Regulator APRA has raised the bar for all future entrants into Australia’s banking sector, following the spectacular collapse of Xinja last year.
Releasing new guidance on Wednesday, APRA announced it would require all future applications for a banking licence to meet higher minimum standards as part of a “pathway to sustainability”.
“APRA’s approach to new entrant[s]… seeks to strike an appropriate balance between supporting entities to enter and thrive in the banking sector, while ensuring financial system stability and protecting the interests of depositors,” it said in a new paper.
These extra conditions include having had “a limited launch of both an income-generating asset product and a deposit product” before being granted a full banking licence, which allows challengers to accept funds from the broader Australian public.
While APRA makes no explicit mention of Xinja in its new guidance, it is extremely likely it has learned a thing or two from the ill-fated neobank.
In December, Xinja was forced to return customer deposits and relinquish its licence after fatally haemorrhaging cash for more than a year. The post-mortem revealed it had engaged in a careless spending spree at the same time it lacked a single source of revenue or a lending product.
At the same time, a publicised and highly questionable $433 million deal with Middle Eastern group World Investments never came to fruition, shutting off what could have been a funding lifeline for an operation that was desperately looking to diversify.The regulator has launched a wide-ranging investigation into the outfit, now renamed Techstacked, and its attempts at raising capital, according to The Sydney Morning Herald.
APRA chair Wayne Byres referred to Xinja’s exit shortly after as a “successful failure”, despite leaving investors from its record crowdfunding rounds without a cent.
Yet, the regulator also sees room for improvement. New banks vying to compete in Australia will be required to “have a more advanced contingency plan to respond to financial stress” which will include providing an exit plan should things go wrong.
The extra requirements come in addition to the original licensing regime that Australia’s first neobanks had to satisfy. Each has previously acknowledged the difficulty of receiving their full licence, a process that typically takes years. But they have also expressed satisfaction with its rigour, understanding that failed competitors only undermine trust in fledgling digital operations.
Not that it has necessarily guaranteed their success either. Volt has still not fully launched to the broader public and remains in beta testing mode a full two and a half years on from receiving its full banking licence.
86 400 has had a somewhat better run, being bought up by NAB in May, albeit in a move that largely undermines its challenger credentials.
As Xinja has shown, it is the outright failures that present the greatest risk, and the one APRA keenly wants to mitigate.
The extra requirements will undoubtedly add yet another obstacle to the path of the next wave of neobanks, in a process that was already acknowledged to be extremely time-consuming and thorough by the first generation.
But perhaps the regulator reasons that if Australia is to produce a genuine competitive threat to its banking oligopoly, they better be built to last.