Hello, everyone, and welcome back to ‘In conversation with’, conversations that Kapronasia is having with some of the leaders in FinTech across the industry. So, thanks for taking the time today Steve, to start with Volt Bank has been a pioneering player in the world of Australian neo banks. Can you tell us a little bit about how the bank has developed since it was established in 2017?
Absolutely, and thanks for having me today. Volt was the first start-up to get a banking license in Australia, since the early 1980s. We got that license in 2019, and that really took the best part of a couple of years’ worth of hard work with various regulators. And since that time, the big focus for us has been building disruptive technology that will transform how banking is done.
Most of our customers won't come to Volt directly, some of them will, but most will be sourced through other businesses, leveraging what we describe as embedded finance or banking-as-a-service. We have our first half a dozen partners on board that are leveraging Volt’s banking-as-a-service technology to offer banking products and access to payment services to their customers.
We have built out a full deposit suite, and not just deposits for consumers, but deposits for businesses, for use by partners, right through to institutions. We recently commenced mortgage lending which we will ramp up throughout 2022. We will also move into the personal lending space later in the year before launching SME lending. So there's a lot to do in the next few years, but 2022 for Volt is very much leveraging all the build work that we've done up to this stage and to scale up quickly.
That's amazing. It sounds like a really exciting year coming up. Steve, you mentioned about technology. And obviously technology is a key enabler for a lot of the customization through leveraging the latest in payments innovation and better experiences, are customers expecting more from their banks now in Australia, and particularly Volt? What are some of the key changes in demand that you've seen over the past couple of years?
Yes, there has been a disparity between expectation from the consumers, the community and the government and what is happening with banking. In Australia, the four major banks represent about 80% market share. They do a very good job in telling the public that they’re “going to take customers seriously” and “put them at the center of what they do”. What we’ve seen, though, is something different than that.
If I look at just the basic savings deposit account, the most popular interest paying deposit, and if I look at the mortgage, the common mortgage; if you are a new customer going to these banks, you'll get a better deal as a new customer, both for your savings account and your mortgage. But why are new customers getting a better deal than existing loyal customers who already have their savings or mortgage with that bank?
Well, that's a real disconnect. Volt is taking action to put customer’s interests at the center of what we want do, and show that banking can be done in a better way for cutomers, not just making statements of intent.
With open banking, we are now in a position to cut through the lack of transparency that banks have and show customers where they can get a better deal. The second part of the equation is to make it easier for customers to switch to another institution, like Volt, where they can obtain a a better deal. We are certainly seeing some movement, usually led by government or regulators to highlight that most consumers can get a better deal if they shop around. But it's not unless you have someone like Volt Bank, or a disruptor digital bank, starting with new technology, that customers can see how banking can be done in a better way to help customers in a way that incumbent banks haven't been able to.
There has been a mismatch between what established banks are saying, and I think really wanting to do it, and what's happening today, certainly from a customer experience perspective. It's an incremental change, of customers realising they can switch to a bank that helps them be better off, and, with open banking, it’s now easier to make the switch.
Yes, that challenge, is certainly not unique to Australia. I mean, when we look at multiple financial markets across the region, in Singapore for example, we have three large Singaporean banks that control 80 to 90% of retail deposits, and there really hasn't been a drive to innovate or change. And so, certainly the new players coming in and the digital banks that are launching later this year will be a big part of that. Focusing in on the retailer just for a second, I mean, one of the more challenging and fickle segments of the market are the millennials and the Gen Z's, are those typically the segments that neobanks in Australia are targeting? And who have been the first customers of neobanks in Australia, specifically on the retail side?
Yes, there are only a small number of digital disruptive neobanks in Australia. Two of those were recently acquired, one by a major bank and one by the fifth largest bank. Then there's an SME focused bank called Judo. So there's not this kind of plethora of fully-licensed neobanks in Australia, which sometimes the headlines would make you believe. One of those neobanks that has done a very good job is called Up. It is very much focused on the millennials and Gen Zs.
Volt has a very different operating model. Over half of our deposit balances are held by customers over the age of 50 and that is something that we expected to happen. That is all about the design of our deposit product; there is a “no catches” interest rate - what you see is what you get, you don't get a good rate for only three or four months, or you don't have to deposit a certain amount each month into the account to get the bonus interest rate. Volt is showing the way that banking should be done.
Volt doesn’t target customers of a particular age, however the younger demographic are those that will typically be the early adopters of digital banks, but they don’t typically generate large deposit balances.
Volt is taking a very different approach from our competitors. We take deposits from consumers and businesses. Most of our customers will be sourced through partner channels, that is through the embedded finance and banking-as-a-service technology that we offer to partners. We take corporate and institutional deposits, from businesses, other banks, local councils, universities, and those sorts of parties. From a direct channel, we have a significant proportion of our customer base from the younger demographic, but not necessarily the same proportion of deposit balances and lending balances.
