Interviewed By Neeti Aggarwal
Simon Beitz, founder and CEO and Craig Fenwick, co-founder and CFO at Alex Bank shared their business model, strategic plans for future growth and how they build their technology to address the challenges and opportunities of digital banks in Australia in this interview conducted in August 2021.
Neobanks have entered the Australian market in the last three years targeting emerging opportunities. They faced a challenging journey to scale in a market dominated by four large incumbent banks.
Alex Bank is the newest digital bank in Australia that received the restricted authorised deposit-taking institution (ADI) licence from the Australian Prudential Regulation Authority (APRA) in July 2021.
The bank’s CEO, Simon Beitz, remarked that digital bank in Australia is a ‘lonely’ space. He said the bank is focusing on whitespace opportunities for consumer finance, where banks in Australia have under-invested. It took almost two years for the bank to get this licence. The plan was hampered by COVID-19. Beitz hopes to scale rapidly and that restriction would be lifted by 2022.
The bank has a loan portfolio of AUD 8 million ($5.8 million) and has set its sights on a bigger target in the next 12 months.
Craig Fenwick, co-founder and CFO, said,“Our focus is on getting our growth engine running towards AUD 100 million ($73.5 million) balance sheet. That's an important milestone for us and beyond that”.
It has implemented a cloud-based core banking system along with data intelligence systems that provide a decision to a customer in three seconds, and funding within a couple of hours. The bank raised AUD 20 million ($14.7 million) in addition to its AUD 35 million ($25.7 million) funds raised previously.
“We will continue to fund our growth through wholesale markets. We have secured a long runway of wholesale funding to grow that. We're growing our lending book aggressively at the moment,” Beitz said.
The following key points were discussed during the interview:
Here’s the transcript of the interview:
Neeti Aggarwal (NA): Good afternoon. We have with us Simon Beitz, CEO and founder of Alex Bank, and Craig Fenwick, the CFO and co-founder of Alex Bank. Simon and Craig, thank you so much for joining us today.
Alex Bank has been there for about three years now. In July, you received your restricted ADI licence. Tell us about your journey so far. What has been your business model, the traction that you got and the business growth that you're seeing in the market?
Obtaining relevant banking and financial services in Australia
Simon Beitz (SB): We are a lending-led neobank. For the time that we've been around, Alex Bank has focused on building our credit business, which requires us to get an Australian credit licence and establish the technology and systems to build that credit business. Today, we have a credit business operating and it is live. We took our time to build that out, while we are applying for our banking licence. At the time of receiving our banking licence, we also received the Australian Financial Services licence. Alex Bank has all the licences that are now required in Australia to operate a lending or deposit product.
NA: What has been the traction till now? How many customers do you have? You're focusing on credit, so what is the lending amount? Are you also raising the deposit?
Craig Fenwick (CF): Currently, we have about 700 customers in our lending portfolio. That's a range of customers in the personal finance area. That's for things like cars and big spending that people are looking for. We're not operating in mortgages at this point, which may come down a track a little way in the future. We are very much focused on the consumer finance segment, which is a huge opportunity in Australia as well north of $100 billion assets in the market, and where a number of the banks have decided not to compete in that space. Banks are very much focused on mortgages, and in day-to-day transaction banking.
Alex Bank is more focused on a higher margin for risk opportunities in consumer finance, where we sit today. We're in the process of going through the final steps of being able to access deposits and provide deposits to customers. We'll start to do that in a limited way in the coming months. Before getting our restrictions lifted. We anticipate in 2022, we'll start to support deposits in getting access to Alex Bank services.
SB: What's exciting is that we've built a world-class lending product where customers can apply in three minutes. We can have our artificial intelligence (AI) or Alex intelligence. The decision deals for customer is within three seconds, and we can fund within a couple of hours. That's extremely fast compared to legacy banks in Australia. The reason or rationale behind us doing that is, Craig and I started interviewing over 1,500 customers on what they were looking for in banking and where banking was broken.
One of the things that we heard continuously from customers is that they're looking for banking that was fast, simple, fair and human. We're able to move Alex Bank to a position with a customer journey, where they allow the customer to hurry up, and make decisions around, “do I have the money to do the experience I'm looking for?” and then enable that experience. We're proud of that feature that we built while we're still applying for that banking licence.
NA: Craig, you've got about 700 customers, but you've been in the market for about two years? You launched your lending product mid-last year. What is your current loan book?
