Here Come the Neobanks — Australia’s Big Banks in Trouble

It’s been an insightful week for Australia’s big banks.

We now have the most recent results for all four of the major players. Each with their own challenges and upside to gleam.

However, the big takeaway (or lack thereof) was dividends.

All four banks have offered up a lower dividend payout this year. With Westpac even going as far as to scrap their first-half dividend entirely.

Needless to say, it was a divisive decision. Making the lives of income investors even more challenging than they already are.

Beyond that though, the ongoing concerns over deferred loans and bad debts still looms. With all the banks setting aside provisions to combat this growing threat. When and how it will all come to a head is still unclear, but when it does expect more balance sheet pain.

On top of that, we’re seeing the banks shut up shop like never before.

Some 2,100 ATMs have been removed in recent months. As well as the closure of 175 branches across the Big Four.

Not to mention the reduced opening hours at branches that are still technically open. At least for now…

A sign not only of the impact of this pandemic, but also the broader economic shift banks are facing.

And they’re not the only ones taking notice. Because as the Big Four stumble, the new ‘neobanks’ can smell blood in the water.

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The ASX advantage

Now, if you still have no idea what neobank is, well it’s pretty simple.

They’re just like a traditional bank, but they only operate digitally.

That means no branches, no ATMs, no paperwork. With some even going as far as to ditch cards as well.

Instead, neobanks typically rely on apps — primarily for mobile phones to do business. Providing users with a seamless and effective way to manage their money.

Granted, it’s not as if the Big Four don’t have a mobile presence either. It’s just that the neobanks can offer a far better deal. With most boasting lower or even zero fees thanks to their tiny overheads. Not to mention better interest rates for savers.

Point is, neobanks are a modern, tech-savvy, and affordable take on banking. Outfits that are already shaking up the banking landscape; and they’re only just getting started…

Up until now though, these neobanks have been fairly fringe.

They sound great, and have a lot of potential, but they’re still small. Without more customers and more capital, they will likely remain niche providers.

That’s where the Big Four’s biggest advantage comes into effect: their shareholders.

Being a public company gives the banks far more money to play around with. Utilising capital that lets them maintain their dominance over the sector.

NAB’s $3.5 billion capital raise earlier this year is proof of that. Money that gives them the ability to shore up short-term pain to deliver long-term gain.

At least, that’s the pitch investors will hear.

Neobanks in contrast, can’t exactly drum up that level of cash. In fact, not a single one of them (in Australia at least) are even publicly traded.

Of the handful of local neobanks, Xinja is probably the closest to being an investible business. Just not in the usual way.

Instead of opting to list on the ASX, Xinja used equity crowdfunding. A means that has allowed individuals to invest in the neobank, albeit with a few minor quirks and differences.

Long story short, it has been successful but definitely different. And because of that difference, I can’t help but wonder how a neobank would compare if it were to go public on the ASX.

A proper head-to-head listing to take on the Big Four.

Well, soon I won’t have to wonder anymore.

Timed strike

Like I said, the neobanks seem as though they can smell blood in the water.

The Big Four haven’t looked this weak for decades. Opening a window of opportunity for a fresh batch of competitors to try their luck.

And that is exactly what one neobank is set to do.

Douugh is looking likely to be the first of this new breed to hit the market. Having closed its own equity crowdfunding round just last Friday. An offering that underscored just how much investor appetite there is for these upstarts.

The $750,000 stock offer was wrapped up within an hour. One of the fastest crowdfunding campaigns ever seen in Australia.

Now, with that money secured, Douugh plans to list on the ASX. Opting for a reverse takeover of the now defunct Ziptel shell company.

So, in just a few short weeks we should finally see the first neobank make its way to the ASX.

When that happens, it will be a landmark moment. One that could open the floodgates for a surge of new neobank listings.

I’m sure many of those on the sidelines will be watching closely.

More importantly though, for retail investors it will be a chance to get in at the ground floor. A more reliable and trusted way to grab a stake in these new banks without having to resort to crowdfunding.

Don’t get me wrong, I love the idea of crowdfunded companies. But, if these neobanks ever want to become serious competitors they’re going to need to be on the ASX.

It is the only way I can see them taking on the Big Four more directly.

Fortunately, the stage is set for this showdown to commence. And I can’t wait to see how both sides respond to the challenge.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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