That's really interesting. Steve, I just want to pick on the challenges a little bit. As you mentioned, we have this view that Australia is a big neobanking market. But in reality, it's only a few small players in there. What has proved to be the challenge for some of the other ones that have moved out of this space and been acquired or pivoted? What are the market challenges that they've had to overcome? And specifically, in the case of Volt, how have you addressed those challenges and been successful?
If I look at the disrupter banks in Australia, there's really been five of them. I'll run through them quickly. And this will dispel some of the confusion. One was called 86 400, the number of seconds in a day, it was acquired earlier last year by National Australia Bank, one of the four major banks and will be rebranded Ubank. In more recent times, Up was acquired by Bendigo and Adelaide Bank, the fifth largest bank. Both 86 400 and Up did a tremendous job of very quickly attracting customers and growing deposit and lending balances and bringing all sorts of capability to market that the established banks haven't. So the fact that they have been sold, people have said, “Oh, the neobanking model hasn't worked in Australia.” My response would be to go and ask the shareholders of those two organizations!
The boards of any company have to act in the best interest of the shareholder and the company at large. And if an offer is put on the table, if the best thing to do for the shareholders at the time is to sell it, that's what they are legally obligated to do. It is certainly not a failure of the neobanking model. It has resulted in some very happy shareholders.
The third digital disruptor is called Judo Bank, which recently listed on the Australian Stock Exchange and is focused on SME lending. It is worth two and a half billion dollars and is doing a tremendous job, with great customer satisfaction. It certainly is not a failure in the neobanking model.
The fourth bank, where most of this talk about neobanks not working in Australia, is a bank called Xinja.
People think that they didn't get into lending quickly enough. I don't have the insider knowledge, and this is from an outsider's perspective, but in a few months, they grew deposit balances to over AUS$500 million. There are so many credit unions and building societies that took decades to get to that level. That neobanking model in Australia took three months to get there and is certainly no failure.
And then finally, there is Volt. Volt has a very different model. The vast majority of our customers will come through business partnerships. Our banking-as-a-service technology platform enables our business partners to offer banking products and payment solutions to their customers.
The products that we've taken to market to date are, very disruptive and very consumer friendly, even our mortgage offer.
In Australia, today, it's taking an average of just over 20 days for somebody to get a mortgage approved, to the point where they can go and make an offer to buy a home. We can get many of those approvals out within an hour, which is significantly better.
Building a neobank in Australia is challenging, but it is clearly not a failed model. The other thing that I say is this, it's a global phenomenon. People think that unless you get to become the third biggest bank in Singapore, or the fifth biggest bank in Australia, you're not successful. The truth is within the next five years if the small number of neobanks were to get 1% market share rich, they and their shareholders will be absolutely delighted. And to bring the real change that consumers are wanting, again, you don't need to be the fifth biggest bank, you can lead by example.
You'll hear Volt throughout the year, start to point out things that we are doing, that we think that the competitors should be doing, saying ‘Dear customers, we're sorry for some of the things that we have got wrong in recent years, and we've gone through a remediation program. But from here on in, we're going to put your interests at the center of what we do’ Well, that's not happening in Australia. And we're going to show that but we can genuinely put consumer’s interest at the center of what we do. And be an example for the rest of the industry.
That's amazing. Thanks for that, Steve, when you touched a little bit on the competition, and obviously there's competition between the neobanks and new entrants into the market. But the traditional players as well, what have you seen in the change of incumbent banks and the competition, that innovation that they're bringing to market and the transformation that they're bringing? Certainly they have their work cut out for them. But at the same time, they have the capital base and the trust and the established track record, how are they competing?
I think there genuinely is a desire to do better. But when you're working with big bureaucratic organizations with very demanding shareholders and the range of remediation programs, plus legacy technology- . it is hard. The incumbent players certainly have the capital base that digital disruptors that are starting out like Volt don't have. There are pros and cons about being an establishment and also pros and cons about being a startup. The reason they can't and don't deliver what the headlines say is quite often as not about the legacy technology but the legacy thinking that exists around the most senior at the table. As successful bankers we’re quite proud, we never want to show any sort of weakness in our knowledge base and when we make decisions, we aren't thinking about things like web 3.0 and DeFi. We're thinking about how I can make branches more efficient, because they are still driving a big brunt of our profit today. And that mindset is difficult to change. Quite often you will need to clean out the old way of thinking and it's just very difficult for us leopards to change our spots. There is no doubt that COVID has helped people live their lives more digitally, and customers have become more demanding. We can't control what happens at the major banks. But I think we can lead by example to show other banks how banking can be better for customers.
