The future of banking will not be created by throwing a digital facade on the tired and old incumbent model, writes Steve Weston, Volt Bank Founder and Chief Executive.
In fact, it won’t even be created within any single retail bank’s branches or user experience.
Instead, it will involve extending financial services into a myriad of experiences where a customer organically spends, sells, borrows, budgets, exchanges, saves, and invests.
As a result, we will increasingly see banking that is integrated within businesses and industries of all sizes and shapes, and powered seamlessly and invisibly by sophisticated technology, such as banking-as-a-service (BaaS) platforms.
Global consulting houses like McKinsey are increasingly pointing to an accelerating evolution of customers wanting to bank through their business partners and not a bank, with strategies and business models urgently needing to adapt.
From opening a bank account within your trading platform, to being granted a mortgage almost immediately through your broker, big retail banks will increasingly decline in prominence and importance as a consumer-facing experience.
And it won’t be the traditional behemoth banks that lead this revolutionary integrated banking charge.
It takes tech to tango
‘Integrated banking’ can be defined as the use of BaaS and other API-driven technologies to integrate banking services within other customer experiences and ecosystems.
Globally, neobanks like the $1.9 billion UK Starling Bank and the $8.65 billion US SoFi are already meeting this escalating demand for better, faster, and digitally driven integrated banking services.
Neobanks have also received a heavy-hitting vote of confidence from one of the world’s most respected and successful – yet relatively conservative – investors. Warren Buffet invested $500 million in Brazilian neobank Nubank earlier this year after Nubank took just eight years to become the largest independent bank in the world with 40 million clients.
Here in Australia, neobank Volt was the first to build its own BaaS platform and implement an integrated banking platform strategy, partnering with the likes of Microsoft and global BaaS player Railsbank.
Westpac has also validated the strategy by acquiring BaaS capabilities from technology provider, 10x. But we believe the traditional banks will struggle to implement integrated banking on their own (or at all) for two important reasons.
Firstly, the technology is complex to build, especially by any organisation with legacy technology and infrastructure challenges. While still challenging, it is easier for a neobank to build new banking tech from the ground up.
Secondly, traditional banks highly covet their customer relationships – an approach that must be abandoned when employing a BaaS strategy.
But for tech-native neobanks, integrated banking represents a paradigm shift in the battle to draw customers away from traditional banks, en masse, via a diverse range of partners.
And though retail neobanks like Up and 86 400 may not have adopted a BaaS model, they clearly demonstrated a phenomenal demand for a new way of banking digitally.
The speed at which Up was able to acquire customers was seriously impressive. Many smaller banks operating for decades don’t have as many customers or deposit balances at that level!
86 400 had raised $370 million of deposits, amassed $270 million of mortgages, and delighted shareholders with its growth prowess when NAB snapped it up for a healthy valuation in excess of $220 million.
Of the remaining independent neobanks, Judo has achieved well over $3 billion in lending, more than a billion dollars of capital raised, and recently completed a $657 million IPO at a $2.5 billion valuation by the close of markets.
Now with more than a dozen new contenders aspiring to enter the banking scene, it is incorrect to suggest that the “neobanking experiment” has failed. Neobanking is not an experiment and it is only just getting warmed up.
And if APRA’s new rules are too tough for some of the incoming neobanks to get their licences, they may well just partner with a licensed BaaS provider.
Our measures of success must change
The misconception neobanks have failed relates to our misplaced obsession with market share as the only measure of disruptor success.
As an example, RBA data shows BNPLs still have captured only one per cent of the value of consumer transactions. But we certainly do not count BNPLs as a failure. They have changed the behaviour of the big banks rapidly, built significant returns for investors, and created economic value and jobs.
While the neobanks must move a little slower due to appropriate regulatory and capital constraints, the sector is on track to have a similarly transformative impact on the financial services sector.
We expect that new neobank-led practices will become industry-wide standards, such as “no catches” savings interest rates and the abolition of introductory rates that preference new customers over loyal ones.
And even if each neobank does acquire just one per cent of the mortgage market, as one example, they would each hold mortgage balances of a respectable ~$20 billion based on the current value of mortgages.
With the ability to reach consumers in any environment in which they transact, via BaaS technology platforms and partnerships across a wide range of industries, the world is truly a neobank’s oyster.
It really is an exciting time to be a neobank!
Steve Weston is Founder and Chief Executive of Volt Bank, a pioneer of Australia’s neobanking sector, and the first retail challenger bank to receive its banking licence since the early 2000s.
Weston was a featured keynote speaker at FST Media’s Future of Financial Services Sydney 2021 conference earlier in November.