The Australian Government’s proposal to make it easier for digital-first challenger banks to compete against industry incumbents is could be improved, according to the peak body for fintech startups.
FinTech Australia has lodged a submission with the Australian Prudential Regulation Authority (APRA) in response to its discussion paper, entitled “A phased approach to authorising new entrants to the banking industry”.
The discussion paper proposes that new banking entrants, known as Authorised Deposit-taking Institutions (ADIs) can apply for a “restricted ADI licence”.
Under the 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, whilst 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 resources and capabilities necessary to graduate toward a fully-fledged bank licence.
In its submission, FinTech Australia 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, it also suggests improvements to the pathway, including:
- Increasing the deposit limit to $5 million, given that new challenger banks are likely to 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, with some improvements, the pathway laid out in APRA’s discussion paper represented a “sound approach” for increased banking competition.
“Australia has one of the most concentrated banking industries in the world, and a large number of struggling small traditional banks,” she said. “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.
“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.”
According to FinTech Australia, 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.
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