‘Challenger banks’, otherwise known as neobanks have been on the rise. These innovative companies operate and trade purely online, with no backing from the big 4 banks. With an increasing number of these digital banks emerging in the FinTech sector, it begs the question of how these banks will stand against the traditional banks.

The futures of Neobanks

Recent news of Volt Bank’s deposit closure and return of its banking licence has led to more questions about the future of neobanks. What was once known as the first startup to gain a banking licence has now closed its deposit-taking business. A vote amongst their board of directors led to the shut down of the company, following insufficient funds being raised for plans to write mortgages. Despite their attempt to build “the best mortgage lending platform in the industry” and their expenditure of around $219m, Volt bank was still unsuccessful in their ventures[1]. Volt’s platform was capable of issuing loans within 15 minutes however was unable to release a product to the general public, with its activities only ever being released in a beta mode.

Volt Bank is the second bank to hand back their licence to the APRA, where previously in early 2021, another neobank, Xinja, also returned their banking licence and refunded customer deposits after failing to provide a credit facility that would generate sufficient revenue. 

Despite these two growing neobanks successfully obtaining a banking licence, the reluctance of investors is seen in the limited ability of these companies in producing a profitable product suite. From being unable to release a product, to the general public’s use, to missing the fundamentals of a business, many neobanks face difficulty in raising capital. Neobanks also must fulfil regulatory capital requirements when holding a banking licence, a higher condition to other FinTech firms without banking licences. It is seen that neobanks can successfully enter the banking sector but struggle to consistently raise enough capital. 

Volt stated a strategic error was made in building its infrastructure rather than finding specialists to partner with[2]. Similarly, issues about securing the funds necessary made it more difficult due to an undeveloped venture capital pool within Australia. This led to the pursuit for global capital raising initiatives, yet Volt still remained unsuccessful in yielding investments. The lack of investments could be attributed to lack of trust by investors as neobanks are independent of traditional banks.

On another note, Up, had been acquired by Bendigo Bank, enabling customers a greater experience through improved digital infrastructure in saving accounts, shares and transactions[3]. This has also been seen with 86 400, which was acquired by NAB at approximately $220 million, merging with UBank to establish a greater customer base and brand given the startup’s existing technology. Both neobanks have reached a similar fate with bigger banks acquiring both infrastructure and customers.  

Whilst FinTech companies do have the leverage in agility to build strong infrastructure and genuity for solving problems, it leaves a grey zone in the investment of these neobanks. Will neobanks continually fail to secure capital funding? Or will their development in today’s economy be dependent on being bought out by bigger banks?

Katerina Trung – 2022 Publications Team