“Challenger banks should not become a ‘fifth pillar’ to serve the Australian community,” Ms Waterford said.

“Their existence alone could force incumbents to up their game.”

The speech comes after APRA granted neobank Xinja an authorized deposit-taking institution (ADI) license in September.

Xinja joined Volt and 86,400 as some of the first neo-banks to receive unlimited ADI licenses in Australia.

Neobanks have grown in popularity since the Hayne royal commission, with start-ups promising a more transparent process and lower costs due to the lack of physical branches.

But popularity may not necessarily translate into profitability. While the neobanks are growing, it remains unclear whether they will be able to take significant market share from the big four.

"It's easy to be lured in by a new website, heavy marketing, new account discounts and the promise of offering something different," Morningstar analyst Nathan Zaya wrote in a September report.

"But history shows that it can be extremely difficult to build the scale necessary to run a profitable and sustainable bank."

While the prospect of full-scale disruption remains low, Ms Waterford was optimistic neo-banks would remain a strong presence in Australia's financial landscape.

"APRA would like to see a steady stream of serious applicants for ADI licenses entering the market and 10 years later still being there, big enough to be significant, competing strongly and providing innovative solutions to the financial needs of Australia,” she said.

Ms Waterford also warned that emerging neo-banks should not underestimate the unique challenges presented by the banking industry, from technology and expertise requirements to the need for a clear funding strategy, saying "optimism is not a capital management plan ".

"Take a pragmatic approach and raise what you can, when you can, at a price that investors will accept," she said.

She also touched on the need to get products to market as quickly as possible.

"If that means lowering your ambitions in terms of product range, so be it," Ms Waterford said.