A loan portfolio of $5.76 million and starting to scale
CF: Currently, our loan books are a little over AUD 8 million ($ 5.76 million). We've come to a journey two years ago. We launched our lending product to test in the market. That was valuable for the benefit of testing out that three minutes to apply, three seconds to come out with a decision and being able to fund fast. We did that in 2019.
We started to push hard with our application for our banking licence. That was the key focus for us to prove that the lending technology was ready, then go into the banking authorisation process. We launched our lending product more formally to market in the second half of last year. The reason why we waited a little while was that we were conscious of the world being impacted by COVID-19. We wanted to make sure that we fully understood the implications of COVID-19 on borrowers before launching that in the second half of last year.
Since then, what we've done is we've started to gradually increase our presence in the market. We're at a point where we're starting to scale. We've got wholesale funding supporting our balance sheet over the next period. We'll start to use deposits to accelerate growth from early next year, onwards.
NA: Digital banks in Australia seemed to be having challenges. We saw Xinja close shop and the 86400 was taken over by NAB. Volt has started its operation using banking as a service (BaaS) model. Judo is focusing on the small and medium-sized enterprise (SME) area more and you're focusing on consumer finance. What are the biggest challenges that digital banks face in this market? How do you address those challenges?
SB: I don't see the Australian market challenging at all. I've been quoted a couple of times in saying “it's quite a lonely space”. Xinja is no longer around. They had some challenges that they didn't know how to navigate. 86 400 has been a tremendous success as far as NAB seeing it as a real threat and acquiring that business at quite a high price for an early-stage business.
What that means though, is that the market in Australia in this space is quite lonely. It has the two genuine players Judo Bank, whom we can all agree is doing a tremendous job with the asset growth, and then ourselves, Alex Bank. The people that know how they were building a bank and understand the fundamentals of banks need to lend money to make money and then take deposits after that to help fund that lending business. There's an opportunity for banks in that space to do that.
Banks are capital intensive and require good people and technology. Alex Bank is well capitalised. We've got great technology, partner in Temenos and some other partners. We've got some fantastic people that are helping make Alex Bank a success.
NA: It’s a space that is going to see more competition going forward with more digital banks coming in. You've got the banking landscape in Australia, where large banks have huge physical presence. To compete with these large banks, what will be your unique strategic focus? Some of them have come up with their own digital arms like, U Bank and banks are undertaking extensive digitisation. What will be your strategy in addressing this market?
CF: It's important to recognise that Australian banking is quite mature. We've got some very good banks in this country that serve customers very well. Those banks are focused on providing mortgages for customers, and they do a very good job in the mortgage market in this country. They've also digitised their day-to-day banking services for chequing or transactional type banking, where they haven't delivered, to bring ease into the parts of the market that is smaller than mortgages.
We've seen that in Judo in the small business or SME space. Alex Bank is focused on that whitespace opportunity, the consumer finance and that's an area where banks traditionally have underinvested and continue to underinvest. Over the last 10 years, they've pulled back from that market because of the focus on other bigger balance sheets, which are mortgages and day-to-day banking.
Where are we looking at? What are those niches where we can compete profitably? Where can we compete by delivering a fast and simple service for customers? Simon talked about all those customers we spoke to early on in our journey. What they continue to be surprised by Alex Bank is its ability to do things easily.
It's 20 questions to apply for a loan and get an answer takes only a couple of minutes to do. The existing banks are challenged by their legacy technology and processes, and focus on the big parts of their balance sheet. That's where they create value and challenges lie. This creates an opportunity for Alex Bank in being nimble and focusing on where those margin opportunities relative to risk in the market are. We can move faster than an incumbent bank into those spaces. We've seen the difference at that time. Non-bank financial institutions have taken a foothold in certain parts of the banking that were traditionally served by banks. They've done that because banks have backed out in certain places. We're in the knight, in a great position where we can move at the speed of light. In delivering service to customers, we're also a bank that enjoys the lower cost of funds that a bank enjoys. We can serve customers in more than just a lending need. We can serve them in their deposit needs, and ultimately in a range of different needs, over time.
NA: Tell us about the technology first. You implemented core banking on the cloud with Temenos. How are you building your technology capabilities? How are you delivering that cost-efficiency, which is very important for a new bank?
