Alex Bank, Australia’s newest digital bank, was first licensed as a restricted authorised deposit-taking institution (ADI) in July 2021. By end of December 2022, the Australian Prudential Regulation Authority (APRA) allowed it to operate as a full ADI, ahead of the typical two-year pathway to the removal of restricted status that limits it to take no more than AUD 2 million ($1.3 million) in total customer deposits. Its new status clears the way for the bank to be self-funding in its lending-led and low operating cost business model.

Simon Beitz, CEO of the challenger bank, sees it carving a niche in the competitive consumer finance market by focusing on a high-quality target segment in the 26 to 56 age group, comprising good salaried and credit-worthy individuals, and about 2.2 million small businesses and owners who are underserved by traditional banks.

The bank is leveraging technology to streamline processes and provide customers with a seamless banking experience through innovative and customer-centric financial solutions.

With over AUD 70 million ($47.1 million) in equity capital raised to date and an ongoing fundraising round of AUD 20 million ($13.4 million) expected to be completed by June 2023, Alex Bank is looking to expand its products and operations to cover unsecured and secured personal loans, term deposits, savings accounts, and small business lending, including mortgages to business owners.

Beitz emphasised the importance of executing the right strategy to avoid the fate of previous digital banks that ceased operations, such as Xinja that returned its operating licence after barely a year, and the acquisition of 86 400 by National Australia Bank (NAB).

Alex Bank’s lending-focused approach has yielded over AUD 65 million ($43.8 million) in total loans approved so far. With the removal of the deposit cap, the bank is able to raise over AUD 25 million ($16.8 million) mainly from term deposit aggregators, to fund about 70% of its current AUD 35 ($23.5 million) loan book, with the remainder from the wholesale market.

Beitz outlined the bank’s goal of achieving self-sustainability and break even by targeting a balance sheet of over AUD 200 million ($134.7 million) by the end of 2023. It aims to reach AUD 50 million ($33.7 million) by the end of its financial year in June 2023.

The bank’s lending model, with an average customer borrowing rate of between 10.4% and 10.6% and a cost of funds of about 4.4%, gives it a healthy margin of 500 to 600 basis points, higher than the returns from traditional mortgage and transactional banking.

Alex Bank’s adoption of cloud technology appears to be a key differentiator. Beitz claims Alex Bank to be one of the few banks in the country that operates 100% on the cloud. By partnering with Temenos, the bank can focus on banking while leaving the core banking system, security, and resilience operations to the experts. This approach allows for rapid prototyping, product development, and scalability.

Beitz highlighted the importance of data in the bank’s operations, both for risk-based pricing and data driven decision-making. Alex Bank leverages its proprietary tool, Alex Intelligence, to utilise data in credit decisions, and bank feed data and accounting software to gain valuable insights for business customers.

To realise its low operating cost strategy and a low cost-to-income ratio, Alex Bank is leveraging cloud-based solutions where the bank can keep costs in check and operate efficiently. With a lean team of only 35 employees, Beitz believes the bank’s focus on cost management allows it to deliver value to customers while staying competitive.

Here is the full transcript: 
Foo Boon Ping (BP): In March, you announced your latest attempt to raise funds of AUD 20 million ($13.4 million). Give us an update on it.

Simon Beitz (SB): Australia has had an interesting past with neobanks. The ones that gave their licence back—frankly, we feel that they didn’t have the right strategy. The acquisition of 86 400 by NAB—that’s a symbol that NAB saw they built something really interesting. And NAB wanted it.

We’ve raised over AUD 70 million ($47.1 million) to date. And we’ve kicked off the AUD 20 million ($13.4 million) raise. We’re progressing well, we’re probably just under halfway through that. And we hope to close it out by the end of this month. I think what’s a benefit to us is—we’re in market. We’ve got a full licence, our software is all built. We’ve got good relationships with brokers, and we’ve got a distribution strategy in place. That’s very different to not having any of those in place.

BP: Tell us in terms of that strategy, how are you building on consumer finance to build profitability?

SB: We absolutely lending-led. And we’ve always been lending-led. So, we’ve been lending for a couple of years, which means that we’ve seen over AUD 65 million ($43.8 million) of loans approved and we’re continuing to see those in our loan book. Our quality is terrific.

