Neobank hype has taken off in recent months mainly because of successful crowdfunding campaigns and open banking legislation.

Some of the bigger banks have responded – for example Bendigo Bank launched its own challenger Bank (Up). The neobanks are certainly watching closely and have no shortage of publicity.

But one university professor has doubts that their mission is straightforward and certain. Swinburne University’s Steve Worthington said in an opinion piece earlier this week that the so-called challengers are the ones with the challenge.


Lessons from the UK

Professor Worthington alluded to Britain’s experience with neo-banking. This goes back to the 1990s when Virgin Money and Tesco Bank launched, followed by Metro Bank in 2010.

Ultimately Virgin Money was acquired last year by Clydesdale and Yorkshire Banking Group (CYBG), although its Australian subsidiary was sold to the Bank of Queensland back in 2013. While it did not exactly fail as a business in it’s own right it has done little to break up the oligopoly of bigger banks.

Meanwhile, Tesco and Metro are currently scaling back. In fact the latter was under investigation for allegedly putting £900 million pounds ($1.7 billion) of loans into the wrong risk bracket. This left it short of capital to meet the Bank of England’s rules.

“The experiences of Virgin Money, Tesco Bank and Metro Bank are examples of just how challenging it is to enter a mature financial services market with established players and claim a sustainable position,” he Professor Worthington said.

“The UK’s Competition and Markets Authority (CMA) found in 2016 just 3 per cent of current/cheque account customers had moved their account in the past year.

“The UK’s Big Four still have a 70 per cent share of the 70 million current retail accounts.”


Unlikely to be a mass exodus from the Big 4

So why would people switch to neo-banks? Three commonly attributed reasons are better customer experiences, the ease of change and dissatisfaction with the Big 4.

But Professor Worthington said he doubted all of these would lead to big banks being abandoned en-masse.

“The Australian Securities and Investments Commission (ASIC) is keen to promote switching under its Money Smart banner and it offers comprehensive guidelines on how to get your new bank to assist with switching or how to do it yourself,” he said.

“In theory, this should make switching easier and allow consumers to access a greater range of competitive offers – given rival institutions can use the data to offer competitive deals.

“However, experience suggests most customers still perceive switching as too complex and not worth the effort.”

Professor Worthington said 40 per cent of Australian adults had never switched from the bank they first joined.

“While banking as an industry may have lost ‘trust’, most customers still trust their bank to keep their money and privacy safe. They also ‘trust’ the solidity of existing banks,” Professor Worthington said.

“Challenger banks, fintechs, neo-banks all face this challenge: they don’t have the history or scale or government backing (real or implied). Many are joining with incumbents to get that brand recognition and scale.”

He did concede that some form of disruption was possible but has not yet happened. Stockhead has contacted Professor Worthington for further comment.

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