Cloud-based core system and data intelligence
SB: We’re using Temenos T-24 in the cloud, and that’s in the Azure Cloud or the Microsoft Cloud. We replicate that across the other clouds as well, such as Amazon Web Services (AWS) and Google from a redundancy or backup point of view. Alex Bank uses a mixture of our partners and a talented team in-house to build out the front end and the customer experience. The shopfront or the product suite is developed and built in-house and plugged into that Temenos system which makes that experience for our customer a fantastic one. We're beating the banks at their own game on that space, though, that's covered with military-grade security to ensure that our customers are safe and secure. Alex Bank is resilient through that. The benefits that get passed on both to the customers and ultimately to Alex Bank are a significant reduction in costs. In long term, we target cost to income ratios certainly below 40% and ultimately below 20%. If you compare that to any of the other big four banks in this country, the most efficient ones are in the mid-40s or high 40s. It shows the efficiency that you can take out by using technology to deliver the requirements of what your customer is looking for.
NA: Being a digital bank, you do not have that physical presence, which a lot of these banks have. In that whole process, how are you enabling this personalisation or that connectivity with the customers? Have you come up with innovative processes or features? How are you implementing it?
SB: It's about being where the customer is and interacting with us in meetings. In Australia, a lot of the big banks have closed branches and not being relevant to where their customers are. We find through the data, and we're a data-led organisation. Our customers are applying for loans, typically when a bank branch isn't available. The simple reason why that's the case is they're at work. It's too difficult to apply for a loan when you're at work. We see in our data sets that before people start their work in the morning or in the evening, early evening, on the way home, people are applying for loans.
When we start talking about that research that Craig and I started off doing, now we continue with the greater team, it's about being relevant and where your customers are looking for you at the time. There's no point in opening a shop around the corner that they can't access. We go one step further, use that data that we take through the application process to tailor a loan that's ideal to them and their needs. We reward them for their risk-based or we do risk-based pricing. Rewarding them for their behaviours, and the credit scores that they attribute through Alex intelligent scoring. We pass on the good behaviours. The good consumer behaviour, there’s a reward for that as well.
NA: Data availability is not a challenge. How are you using it more effectively vis a vis other banks or other fintech in the market? What's the unique proposition that you have? On risk-based processing, tell us about that and give more details.
CF: We use over 1,800 data points as part of Alex intelligence accredited assessment process. That's all designed around using the process of the 20 questions. We ask customers to understand who they are. We use biometrics and identification processes that are digital. It allows us access to government databases to make sure that we know whom we're dealing with. That's important from a know-your-customer (KYC), anti-money laundering (AML) perspective. We use that data including telemetric data from, where and how they're applying. What handset are they using to understand relativities in risk? We know things that if someone always got the latest version of the software installed on their handset, they tend to be a lower risk than someone who's a bit slower with upgrading their operating system. That's the type of front-end information we get. As customers tell more about themselves and share more data, we add greater richness in behavioural insights that go into Alex intelligence that allow us to set where they are in their Alex score. That allows us to make a very fast decision to say, how much credit are we prepared to advance to them, and that gets done in a matter of seconds.
It's all about making sure that we are respectful and asking for the amount of data we need to make a good responsible lending decision and giving them an immediate answer. We get people our very quick ‘No’, because they are fast. Now, it’s always a good thing to have in lending, getting people a fast ‘Yes’. We support that. It's important as a digital business to support that with human interaction. If we need to make further inquiries of a borrower because there's a couple of things we need to ask them about, we have people on the ground that can go back to them and request that information. We've got people for where customers needed to contact us to help them out with something that they might need help with. It's backing digital, but with human interaction to achieve what people are looking for.
SB: The data is freely available to everyone. That point is right but the problem or the challenge is that the incumbent banks struggle to consume it or be able to do things with it. We don't have access to any special data that other people don't have access to. Our skills or our special bit of magic that we have at Alex Bank is we've been able to work out how we can consume it in a system in real-time because we don't have the legacy challenges that means we can't consume it properly. We've got some exciting intellectual property around using different data sets to help attribute to the character which is one of the most important ‘C’ in the four C's of credit. We use those different data sets to help us determine whether this customer is of good character and is highly likely to pay us back. Again, we haven't seen that from the incumbent banks or any of the banks in the country at the moment that does that.
NA: What are your recovery rate and default rate?
