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Challenger lenders weigh in on APRA’s halfway house

Since the release of APRA’s restricted licence for aspiring ADIs, a representative from the regulator said it has received a large number of applications from emerging firms with alternate business models.

Speaking on a panel at the 2018 Australian Payment Summit, Melisande Waterford, the general manager of licensing at Australian Prudential Regulation Authority (APRA), said a large number of new entrants have applied for a restricted authorised deposit-taking institution (RADI) licence since it was introduced by APRA in May as a “halfway house” for new entrants looking to become ADIs. A day later, the regulator granted its first RADI licence to Volt Bank.

“I think [the RADI framework] has been successful in [prompting] some new people to talk to us. I also think it’s opened people’s eyes to the fact that it is available to become a bank either through the restricted path or more broadly,” she said.

“The actual framework has also been supported by the fact that APRA centralised its licensing function in the last year. Having one central team that is dealing with all the applicants, who’s dealing with all the issues has really helped.”

During another panel discussion at the summit, Volt CEO Steve Weston said without the RADI framework, the lender would have had to raise $100 million, which is no easy feat for a new entrant.

With a restricted licence, Volt can only hold $2 million in total deposits, which Mr Weston said “is not enough to make a commercial return”.

As such, Volt, which currently has a headcount of around 100, is working to fast-track its journey to becoming an unrestricted ADI.

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The CEO acknowledged, however, that new entrants need to be held to the same standard as any other ADI in Australia.

“People need to know they have [Financial Claims Scheme] to protect their money. People need to know that they’re not going to lose their data or [experience] a breach,” Mr Weston said.

“Australian banks are very good at protecting people’s data. We don’t see [here] those same big data breaches that we’ve seen overseas, so we have to be held to that same standard if we’re going to operate in the market and compete.”

Holding a similar viewpoint, Xinja deputy CEO Andy Rigg, who was also a panellist at the summit, said the RADI licence is “a ticket to join a regulated banking system in Australia” and so new entrants “can’t mess it up”.

“Consequently, the ticket to get through the door has to be tight. We are doing everything we possibly can to ensure all the processes, procedures, systems and the security around those systems is in place and tight. We are well advanced in that journey now,” Mr Rigg said.

Ms Waterford said while APRA wants to ensure there is a pathway for new types of products and business models to enter the market, it’s particularly important to create boundaries for new entrants in order to determine which aspiring ADIs are “fair and safe” because a failure in the early stages will increase scepticism towards new entrants and ultimately have a “detrimental impact on competition”.

At present, Mr Weston said Volt has no customers, explaining that it would be “wishful thinking” to expect customers “to flock to [a new lender’s] door” as soon as they are granted a RADI licence.

The lender’s growth plan involves partnerships with reputable companies. It already has a partnership in place with PayPal, which has 7 million users in Australia and has only partnered with three other institutions, including UK bank Barclays, Citibank and Bank of America.

“We’ll be announcing over the next year a number of partnerships where people will go, ‘how did this unknown bank crack those partnerships?’” Mr Weston said.

“It’s difficult [for] big incumbent banks who have a variety of reasons why they can’t innovate. So, the big guys have been working with people like us to show what is possible. We will look to leverage those partnerships.”

Another “neobank”, Up, took a different pathway to becoming an ADI (prior to the RADI licence being introduced by APRA), which involved “restricting the risk, taking less deposits, and having less customers”, according to the lender’s co-founder Dominic Pym, who was also a panellist at the Australian Payment Summit.

Up went into production in October 2017 but didn’t publicly launch until October this year.

Its customers were initially staff members and their families and friends, according to Mr Pym. Up then launched a private beta program, followed by a public beta program, and finally went live in October.

“The model of taking the more conservative steps to make sure you get the systems and processes, the legalities, the security, the compliance and everything right before you open it up to the public, I think that’s a really valid model,” he added.

Ms Waterford said that the regulator is “open to a variety of different business models” as long as new entrants can meet APRA’s standards.

“We don’t have a particular business model that we’re trying to push,” she said.

In disagreement with fellow panellist Stephen King from the Productivity Commission, who expressed his scepticism towards the idea of major banks being legitimately challenged by aspiring disruptors due to their collective market share, Ms Water said new entrants with alternate business models and offerings have a “completely different mindset and a different approach to providing a service” that the major banks would have difficulty replicating because of their legacy systems and frameworks.

“I think the actual competition that is starting, it’s not just about numbers. It’s actually that there is going to be a different service on offer,” the general manager of licensing at APRA said.

[Related: Big four will ‘gobble up’ challengers: PC commissioner]

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