The founder of Australian challenger bank Archa has his sights set on launching the company's first products to customers next quarter, but the plan is to "avoid the word bank wherever possible".
Speaking on a blockchain, AI and robotics panel at Gold Coast Business Week, Archa founder and CEO Oliver Kidd discussed a business model based on convenience and an intuitive app that makes managing finances much easier for young people.
"From our point of view we're lucky. I think the industry we're in is the least relatable on the planet - our customers don't like their existing banks generally speaking," he said.
But as with many neobanks those customers are still a theoretical construct.
Archa is not in the market yet and is currently building its waiting list of interested users, but it has overcome several hurdles and expects to soon announce "exciting partnerships" with large overseas players in order to include international money transfers in its service.
"We're in a good position to start from scratch and try and build a business model that's likeable...we try to be a brand first and then a technology company and avoid the word bank wherever possible," Kidd said.
"I think it brings with it a lot of baggage - for traditional banks the complexities of their businesses and the regulatory requirements that come with running a deposit-taking institution mean it's really challenging to stay relatable.
"From our point of view we just simplified the product. We don't have an investment banking arm, we don't look at mortgages at this point; all we're looking at is a transaction account which is run by an intuitive fun app that's very easy to understand, and then restructuring the type of lending products that we're offering."
The young entrepreneur argued that as banks earned most of their retail portfolio revenue from mortgages, the incentive simply was not there to design credit products that suited the lifestyles of young people.
"If you look at a university student that has a $500 shortfall for a particular month and needs to pay a friend back, buy uni books or go away for a weekend, the solution to that is not a $10,000 credit card," he said.
"From our point of view we think there are better financial products. Whether they exist or not, we would say not."
He said the Archa team had asked all of its investors to back them on the basis young people "quite frankly don't care about interest and they'll pay for convenience".
"This is the generation that pays a 50 per cent mark-up on their pizza to have it brought 50 metres up the road to them. If you offer a service that people like, they will pay for it," he says.
"And we think by offering a fair transparent fee for a small amount of capital for a small period of time, we can do that better."
A roundabout route to market
Archa has the advantage of a blank slate, so it isn't weighed down in its ability to harness newer technologies such as artificial intelligence (AI) and blockchain.
"We've looked at AI, particularly in the context of underwriting young people, making better credit decisions, delivering better loss rates as a financial institution," Kidd said.
"And we've also looked at blockchain from the perspective of international money transfers.
"Shareholders know they're getting involved with a challenger bank that's going to prioritise customer experience, so we do prioritise the way we deploy tech, not just to better our profitability but to provide better customer outcomes."
When the company started out the Australian Prudential Regulation Authority (APRA) had recently introduced a new scheme for challenger banks to become licensed, forming a stepping stone for them to become fully licensed Australian Deposit-taking Institutions (ADIs).
But this was much harder in practice, according to Kidd.
"We made an assessment that to seriously have a go at getting a banking licence we would need $15-20 million in capital on day one," he said.
"To do that and raise that money at a respectable valuation would have meant that we were in a room trying to defend a $50 million valuation without product or customers."
In light of the notorious risk aversion of Australia's venture capital community and challenging regulatory expectations, Kidd opted to take a different tack.
The solution came by meeting with banks that might be happy to have Arch sit under their licences. This way the challenger bank won't need a banking licence and can scale up in the long term.
"That immediately put us in a position where we were able to raise multiple millions in a series A capital raise," he said.
"We pivoted the business model so that we were able to raise the capital that we needed to get to market, and now we're in a position we can launch I suppose next quarter with an actual banking product rather than launching with a pre-paid card."
Banks take note of challengers' methods
However, why would a bank want to facilitate the market entry of a potential competitor with such a disruptive business? There are likely several motivations, but key aspects include technology sharing and licensing.
"One of the key things was taking learnings from what we're doing. When you sign up with a challenger bank you expect to sign up in two or three minutes," Kidd said.
"For most Australian banks that's something that's relatively new. Even things that are as basic as that, a lot of banks will want to have conversations of how can we take the way you've designed that process and implement it for our customers quickly and easily?
"If you look at the growth in customers for tier 2 Australian banks and credit unions, in many cases there is no growth. So for them they see it as a way to grow deposits, a way to grow customer numbers and a way to lower the average customer age."
Kidd also argued that while banks often heralded their initiatives in the deployment of new technologies like AI and blockchain, they were often hamstrung by their existing technological systems in place.
"It's a different thing to talk about doing something versus actually looking at a practical way they can do that that would actually benefit their customers or their bottom line," he said.
"They can only do so much because of all of the legacy technology that they have in-house at the moment. The core banking technology, which for all of the big banks underpins their operations, can only be changed so much."
He said the types of solutions on offer a wide-ranging and could mean between a few hundred thousand dollars to multi-billion dollar projects for the big four banks.
"So for those guys to feasibly do something in blockchain or to do something with account management or they wanted to do something with artificial intelligence when it comes to making credit decisions for customers, that would require wholesale decisions to be made around the core technology that underpins their businesses," Kidd said.
"And in many cases it would require assets to be written off that are worth billions of dollars, and then cheques to be written for new pieces of technology to be implemented."
Send that extra email, meet for that coffee even if it sounds impractical
The team at Archa obvously have a strong case on their side, but what has been Kidd's secret to getting partners on board?
"In my experience, I would say you don't know where your success is going to come from," he said.
"A lot of the huge milestones we've hit as a business have come from the 99th email that I've sent when I just wasn't thinking about it.
"I think genuinely some of the biggest things that our business has done and achieved internally and have had huge effects on our strategy, have come from saying 'I'll just send a couple more emails, I'll have that coffee; it sounds kind of pointless but I'll have that chat."Never miss a news update, subscribe here. Follow us on Facebook, LinkedIn, Instagram and Twitter.
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