100% success in first repayment and less than 1% in default
CF: We have very low levels of default. We've got well, less than 1% of customers in arrears. We have very low levels of missed payments. One of our key statistics - we measure first payment default. Did the customer pay you their first repayment? We've had a 100% success rate on customers making their first repayment. That's a good indicator of the types of customers that we're onboarding. Others, as what we see in our customer bases, the majority of our customers have higher than average incomes. Majority of our customers own their own home, have a mortgage or are in long-term, stable rental. They're very good quality customers in those attributes. Our target market is very much in the 26 to 46 age band. Customers who are a little more financially-savvy and experienced. We expect that those attributes should indicate our highest level of quality customer or borrower. That goes back to our cost of operation. We can pass the savings of lower costs of supporting those customers back to themselves.
SB: It's worth adding that while Alex Bank started with consumer lending or personal loans, we're continuing to build out the Alex product set as well. One of the additional superpowers we've been able to build at Alex Bank is straight-through processing (STP). We're able to process most loans in the speed and time that we talked about before, which is a real game-changer from an opportunity thereof, removing all those points of friction and being better for customers to interact with. As we roll out lines of credit or other deposit-style products, or even move into the small part of SME, looking after those ‘moms and dad’ businesses, and Australia has over 2 million of those, sole trader type businesses, Alex Bank has worked out how to do that STP. We look forward to helping many Australians with their banking requirements.
NA: You've got your restricted area licence so, how were you funding the loans last year?
CF: Initially they were funded out of capital. We've got wholesale funding facilities available to us, which we established last year, and we continue to work to increase it. It's supporting our lending capital. We are well-capitalised in investment into Alex Bank to support our regulatory capital position to be able to grow.
NA: What are you funding? When do you expect to be profitable? That’s one struggle that many digital banks have. We have seen that in UK until now.
CF: One of the important things about Alex Bank is we are a lending-led neo bank. As bankers, having a revenue stream is incredibly important. As we’re building our balance sheet, every new customer who comes onboard is contributing revenue and net income in Alex Bank. That's the power of having a lending-led neo bank. Over the next couple of years, we will see our balance sheet start to grow, and in probably two to three years’ time, we'll start to see profitability building for us, and that sustainability of the business coming through. We're seeing what we're doing is a direct pathway to profit, based on the types of customers that we're attracting. On our business model, as it's been built, it's a difficult place to make money out of deposits. Deposits have a net cost to your business if you don't have a lending product or a fee-generating income product on the balance sheet.
NA: How much is your funding till now?
Over $25 million of funds raised and targeting total assets of $73.5 million
CF: We've raised AUD 35 million ($25.7 million). We're just completing AUD 20 million ($14.7 million) funding.
NA: Since you've got this restricted ADI licence, you will be able to raise deposits from the public as well. How do you plan to fund your operations?
SB: The restricted framework doesn't allow us to generate any more than $2 million of deposits in Australia, but it allows us to call ourselves a bank and offer the Australian Government guarantee to deposit holders. The $2 million won't shift the needle match for us as a business. We will continue to fund our growth through wholesale markets.
As Craig mentioned before, we will ensure that we've secured a long runway of wholesale funding to grow that because we're growing our lending book aggressively. We'll continue to do that through the restricted phase, all the way out the other side of the restricted phase until we can generate a deposit ratio of 70% to 80% deposits. We'll have the remaining wholesale funded to make sure we can operate through cycles. That's the plan broadly around deposits and how we can fund our growth. In funding our growth, at the moment, it’s through those wholesale markets.
NA: Tell us about your future plans. In the next 12 months or so, what kind of growth are you anticipating? What are the plans for target market or new products to launch?
CF: Our focus is on getting our growth engine running towards an AUD100 million ($73.5 million) balance sheet. It’s an important milestone for us. Beyond that, it’s about delivering the additional lending capabilities.
Simon mentioned, bringing onboard our flexible and secured credit offerings for customers. On the credit side, it's all about giving people the fundamental which is, ‘giving me a loan that I can repay over time’ with certainty of the repayment amount. ‘Give me access to flexible credit when I need it’. ‘Give me lower rate’ when I provide security on that loan. These are the things that we'll be delivering over the next 12 months. On the other side of the balance sheet, we'll be building our deposit and funding capabilities to make sure that we've got the right mix of deposits both at call and term and from different parts of the market, including retail and wholesale. We have a diversity of funding and the right amount of funding when we need to lend.
NA: You mentioned the AUD 100 million balance sheet. When do you expect to achieve this target? You reached AUD 8 million, yet there's a significant amount of gap.
CF: Over the next 12 months, we'll be pushing towards that target and beyond that target.
NA: Thank you, Simon and Craig for joining us today.