Technologies

New digital banks face ‘significant risks’

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In a research report published this week, Morningstar analyst Nathan Zaya said the neobanks were unlikely to cause disruption in Australia’s banking industry, which remains dominated by CBA, Westpac, NAB and ANZ.

“Volt, 86,400, Up, Xinja and Judo are just some of the banks with interesting names that are attracting media attention as ‘disruptors’ in the Australian banking sector,” Mr Zaia said.

“It’s easy to be lured in by a new website, heavy marketing, new account discounts and the promise of offering something different. But history shows that it can be extremely difficult to build the scale necessary to run a profitable and sustainable bank.”

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The analyst said competition from non-bank and digital banks has had limited effect on the banking landscape so far.

He said a number of neo-banks focused on digital offerings are growing, and while some are reporting large growth rates in their loan portfolios, they have only made small inroads in market share.

Mr Zaia noted that digital banking alone was nothing new in Australia, pointing to ING Bank Australia, which has held a banking license since 1994. and has accumulated a total loan portfolio of $60 million and $47 million in deposits. Morningstar said that without the balance sheet and technology to increase technology spending, neobanks would struggle to be as disruptive as ING.

"There are significant risks to challenger banks and fintech startups that we believe the market is underestimating," Mr Zaya said.

"The pursuit of credit growth often comes at the expense of credit quality, and in a downturn spectacular growth can quickly give way to rising bad debt," he said, pointing to multiple examples of booms and busts in Australia.

CBA acquired Bankwest in 2008 after its then UK parent, HBOS, ran into financial trouble during the GFC. Mr Zaya said the bank had suffered severe impairments after a period of rapid expansion and had taken on high-risk loans that other lenders did not want.

"Westpac's acquisition of RAMS Home Loans followed another notable industry failure," the analyst said.

"In 2007 RAMS Home Loans' business model of lending to low-income people using cheap U.S. debt collapsed when credit markets froze and it failed to float $5 billion in commercial paper.”

Mr Zaia added that the prioritization of low growth over credit quality had also caught up with regional bank Suncorp, which required a capital raise following large corporate and commercial property writedowns.

Investor Daily contacted Volt, Xinja and 86,400. None of those banks would comment on Morningstar's analysis.


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