (Australian Prudential Regulation Authority) to use the word ‘bank’,  you have to have $50 million in capital!  As you can imagine, this is a significant hurdle. It’s hard enough being a start-up, without the additional burden of raising this amount, and of course, in fact you need to raise a lot more, as you also need enough to build a core banking system, ensure compliance, acquire customers etc.

Bigger banks have access to lower costs of funds

Furthermore, smaller banks (including new players) don’t get the access to comparatively lower costs of funds (and higher volume) enjoyed by the big banks, so it becomes harder - in the immediate term - for them to offer competitive rates.

No wonder we haven’t seen many new banks

With these barriers to entry, most of the innovation we’ve witnessed in financial services in Australia, therefore, has not been in banking per se. A typical ‘lean start-up’ seeks the fastest, least risky path- ie: starting with a minimum viable product (MVP) to validate, then learning & iterating from there till they are ready to scale. It’s hard to start ‘lean’ if your first customer already costs you in excess of $50m.

Raising funds for a startup and raising funds for a startup bank are two very different challenges. 

So what ARE the options?

There are 3

  1. Raise over $50m in capital - there are no grants at this scale, a bank loan hardly makes sense, and it’s very tough trying to raise this kind of money.
  2. Partner with an existing ADI or buy a small one - ie: be dependent on and constrained by your competitors, or
  3. Raise less capital and operate like a bank without calling yourself a bank.

None of these are particularly commercially attractive, market competitive, or market attractive.  In fact, a branch of a foreign bank would most likely find it easier to enter the Australian market, than a local startup under the current regulatory framework.  

Applying for a 'business loan' from a bank to start a bank would be akin to a startup asking its competitor to fund it, whilst handing over your business plan for how you will compete. 

Comparing the UK Neobank experience

The UK has a very healthy neobank market place, with several major players already well underway, like Monzo, Starling Bank, Atom Bank and Tandem. The difference there is that the barriers to entry are much lower. Since 2013 the minimum capital requirements in the UK have been SIGNIFICANTLY lower - ie: €1 million or £1 million (whichever is lower) so it’s not surprising that these companies have got off the ground and done well.

Applying an L plates/P plates approach

Obviously the original reasons for imposing such a restriction were presumably well-intentioned - it was about creating a capital buffer that would ensure the viability of the bank and security for its customers. So the regulatory authorities in the UK decided to allow companies to apply for a restricted license - a bit like L or P plates - in other words, banks are given a time to prove their reliability whilst customers’ interests are protected. This phased process is being considered by the Australian regulators, and at Xinja this approach certainly makes sense to us!

Xinja is undaunted

At Xinja, we were acutely aware of the environment we were entering. We are pleased that potential lifting of restrictions could make our path easier, but we didn’t and aren’t (pardon the pun) banking on it. #xinjaiscoming

You can read the full text of our response here or download the PDF here.