Prior to the release of the Final Report from the Banking Royal Commission, many speculated that its findings would leave the industry’s largest players reeling and facing major legislative threats to their business models.
However now that the Report has been tabled, many have been left wondering whether it will deliver the substantive change that they had hoped it would. For the most part, the recommendations put forth by Commissioner Hayne will need to be implemented over the medium-to long-term, meaning that we can only speculate as to what the future implications will be for the banking sector.
Notwithstanding the impacts the Royal Commission, one trend we are already witnessing is a shift towards customer-centric models of business in banking.
Government policy is a set to bolster this trend. Open Banking legislation due to come into effect from February 1, 2020 will require the big four to provide access to personal banking customers’ data via APIs, and all other banks are to be subject to the same set of regulations from February 1, 2021. These changes will give customers more control of their financial data and make it easier than ever for them to switch between financial institutions.
Subsequently, this brings a new era of opportunity for ‘challenger’ banks to capture market share from the big four as customers becoming increasingly dissatisfied with dishonest sales tactics and ‘fee for no-service’ models of businesses.
Challenger banks aren’t a new concept to Australia – mutuals and credit unions have been around for decades with promises of better service, lower fees and competitive rates.
However, we are now witnessing the emergence of a new wave of Australian challengers in the form of digital innovators – the ‘neobanks’.
Following an online-only business model, neobanks offer better rates than traditional lenders as they don’t have to deal with the overheads associated with operating a bricks and mortar business. Additionally, they promise faster loan approvals thanks to utilisation of automated technologies such as artificial intelligence.
Coupled with clever marketing and a customer-first approach, neobanks certainly present an attractive offering to consumers, in particular the younger, digitally-native generation and those people who have become fed-up with the big four banks.
While it’s a relatively new concept in Australia, neobanking is already well established in several overseas markets. The UK, often recognised as a pioneer in this space, already has approximately 20 neobanks operating on its shores.
Locally we are likely to see the emergence of three or four genuine players in the first-half of 2019.
However, while there are undoubtedly exciting horizons ahead for banking in Australia there are also threats to the success and sustainability of neobanks in the new era of open banking.
In a well-regulated industry like banking, building a competitive solution from the ground up, while also minimising costs, is certainly a complex undertaking.
By partnering with an established provider, neobanks can implement a trusted Core Banking platform without expending the resources required to develop a proprietary solution. This ensures that they can focus on delivering a functional user-interface and customer experience, and cost-effectively bring to market products that also meet the compliance requirements of Australian banking regulations.
This was the case for one of Australia’s neobanking pioneers, 86 400, who selected Data Action to partner in the delivery of its banking system.
By leveraging our established core banking platform and open Application Programming Interfaces, 86 400 has been able to use its proprietary Customer Experience Engine to deploy features significantly faster than incumbent banks. This is an important development for 86 400 as it prepares to launch and expand its product portfolio this year.
While this is the first time Data Action has partnered with a neobank, as an established provider of Core Banking solutions to Australian mutuals and credit unions, we have a long history of supporting challenger banks.
Importantly, we also know how important it is to get the implementation right the first time. We have seen several recent examples of failed Core Banking implementations that have set banks back years and resulted in cost overruns into the tens of millions of dollars. In many cases, these failures have come about in selecting a provider that is not proven in the local market where unique regulatory and practical challenges can derail banking platform implementations.
By comparison, DA has delivered over 80 Core Banking conversions in Australia with a 100% success rate. On the back of these implementations, DA is well positioned to be the foundation for neo and challenger banks. Because, while promising better service, increased transparency and low fees may encourage customers to sign-up, retaining them relies on keeping promises and ensuring that the fundamental banking mechanisms work right, the first time – and that’s where DA excels.
To find out more about the DA Core Banking platform and how we can help you tackle the new challenges in banking contact us at firstname.lastname@example.org