That's really interesting that you bring up the idea of legacy technology and legacy thinking, and I can see what you're saying about the legacy. Just talking about the technology for a second, we recently did a webinar with AWS and TCS and it looked at the idea of being agile and optimizing new technologies like cloud and AI, as being central for banks to stay innovative and agile and adapt to what's happening out there. What does technology like AI or cloud mean, for Volt Bank in terms of what you're able to offer to your clients and what it means for the future?
It's a very broad question and you absolutely need to be cloud hosted as Volt is. You need to be leveraging AI, and data analytics and machine learning for two reasons. One is, if you say that you are going to help customers live better financial lives in a way that incumbent banks haven't, then you need to know what they're doing. And you need to be able to do real-time data analytics, to show customers where they can do better, particularly around responsible spending. We can see that you could get a better deal on your deposit accounts, or your lending, or your electricity, or your gas, or your mobile phone plans. Banks can get that information, and they genuinely can help customers, but as a bank, they don't make a lot of money out of it. In fact, you make nothing, but it's what customers need. So, if you're going to do something that's going to help customers live a better financial life, you need to build that capability. And it's all about data analytics and digital technologies. That's the consumer side. The other is if you want to offer competitive interest rates, both deposits and lending, you need to operate efficiently. And once again, that is all about being heavily automated. Even in Volt’s early stages as a startup, when you launch a product to market, it is never perfect. In fact, you'd never launch if you had to wait to be perfect. So you'll always have some sort of manual work around, but if you don't go back and fix the manual workarounds and put in place controls, you end up in a pickle a few years later. And we've seen some of those examples. With neobanks around the world, you end up with operational risk events, you have compliance breaches, and you'll wind up employing a lot more staff and headcount than what your business case said. So be really disciplined about delivering new products, onboarding, new banking-as-a service partners, and being absolutely laser focused on automating the heck out of the manual processes. And if you don't do that, you're building yourself an issue that is harder to resolve as you scale.
Great, Steve, we've talked about what Volt’s role in open banking, banking-as-a-service and embedded finance. Can you walk us through some examples and some case studies of some of the clients that Volt is working with?
Oh, absolutely. We've got some really interesting case studies. One of those is with the largest of the digital currency exchanges, and that is all about removing payment friction between the traders, and the exchange itself. It's a great opportunity. We have also partnered with two other fintechs with wonderful customer propositions, but they need a bank account and payment solutions. Volt’s banking-as-a-service platform is the power behind the capability that they have built for customers. These fintechs know that getting a banking licence is very difficult, so Volt has architected our technology in a way that effectively we provide the banking products and the infrastructure. All the front-end work, or the contact with customers, curating customer journeys, are done by the partner. One of our key partners is with Railsbank, who some of your readers and viewers will be familiar with. They partnered with DBS in Singapore and other banks around the world. And, so one of those is called Douugh, it's recently listed on the Australian stock exchange, and another is called Parpera, which is a new startup that provides a whole range of solutions to SMEs to become the first live banking-as-a-service use case in Australia recently, via Railsbank with Volt providing the infrastructure. Douugh has a presence in the U.S., and again, helps customers with their budgeting and more effective spending and it makes sense that they partnered via Railsbank and not directly with Volt because they also want a global reach to the U.S., in Asia or in other geographies. The customer experience is owned by the fintech. Behind the scenes, invisible to a large extent, is Volt Bank providing access to payment rails, banking products and solutions. Another partner is one of the large mortgage broking firms in Australia, AFG. Volt has provided them a white label banking app. AFG handles about 1 in 10 mortgages brought in Australia. Through their partnership with Volt, AFG’s customers will be able to go on to the AFG app, see all their bank accounts, credit cards, and home loan account. When the customer wants to apply for a loan, they'll be able to access information digitally: the bank statements, income and expenditure data and make that process easier. With AFG effectively we're helping them deepen their relationship with their customers. Because typically what they do when a customer comes and says, ‘Hey, look, we want a mortgage’ is connect them to the broker, who will refer them to their recommended two or three lenders. Quite often that will be one of the four major banks. When the bank gets the mortgage application, it then wants to cross sell a current account, a checking account, and a credit card. Suddenly, the bank then owns that customer, and when the customer wants to do a re-mortgage, or they want to take out another mortgage, they quite often will go back to the lender. They'll bypass the broker and the way that broker gets paid is an upfront and ongoing trial commission. So with the banking-as-a-service capability that we’re providing for AFG, they're putting a moat around their customer, that customer is now an AFG customer. These are the sorts of opportunities that we have working with a variety of companies. And the driver for it is this: As consumers, we trust the banks will keep our money safe. But more and more, we are not trusting that they have got our best interests at heart. So if one of my favorite brands that I work with and use all the time should offer me a banking product or payment solutions, and I know my money is safe, then I’m going to go with them. To make all that happen, you do need a bank behind the scenes there somewhere. And there are two challenges for banks. One is you got to build the technology. And it is incredibly complex, particularly if you've got your own legacy tech that you need to work around. The second is, as a bank, you have to realize that you no longer own that customer relationship. It absolutely belongs to the business. And they're going to curate that customer journey and experience and they're going to decide where a bank product or payment solution or data sharing could suit, not the bank, and that's hard to get your head around. It really is interesting to see the level of demand from businesses, not just in Australia, but globally, that we're moving to the embedded finance space. And the majority of Volt Bank’s customers, deposit balances and lending balances are going to come by the partnerships.