We’ve got our restrictions removed now. Which is terrific news and something that I’m out speaking about at the moment. We were a restricted ADI. And during the restricted ADI, we had a wholesale lending facility in place that allowed us to fund that book. And we also use equity in the business to drive that.

We were lucky enough, or not lucky I would say, we did the hard work to get APRA to remove those restrictions. And those restrictions were removed in December of last year. So, from there, we’ve come back out and we’re raising deposits.

We’ve got well over AUD 25 million ($16.8 million) in deposits. Our deposit strategy is working well. Our deposit strategy is based on term deposits. So we’re working with term deposit aggregators that are putting deposits with us. That means in Australia, where we’ve got the government guarantee of up to AUD 250,000 ($166,450), we’re receiving on average at deposit of AUD 130,000 ($86,544). So that’s much more efficient than going down a retail deposit gathering strategy, where I’m getting AUD 50 ($33.2) or AUD 100 deposits ($66.5) from customers off the street, where we’re able to fund our lending book, and really accelerate that growth.

We’re targeting from a self-sustainability point of view to hit north of AUD 200 million ($134.7 million) by Christmas of this year. We’re at about AUD 35 million ($23.5 million) today. So we will hit our end of financial year target of AUD 50 million ($33.2 million), and then AUD 200 million ($134.7 million) by the end of the calendar year. And that will see us be self-sustaining, or break even at that point, which is again a terrific outcome.

How are we doing that? We’re raising term deposits at roughly 4.4%, and we’re lending at an average customer rate for prime quality customers, as you said, at about 10.4% or 10.6%. So we’re able to derive a wide margin of between 500 and 600 basis points, which is terrific. And that will see us getting into a much more profitable space than maybe in the traditional mortgage and transactional banking space which is highly competitive.

BP: Your business model is predicated on high-margin lending and low operating cost.

SB: Yes, correct, the fundamentals of banking.

BP: How’s your technology enabling it?

SB: It’s a great question. And we’re using Temenos, and we’re 100% on the cloud. And we’re one of the few if not the only bank in Australia that’s 100% on the cloud. And the way we look at it. That’s quite simply: we’re great at banking, and we know banking, and we know lending. So we need to work with a partner. And we’ve chosen Temenos to do this, that is 100% on the cloud.

They manage the core banking system, they manage the security, and make sure of resilience in operation. We get them to look after all of that, which allows us to focus on building our products and building our business out. And so that’s why we went with Temenos and the cloud.

BP: The Reserve Bank of Australia raised bank rates again by 25 basis points just last Tuesday. You will have a higher cost of funding from term deposits, and you’re lending with higher margins. How do you sustain that?

SB: So, over the course of the last 12 months, the rates have gone up in 12 different movements. What a great time to be a bank! I’d hate to be a non-bank lender. The reality is our cost of funds are cheaper than non-bank lenders. Yes, they’re slightly more expensive than the legacy banks that get the opportunity of free deposits. But we are in that higher margin lending business. So the margin is maintained, even though our cost of funds has gone up, and customer rate has gone up as well.

We only bank prime quality customers. We do risk-based lending. So, depending on where they fall in the risk-based curve will determine their pricing for that. But again, we’re targeting and we’re delivering today on a margin of 500 to 600 basis points.

BP: 500 to 600 basis points and you are looking at banking millennials?

SB: That’s where we started off and you are right. That’s where we thought we would be targeting our customers. But that’s not how it’s evolved. Our customer age today sits anywhere between 26 and 56 [years old]. Our customers are in stable living arrangements. So, they’ve got mortgages or are renting in a stable environment. And some of our customers even own their house.

Most of our customers are customers of the big four banks of Australia. Average credit score is 780 out of a scale of zero to 1000. So, we’re actually getting prime quality customers that are looking for a better banking solution, and Alex Bank can offer that. So, we still want to look after the millennials and see what we can do there. But the reality is that it is a very broad base of customers using Alex Bank today.

BP: Besides lending, what are you getting into in terms of consumer products?

SB: We have the unsecured and the secured personal loan, which is typically for cars, renovations of homes, those sorts of things. And then on the other side, we have term deposits, which is obviously how we’re raising the funds. And we also have a savings account.

We’re looking to roll out in the not-too-distant future, small business. And when we talk about small business, we’re talking about the mum and dad businesses. There are 2.2 million Australians that are either restaurant owners, tradespeople, news agents or dry cleaners that are looking for better banking solutions, and using our technology to work with them. And also mortgages for those customers. The reason is because the banks in Australia abandon that cohort of customers, and we see it as a real opportunity to serve and deliver there.

