FinTech Australia has provided a comment on the consultation paper published in August regarding authorising new entrants into the banking industry. The creation of digital challenger banks in Australia is a welcomed move but, according to FinTech Australia, needs some improvement.
The discussion paper proposes that new banking entrants, known as “Authorised Deposit-taking Institutions” (ADIs) can apply for a “restricted ADI licence”. Under this restricted ADI licence, new banking entrants may take up to $2 million in deposits with an individual limit of $250,000 per depositor over a maximum period of two years, while maintaining a minimum of $3 million plus wind-down costs in reserve capital (or 20% of total assets, whichever is greater). It is expected the restricted ADI licence-holder would remain within these limits while developing the full range of capabilities necessary to graduate toward a full bank licence.
The FinTech Australia submission with the Australian Prudential Regulation Authority (APRA) welcomes the pathway, stating “it is our belief that many innovative new challengers will benefit from this new pathway, and from being able to successfully test their new services with consumers.”
However, the group believes the proposals fall short. In fact, the APRA suggestions could be improved by including the following:
- Boosting the deposit limit to $5 million, given that new challenger banks should easily breach the proposed $2 million limit particularly if they are targeting business customers
- Allowing challenger banks to operate with a restricted licence for three rather than two years, given they are unlikely to be able to raise the required $5-7 million in capital to operate if the two-year limit remains in place
- Setting up an innovation hub within APRA to solicit and facilitate applications
- Providing an improved definition of what is considered an eligible “low risk” activity during the restricted licensing period
- Consider creating two pathways for challenger banks – one for new startup companies and another for existing and mature “low risk” financial services
- Considering splitting the proposed $80,000 entrant fee across the three-year testing period
FinTech Australia CEO Danielle Szetho said a few improvements and the pathway could create a path for some much needed competition.
“Australia has one of the most concentrated banking industries in the world, and a large number of struggling small traditional banks. So a regime to encourage increased competition from new digital-first challengers is badly needed. New entrants to the banking industry will bring a fresh, innovative mindset to this industry and in doing this will provide consumers and businesses with increased choice and improved services,” said Szetho. “We think our suggestions will smooth the way for new digital challenger bank entrants to our banking industry, while at the same time ensure ongoing strong customer protections – including the ability for APRA to safely transition out underperforming ADIs.”
FinTech Australia says the Australian Government’s proposed new entrant pathway sits alongside other proposals to encourage increased banking competition, including:
- Relaxing the current restriction on any one bank shareholder owning more than 15 per cent of the bank, which will make it easier for startups to become banks
- Removing the prohibition on use of the term ‘bank’ in the names of authorised deposit-taking institutions (ADIs) with less than $50 million in capital, so new challenger banks may also benefit from the reputational advantages of the term.
Banks around the world are struggling to adapt to their Fintech future. Legacy technology, far too many brick and mortar locations, combined with a risk averse culture means traditional banks are loathe to change. Allowing agile, Fintech startups to provide modern banking services in a mobile first platform should improve services while reducing cost for consumers and business. Isn’t that what APRA, and the Aussie government, wants?
FA Submission - APRA Restricted License proposal