Less than two years after earning its unrestricted banking licence, challenger bank 86 400 is about to disappear into a puff of smoke.
National Australia Bank on Friday offered roughly $220 million to take the nascent neobank off the market and combine it with UBank.
It’s good news for the startup’s credit union shareholders, who are keen as mustard to cash out, but may not be what the Australian Prudential Regulatory Authority (APRA) had in mind when it granted 86 400 permission to hold millions of dollars of consumer cash in 2019.
One of three independents granted a banking licence after the Hayne Royal Commission, 86 400 was billed as a cure to the exploitative and downright dodgy behaviour of the big banks – a club it’s now on the cusp of joining.
The irony is palpable.
Alongside peers like Volt Bank and Xinja, 86 400 cashed in on community discontent with the big four, attracting $645 million in deposits and mortgages amid hope of a new dawn in Australian banking.
Uncertainty for consumers as competition thins
Exactly how the merger will unfold is anyone’s guess.
NAB and 86 400 still haven’t ironed out the details, including branding, but say they intend to marry the best of both platforms.
At the moment, 86 400 pays 1.2 per cent interest on its savings account while UBank pays 1.1 per cent.
The broader consequence of the deal, which is subject to regulatory approval, would be a shrinking field for those trying to escape the major banks’ dragnet.
It comes after neobank Xinja handed back its licence last December after hitting the pandemic rocks, becoming the first Australian bank to return all customer deposits and leaving just Volt Bank (still in beta) and two others not yet granted a licence remaining in the neobank field.
Canstar financial services executive Steven Mickenbecker said it was clear the wave of competition foreshadowed by the much-hyped neobank renaissance was quickly fizzling out.
“The whole point of neobanks was to introduce new players and new propositions,” Mr Mickenbecker told The New Daily.
“You lose that when these acquisitions occur.”
Insult was added to injury on Friday when, hours after unveiling the acquisition plan, NAB slashed its regular savings rate on deposits by 0.15 points to 0.45 per cent.
Customers at 86 400 won’t be affected. But it will hit the last remaining Xinja users (4176 accounts worth $65,809), who were funnelled into NAB in an APRA-approved deal earlier this month.
Independence is ‘bloody hard’
So, how did we get here?
One fintech executive, who declined to be named, told The New Daily that while consolidation would “100 per cent” be worse for consumers, neobanks like 86 400 had found going it alone difficult during the pandemic.
“Running [a neobank] is bloody hard … COVID didn’t help. It stalled capital raises for lots of fintechs,” they said.
Although larger banks revelled in cheap debt flowing from stimulus measures like the Reserve Bank’s Term Funding Facility, smaller players had less capital to play with, making it harder to take advantage.
“The opportunity for neobanks in Australia is amazing, but you need to raise a lot of capital,” the executive said.
Mr Mickenbecker said he was unsurprised 86 400 was looking to merge with a bigger bank, saying startup founders looking for an exit was par for the course.
“It certainly wouldn’t be what APRA had planned when they introduced the concept of neobanks [in 2019],” he said.
“We’ve seen the innovation, but unfortunately the competition side is now back in the fold with the big four.”
Robert Bell, CEO at 86 400, bristled at suggestions the pandemic had challenged the neobank’s appetite for independence, saying a boost in online activity during COVID-19 had had the opposite effect.
Mr Bell said the merger would deliver better outcomes for consumers because 86 400 would be able to expand its reach.
“NAB want to work with us and our experience, our team, our technology, our platform,” he told The New Daily.
“I think we’ll be able to take our experience to more people and accelerate investment in our technology.”
Will more neobanks spring up? Maybe
The startup opened negotiations with NAB last December, around the time Xinja threw in the towel citing an “increasingly difficult” capital raising environment.
NAB, which already holds an 18.3 per cent stake in 86 400, said in a statement on Friday that the proposed UBank merger would be a boon for consumers.
“The combined business will deliver accelerated innovation and an enhanced customer experience to create a stronger and more competitive banking alternative,” chief operating officer Les Matheson said.
Fintech Australia chief executive Rebecca Schot-Guppy, an industry lobbyist, also believes the acquisition will benefit consumers in the long run.
“It’s a positive step for the ecosystem. Entrepreneurs work for an exit or an acquisition, and this goes to show that the ecosystem is maturing,” she told The New Daily.
But Mr Mickenbecker said neobank investors would be more wary after witnessing the tribulations of earlier movers, which benefitted from less sophisticated major bank competitors.
“Investors will be more nervous about the neobank proposition,” he said.
“I hope we see the emergence of other players, but it’s a hard road.”
Where to next?
Two regulators and one Treasurer stand between NAB and its prize.
Josh Frydenberg, competition watchdog the ACCC, and financial regulator APRA must all approve the merger before it’s confirmed.
And the ball is already rolling, as NAB wants to finalise a deal by mid-2021.
Earlier today, the ACCC listed the transaction on its public register, typically the first step in any regulatory approval process.
“Acquisitions by the big four banks of small but vigorous and effective competitors in the market has the potential to substantially lessen competition and therefore the ACCC will carefully scrutinise such transactions,” an ACCC spokesperson said in a statement.
“This does not mean however that all acquisitions of fintechs by the big four banks will necessarily raise competition concerns. It will depend on the circumstances of each case, including assessing the barriers to entry for new competitors to emerge.”
There’s a ten-week timeline for the review, with an indicative decision date set for April 15.
APRA declined to comment. Mr Frydenberg did not respond to a request for comment before deadline.