The board and management of Volt Bank, in their bombshell decision in June 2022 to hand back their banking license, have underscored the fragility in so many fintech business models in Australia. Banking is an incredibly heavy consumer of capital and even in the best run organisations it chews through mountains of pricey executive and consultant time.
From the outside, it seemed Volt - which weathered the storm of Xinja Bank’s chaotic demise in 2020 - was passing milestones and finding its footing, even the outline of a sustainable niche, in the crowded banking market in Australia.
The hard-working Volt board, fed up with the shrinking pools of capital worldwide for the briefly-fashionable fintech and neobank sectors, have resorted to retrieving whatever owner value they can, and carrying on with the remnants of its tech (via Volt Limited) that may challenge banks, without the unaffordable luxury of a banking licence.
Startups who plan to fund and flip
As unbelievable as it sounds, there was a period - let’s say around 2019 - when all manner of schemers and dreamers and their advisers sat around devising banking business models that were never intended to be a proper business. The poorly-founded belief was that, once and if licensed, the plan was to cash in. Just flip the license pronto.
Proponents of this madness, of which there may have been dozens, must have thought the process was mainly a case of ticking APRA boxes, then cutting and pasting the absolute minimum risk, prudential, operational and governance documents to creep over the line.
With no more than vapourware, these schemers intended to rustle up the minimum capital to get the APRA green light. Then, these hopefuls believed, they’d pocket the profits from the sale of their non-existent bank via a trade sale.
Only equally desperate and even less well-capitalised fintechs could have been in the target market. Of course, none of these operators got anywhere near the starting line.
Judo Bank is kicking on, even flourishing. Two licenced RADIs doing not much are Alex Bank and Avenue Bank. Alex is up and running, or dawdling. The Alex balance sheet is constrained by the low ball cap on deposits. It has until July next year to progress to a full licence. Avenue, 20% owned by Liberty Financial, has no deposits, no loans and no known plans to make its debut.
Volt was different
Volt’s management and board were never part of the ill-informed antics. A defining difference at Volt was the depth and experience among the top management team and on the board.
Only half a dozen or so neobanks ever secured a license from APRA during this strange era. And there won’t be any more. Xinja self-destructed 18 months ago. Soon after Xinja tanked, Cuscal – the owner of 86 400 – astounded the industry with the well-considered (and highly profitable) sale of the bank to NAB, in January 2021.
Now Volt, less dramatically, is staging a strategic withdrawal.
Non-bank mortgage funder Resimac appears to be the buyer of the mortgage book of Volt Bank, which is exiting the industry. In a media release, Volt said it had "executed a transaction to sell its mortgage portfolio," but did not identify the buyer. Resimac declined to comment on a request to confirm or clarify its dealings with Volt. APRA data shows Volt had $80 million in housing loans at the end of April.
Through Volt Limited, which will continue trading even as the bank is wound up, Volt retains ownership of the intellectual property at the heart of the Australian Mortgage Management business, which it acquired a year ago.
Volt Bank clients - fintechs and others – are scrambling to identify and engage with alternative suppliers of a banking-as-a-service offering, and minimise damage to their own businesses. Volt devastated their BaaS clients by withdrawing their increasingly in-demand BaaS suite – including deposit products – effective immediately. Volt had five BaaS clients in production and another half dozen ready to on-board. The number of prospects in the pipeline is unknown, but likely to be plenty.
For clients such as money management platform Parpera, which was reselling deposit and card payments product to sole traders and very small businesses, the sudden cancellation is compromising for a fintech emerging from its start-up phase. Parpera ceased onboarding new members immediately and providing its services to members by 5 July 2022.
Who might the likes of Parpera go to? There is little depth in the banking-as-a-service domain in Australia. BAAS is, nominally, a (recent) strength of Westpac, but there are doubts the bank is eager to serve small fry and its systems may be too clunky (the bank counts heavyweights such as Afterpay and SocietyOne as clients). CommBank? Maybe, but fintechs by and large plan to profit from attacking the market share of the biggest banks.
The drastically short notice imposed on clients by Volt had some asking: why not a few weeks longer? The reason may well be that this is a function of APRA’s inflexible requirements, rather than any resolve of the Volt board for a hard stop.
Ian Rogers is a seasoned industry commentator with more than 30 years’ experience and Founder of Banking Day. This article is general information.