Aspiring neobanks face stricter Australia licensing process after Xinja collapse

The Australian Prudential Regulation Authority (APRA) announced that has finalised its revised approach to licensing and supervising new authorised deposit-taking institutions (ADIs).

APRA’s updated approach, comprising stronger requirements for being granted a banking licence and closer supervision of new entrants as they seek to establish themselves, was released for consultation on 18 March 2021. 

The revised approach followed a review of APRA’s ADI licensing regime aimed at incorporating learnings since the launch of the Restricted ADI licensing pathway in 2018. It was designed to encourage more sustainable competition in the banking sector by ensuring new ADIs are better equipped to succeed.

Today’s package responds to feedback received during the consultation. APRA’s final position remains largely consistent with its original proposals, with the most significant clarifications relating to milestones in the progression of a licence application. 

Under the finalised approach: 

. restricted ADIs must achieve a limited launch of both an income-generating asset product and a deposit product before being granted an ADI licence;

. there is increased clarity around capital requirements at different stages for new entrants, aimed at reducing volatility in capital levels and facilitating a transition to the methodology for established ADIs over time; and

. new entrants are expected to have a more advanced contingency plan to respond to financial stress, including an option to execute the ADI’s orderly and solvent exit from banking business.

The new approach comes into effect immediately, although much of the information package published today is simply a formalisation of existing practice.

Neobanks that are just now ramping up may even benefit from the regulatory shift, as they are either already in the process of getting credentialed or will have the wherewithal to move through, according to emarketer.com.

• Alex is operating on a restricted license, but is on the road to meeting the product-side requirement through its partnership with technology vendor Temenos, which allows it to issue personal loans—and it’s planning more products.
• Up already has licensing by way of its parent bank, Bendigo and Adelaide Bank.
• Buy now, pay later (BNPL) provider Afterpay will enter the fray with a savings app in partnership with incumbent Westpac. Afterpay could become an even more formidable newcomer once its pending sale to US-based fintech Square closes. The tie-up, valued at around $29 billion, will create a company big enough to endure a full licensing process, should it choose to.

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The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance and superannuation, and is accountable to the Australian Parliament. APRA was established by the Australian Government on 1 July 1998.