APRA embraces the uncomfortable

An APRA exec has unpacked the unique considerations the regulator has been working through following the surge in neobanks securing their full banking licences. 

In a speech to the Future Banking Forum 2019, APRA GM for regulatory affairs and licensing, Melisande Waterford, explained how the regulator's guiding mission of "balancing objectives and outcomes" in the banking sector has been particularly tested by the rise of the neobank. 

“Nowhere else in APRA are the potentially competing objectives of financial safety on the one hand, and competition and contestability on the other, so stark and so obvious,” she said.

According to Waterford, APRA has been pushed to make changes to accomodate the new sector while being careful not to compromise the system as a whole. 

"This can be characterised as a mindset of looking for a way to say ‘yes’, rather than looking for a way to say ‘no,'" she explained, 

While Waterford reiterated that all banking licence applicants are assessed by the same standards, challenger banks included, APRA has taken steps to assist the new entrants without lowering its standards. This includes: 

1. Applicants can now either apply directly for an unrestricted licence, or pass through a Restricted ADI phase on the way, intended to allow time to build capabilities and resources. Volt and Xinja both received a Restricted ADI licence before going on to achieve a full, unrestricted licence.
2. A centralised and dedicated Licensing Unit, established two years ago to contribute to a faster, more consistent and structured process.
3. APRA having “challenged itself to be more open-minded towards unprecedented or unorthodox proposals that push outside the usual comfort zone.” While there are core prudential issues that cannot be compromised, APRA has pivoted to be more “actively open” to innovative approaches that might benefit the banking system.

However, the challenges posed by neobanks extend beyond striking a balance to protect both competition and stability.

“At the risk of stating the obvious: challenger banks can only make a difference to the competitive dynamic of the Australian market if they survive and thrive," said Waterford.

“There are industries where start-ups can make a noticeable impact without having lots of capital or a large balance sheet. To date, banking hasn’t been one of them. In simple terms: impact requires growth, growth requires a balance sheet, a balance sheet requires capital, and depositor protection requires plenty of capital. The mathematics of this are inescapable.”

This contributes to what Waterford has termed “a classic chicken-and-egg situation,” with investors reticent to contribute funds before tangible signs of success, and neobanks unable to deliver solid proof of concept without access to sufficient capital.

As such, Waterford anticipates slow and steady growth from the challenger banks rather than a speedy revolutionisation of the banking sector. 

“Challenger banks don’t need to become a ‘fifth pillar’ to serve the Australian community. Their existence alone can force incumbents to up their game,” she said. 

“APRA would like to see a steady stream of serious ADI licence applicants that enter the market and 10 years later are still there, large enough to be significant, competing hard and providing innovative solutions to Australia’s financial needs."