That's great. Certainly it's a change in mindset and thinking for a lot of the traditional banks.
They're all talking about it, but it's very difficult to deliver and one is technology, with the astronomical amounts that Westpac has invested to go down this path. It also takes time to build an investment case that looks like it's going to return in any reasonable time. The executives of the incumbent channels will call out that banking as a service is competing with their existing customer channels. This is where Volt will compete. Where are the areas that are less contested in banking, where are those areas that are going to grow? It doesn’t make sense for Volt to go to war with the four major banks on every street corner.
That's a really good point and something that I think a lot of people don't really consider when they're considering the total cost of ownership and the advances that you can make. I want to go back to one of the other things that you brought up, Steve, there's a lot of talk about DeFi web 3.0 and the metaverse, here in Singapore at the Singapore FinTech Festival last year, web 3.0 was a key element, what impact do you see both short term and longer term around DeFi and web 3.0? I mean, talk maybe specifically around payments, and then any other areas that you see them really having an impact on Australia and in general?
Yes, it's a fascinating area. And you can just see all the focus, particularly from fintechs and banking, but the thing is that these sorts of disruptive transformation take longer than we expect them to. But when they start to bite, they bite hard. And usually, there's something to look at when you see the regulators getting involved. You see that with crypto now, almost every country on the planet is looking at regulating digital currency, a bit of that is around, some of the bad actors and avoiding taxation obligations. But it's much more pervasive than that. Now, we are starting to see people being able to pay for goods with digital currencies. I've been a banker for more than 30 years, and like to give myself a little pat on the back about understanding it quite well. Payments though is something else. There were a number of players that have been deeply embedded in the payment rails and there are certainly opportunities, commercial opportunities for new players, and we're seeing that. I imagine, at the Singapore FinTech festival, just the amount of focus on payments, and as well as crypto and DeFi, that probably would have covered most of the universe, and it's growing very much in popularity. For Volt, we see that as a real opportunity for us. For example, we've done a global first partnership with one of the largest digital currency exchanges in Australia, BTC Markets, where we will offer AUD bank accounts to the digital currency exchange itself and their ~300,000 trading clients. This makes the trading experience more convenient - rather than payments sometimes taking overnight and other times taking two days and banks blocking payments to and fro, If both the trader and the DCE with Volt, those payments are instant. We have very carefully kept an eye on the developments around crypto and DeFi around the world because it is certainly something easier for a startup like Volt, that's very much focused on banking-as-a-service and partnerships not needing to own the customer relationship. We are aiming to be one of the pioneers in a new way of banking and certainly the leading banking-as-a-service provider in Australia.
That's great. Thanks, I realized we're close to hitting time here. One last question. What are one of the things that keep you up at night?
I don't sleep well at all! Some of the things that do keep me up or worry me, are the obvious ones. Cybersecurity, you know, like every bank, particularly being a new bank, we’re targets and you need to be at the top of your game. When you're doing lending and you're starting off, you haven't got a seasoned book of lending to make sure you are making responsible lending decisions, and that your customers can afford to pay down their loan. As a bank you need to raise significant amounts of capital so a billion Australian dollars in the next couple of years, that's a lot of money. COVID and other black swan events are things you can’t predict so not much point worrying about those, but you need a resilient business to handle those events. But by far, the issue that keeps me up the most is around people and talent. How is it that you get the most talented individuals on the Volt train? That's not easy. The real challenge is how you create an environment where these very talented people can do their best every day. And that just rolls off the tongue, like, it's easy, and it's not. We are all human and when you have highly talented people who have usually been the star of the team somewhere else now working together, you need to get them to learn to play as a team. All those sorts of things are where I put a much greater percentage of my time than most people would have thought and they're the things that keep you up at night.
Certainly that talent is a challenge everywhere. Steve, this has been great. Thank you so much for the time, really appreciate it and really enjoyed this conversation.
My pleasure. Thank you very much.