Neobanks, which operate entirely online, play the all-important role of keeping Australia's big banks on their toes. Photo / 123RF
Neobanks, which operate entirely online, play the all-important role of keeping Australia's big banks on their toes. Photo / 123RF
OPINION:
For the last couple of years, it looked as if Australians had a genuine alternative to the big banks.
The rise of the neobank promised so much but their ongoing success is in doubt.
Neobanks are best described as agile, start-up banks.
They don't have branches and operate entirelyonline and through apps. And instead of legacy IT systems patched together with sticky tape and string, they start with a clean slate, leveraging cheap and flexible cloud technology.
What it means – in theory at least – is that they can offer higher interest rates on deposits and lower rates on loans.
The neobanks let users open a bank account on their phone in less than a minute from start to finish and use data and analytics to provide services such as predicting when bills and other expenses will arise, helping customers plan their finances better.
But the rise of the neobanks is looking decidedly shaky after two of Australia's four new banking entrants effectively exited the market.
In the past few weeks, Xinja Bank, one of the four neobanks granted a restricted banking licence by the Australian Prudential Regulation Authority, has handed back its licence, and another, 86400, is being sold to the National Australia Bank.
That leaves two others, Volt Bank and Judo Bank.
Volt Bank takes deposits from customers but is yet to launch a loans product. A bank can't go on for too long paying interest to customers without bringing in any interest income for loans. This scenario led to the demise of Xinja Bank. It had gathered close to 40,000 customers who between them had deposited a quarter of a billion dollars, but it was unable to raise enough capital to develop and launch a lending product. This meant it was spending existing cash from investors to pay interest to depositors, but didn't have any money coming in.
It had to keep raising money from investors, and eventually the investors lost patience.
To be fair, this doesn't mean that Volt Bank will go the same way.
But it is also true that Judo Bank is so far the only unequivocal neobank success in Australia.
Judo Bank specialises in lending to small and medium businesses and has made about A$3 billion ($3.2b) in loans. It is also valued at over A$1.6b, based on the A$280 million in investment it raised late last year. This builds on the A$230b it raised earlier in the year and shows there is considerable investor support for its business model.
Beyond offering better interest rates and innovative services, neobanks play the all-important role of keeping Australia's big banks on their toes. They hold particular appeal to millennial consumers, who are comfortable with managing just about every aspect of their lives on a phone app. Their upstart brand images are also very appealing.
The major banks and their offshoots, such as St George and Bendigo, are forced to offer sharper pricing and be more responsive to customers if they have these minnows nipping at their heels.
The Australian government recognises the benefits that come from a more competitive financial sector and Australia's banking regulator has provided an accommodative licencing regime to allow them to get up and running.
It would be a pity if the major banks used their huge balance sheets to buy up neobanks and other fintech competitors before the latter become large enough to create a competitive threat.
Caught out by the fine print
When the Covid-19 pandemic struck and shut down shops, restaurants and tourism operators among others, a lot of companies turned to their insurers and made claims on their business interruption insurance policies.
As the name suggests, these policies pay out to businesses in the event of an interruption that stops them from operating and bringing in revenue.
There's no doubt many businesses suffered significant disruptions but their insurers said pandemics were excluded from their policies and refused to pay up.
Many businesses suffered significant disruptions when Covid-19 hit. Photo / File
In doing so, insurers pointed to policy conditions that excluded diseases "declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments".
The problem for insurers is that this act no longer exists. It was replaced by the Biosecurity Act in 2015.
In a test case, insurers argued that the phrase "subsequent amendments", included in most policies, covered off the new law, but the Court of Appeal rejected the argument.
The insurers are now facing a class-action lawsuit from thousands of businesses who want their business interruption payouts.
Insurers are masters of holding out on payments due to clauses most of us never read. It's refreshing to see them caught out by the own fine print.