BP: Mortgages are not necessarily a high margin business. But you are more focused on this particular segment, mum and pop, the underserved.

SB: Correct. We’re looking at not delivering mortgages to the general population because you’re right, that’s highly competitive. We’re looking at delivering the mortgages attached to a small business loan to help a small business owner not only grow finance for their business which is important to them, but also enable them to enjoy home ownership, like many of us do, which is often too difficult for the major banks to do those two products together. That means we also get a slightly higher margin for our product.

BP: And now with higher interest rates and possible repayment difficulties, how are you maintaining asset quality?

SB: We haven’t seen a change in the credit quality of our book. Our 30-day arrears remain very low, 90-day plus extremely low. Credit quality of the book continues to be strong. But as I mentioned before, the average credit score for our portfolio is 780, which is very high compared to maybe with some other non-bank lenders.

In Australia we’re not seeing a change in unemployment. We’re still seeing record [low] unemployment. As in it’s very low. Therefore, we’re not seeing that stress on repayments. If you think about Australia as a very big country, people need their cars to get to work and do those things. So again, Australians typically are very good at [re]paying loans.

So, we’re not worried because we also don’t have an old book. We don’t have anything in a large, old portfolio that might have things hidden in there.

BP: But you have a fairly new portfolio that has not gone through a full business cycle.

SB: That’s right, which comes with new-portfolio challenges. But seasonality is starting to roll through. It’s over two years old now as well.

BP: The latest is a round of debt funding? Your capitalisation is AUD 130 million ($86.5 million). Do you plan to raise capital as well?

SB: Absolutely. We’re raising at AUD 130 million ($86.5 million), pre-money valuation. As I said, that’s progressing well. At the moment, we don’t need to do any securitisation around our book. We are deposit funding 100% of our lending growth, which is great. Longer term, that’ll probably come back to 70% to 80% deposit funded and some wholesale debt in there. But at the moment, that’s the numbers. And that’s what we’re delivering on.

BP: By 2024, you will be looking at achieving profitability. You will be achieving a AUD 200 million ($134.7 million) loan portfolio, and also a term deposit growth to support your loan deposit growth as well?

SB: That’s right.

BP: Your prime customer target is between age 26 and 56. What is important to them? How is the technology from Temenos helping?

SB: I think time-to-market is really important. A cloud banking solution, such as Temenos, enables us to achieve that. It allows Temenos do what they’re good at, the technology element, and allows us to get on with banking. It also allows us to do rapid prototyping, building the product, and rolling that out.

Data is extremely important to us as well. We’re building in-house, although it works alongside the Temenos solution, what we call Alex Intelligence. Alex Intelligence is our system or our tool that takes in data, does risk-based pricing and makes better credit decisions.

When we think about the four Cs of credit, the most important is character, and we’re using Temenos and doing risk-based pricing, lending off the back of that. On the business side, data is also really important. We can consume data for small business accounting software systems, to make better informed decisions there as well, because that’s really the central source of truth. And also the bank feeds data which we take as well.

BP: And you claim to be the only bank to be 100% on the cloud?

SB: That gives us the advantage not only around technology and scalability. We don’t have to worry about managing that solution because Temenos does that for us, and does a great job at that. It allows us to get on with what we need to be doing instead of worrying about the technological solutions. So, that’s a huge advantage.

I was talking to a large bank CEO recently and he said his technology team will soon surpass his banking team, in how many technologists they need to run the bank and deliver the banking solutions, versus the customer-facing. I think that’s a really sad place to be as a bank. We’re here to serve customers, and deliver for customers. It’s important to me that I don’t need to have more technologists than customer-facing staff. Of course, I like technologists, but I love customers better.

BP: Your business model is lending led and low operating costs. Your costs of technology, being on the cloud, how is that different?

SB: One of our key strategies is a low cost-to-income ratio. And that’s an important metric for any bank CEO. By being on the cloud, using cloud-based solutions that can scale as we need to, it means that our costs are in check, and only spending money where we need. Alex Bank is targeting a cost-to-income ratio of sub-30%. Even lower over time. We can achieve that through those solutions like online. We’re running a bank today with only 35 people. That’s very lean, but we’re able to do that because of great partners like Temenos.