Digital challenger banks off and away in Australia

Australia has its first licensed digital challenger bank, following a decision by a key Australian Government regulator to establish a new pathway to allow these banks to be established.

On 4 May, the Australian Prudential Regulation Authority (APRA) published its new “restricted authorised-deposit taking institution” framework.

The framework is designed to assist potential new entrants to the banking industry, particularly small firms which are in the early stages of establishing their capital base, to navigate the licensing process.

APRA followed this by, on 7 May, issuing its first restricted Authorised Deposit-taking Institution (ADI) licence to the Sydney-based volt bank. It has been reported that Volt – co-founded by former NAB and Barclays executive Steve Weston – will be building a branchless, cloud-based digital banking platform.

FinTech Australia is aware of a number of other firms which are keen to become digital challenger banks. The most publicly known of these is Xinja, with others operating in stealth mode.

The United Kingdom is regarded as having the most advanced digital challenger bank ecosystem in the world. According to an April 2018 report by Mapa Research, there are more than 30 challenger banks in operation in the Old Dart.

Since very early last year, FinTech Australia has held several meetings with Treasury and APRA and has strongly advocated for the concept of a digital bank testing licence and to make it easier for smaller firms to call themselves banks.

This led to the Australian Treasurer’s announcement in the 2017-18 Budget that he would relax the previous capital restrictions on entities wishing to hold an ADI License and to call themselves “banks”. It also helped lead to APRA’s licensing team issuing a discussion paper later in 2017 seeking feedback on a new restricted licensing pathway for challenger banks.

In December 2017, we lodged a submission in response to APRA’s discussion paper, strongly supporting the proposal whilst calling for some changes to the proposed restricted ADI framework.

While FinTech Australia was not successful in getting our requested changes to the framework, we nevertheless welcome the introduction of the new digital challenger bank pathway.