A whole new world of digital banking

Consider the word ‘neobank’. Does your mind go to the Wachowski Brothers 1999 sci-fi film, The Matrix, starring Keanu Reeves as Neo, a computer programmer in a dystopian future who fights to free the human population from the crushing power of a world run by technology? Mine did.

The irony was not lost upon meeting David Nichols, chief risk officer of Australia’s first 100% digital-only neobank, Xinja, which is aiming to disrupt traditional banking by making technology the hero of customer service. Spending time with Nichols, it is easy to get swept up by his clear enthusiasm for this innovative field.

This is more than just a banking risk management role to him. Nichols smiles broadly as he recalls how he got involved in the Xinja venture. “A trusted friend of over 10 years, with deep banking experience, came to me and said: ‘We are getting the crew together to revolutionise banking, but to do it for the right reasons.’”

The concept of Xinja came to the fore not because of any great desire to disrupt traditional banks but actually to make banking more human-friendly, says Nichols. “A group of bankers in the Australian system thought: ‘There has to be a better way to serve the actual needs of customers’ and so we got together to create Xinja. We’re designing a bank for the people. Technology needs to be intuitive and simple, quick, robust and secure, because that’s the actual face the customers see. Xinja is deliberately built by people who have had deep banking experience, are customer-centred and have the required IT knowledge to run substantial projects.”

Taking away the humans

Nichols says while it is possible for customers to use call centres manned by “amazing customer service people”, the best way to give humans positive interactions with banking is to take away the humans. But isn’t it rather paradoxical to take the humans out of human interactions?

Nichols disagrees: “We actually ask the customers how they want to be able to bank, as opposed to giving someone a human-designed product such a standard, off-the-shelf product and saying, “This is your home loan, go forth and do it.” We’re starting with a human being, absolute front and centre. We find out what they want and need and go from there.”

Nichols says gone are the days of physically going into banking branches as “it is no longer a thing people really need”. At least not anyone under 45, he says.

“My grandma, who I love dearly, loves going into a branch and spending over two hours having a chat. She would deposit $20 at the end of the day. So, we’re probably not targeting my lovely grandma, but we are targeting anyone in the 25–45 market who is time-poor, looking for smart and savvy technology, and likes using it to make their life easier and more effective.”

Nichols pauses to pick up his phone from the table in front of him and holds it out by way of demonstration. “If I look at my smart phone, I’ve quite deliberately got my whole life here and on my calendar. Neobanking is the ability to do all of your banking transactions through your smart phone. Why shouldn’t I be able to do my banking and do that at a time that’s convenient for me? Without the need to actually physically go into a branch?”

Not going into a branch is one thing, but how can customers withdraw or deposit physical money if there are no actual branches? Nichols explains: “Customers will be able to withdraw cash from ATMs, transfer money to others and almost all other standard banking operations. In terms of deposits, once we become a Restricted ADI [authorised deposit taking institution], subject to regulatory approval, money can be transferred from other accounts to Xinja. We will likely establish relationships with other banks to accept cash at branches, but we are hoping Australia soon follows a number of other jurisdictions in the world where physical cash is becoming a thing of the past.”

The New Kids

But all our talk about banking is null and void without actual licences to do so. “We are going through the process of obtaining all our licences to operate,” Nichols says. “We are working very closely with our regulator, but clearly, one of the main risks here is we don’t get our banking licence. Obviously, we’re doing absolutely all that we can to mitigate that, but that’s probably our number one risk.”

A bank without a licence – how will that work? Nichols is surprisingly optimistic about this risk. “Our business model can be almost disengaged. So, we currently have our Australian credit licence, which means that we can now offer loans and mortgages. We’ve got our draft Australian financial services licence, which is the next step.

“But should we be unsuccessful with our final licence, we’ve got other ways that we can still run our business and be highly successful. Ideally, we’ve always wanted to be whiter than white, cleaner than clean– and to deliberately be acting in a way where we do things to the absolute highest level of professional making.”

Looking at the figures behind Xinja, it is clearly a very attractive prospect for buyers but Nichols says the firm prides itself on its independence. “We’ve deliberately been independent. Yes, we have been approached by numerous incumbent players wanting to buy us, but we are quite happy being independent, at least at the moment,” he says, seemingly leaving the door to sell slightly ajar for a later date.

In another Australian first, Xinja launched Australia’s first equity crowdfunding offer, via the Equitise platform, in January 2018. This raised $500,000 in the first 24 hours, more than $1m in a week, and is currently at over $1.4m. A very impressive feat for a concept new to the Australian market, but hopefully not a new concept for long, says Nichols.

Being the new kid on the block is always going to be tough, but Nichols is keen for others to join the neobanking movement and create some competition; something not usually wished for by new-to-the market businesses. “Strangely, we actually like competition, because it is the best thing for the customer. And it keeps us on our toes. We actually encourage other Australian banks to come into the market, which is a very strange concept,” he laughs.

“But, we almost think that once the customer has gotten over the complexity of ‘What is a neobank and does it mean I have to do everything on my smart phone?’, then it becomes a case of now competing with the incumbents in the existing Big Four. We’re not really competing with the other digital banks. We work very closely with them, and we’ll continue to do so, because we think there’s some real synergies in using the technology and there’s common experiences.”

But what about cyber risk

We move onto the risk aspect of neobanking, and Nichols’ role as a chief risk officer, where he remains upbeat. He argues that while it may seem like a digital-only bank may have more than its fair share of cyber risks, actually the opposite is true. “Cyber risk is something we talk about on a daily basis. We’re building a bank for the digital age, so that means cyber risk is a large risk for us. But interestingly, probably not larger than the incumbents because we are starting with a totally clean slate of technology, so we don’t have the silo systems, people and processes from an existing company. We are going around the world getting the best technology and saying, ‘How do we plug this in and turn this on for our market?’” “It’s actually incredibly hard for traditional banks to manage their cyber risk. We are basically a brand new car, straight out of the factory. It’s had no dings. It’s got the best computer in there so that really helps us to manage our cyber risk,” he explains.

But one area of concern to Nichols is fraud risk and it is something Xinja is already preparing to attack head on. “As a new player, we’re expecting to be inundated with potential fraudsters. We’ve got a very strong cyber anti-money laundering programme. But, operationally it’s a really interesting situation because we are using the best technology, so the majority of our systems, controls and traditional risk management tools are actually automated in real time. They’re based on real data as opposed to constructed spreadsheets used by incumbents. Actually, we manage that risk easier and better than a traditional bank.”

Helicopter management

Moving onto the man himself, Nichols says dealing with conflicting priorities is one of his biggest frustrations as a risk manager. “We are looking to use the most amazing technology that we have sourced from around the world, but we also need to be mindful that our Australian customers may not be ready for that technology. And secondly, our regulators may also be struggling to keep up to speed with the rate at which technology innovation is occurring.”

Nichols says he doesn’t choose one approach to risk management – operational or strategic – because in his mind, they are, and must be, intrinsically linked. “As a risk manager, I am flying my helicopter around the organisation and diving down into the areas of operational risk that need my attention. That is where I spend most of my time.”

“Strategic and operational risk management work upwards and downwards. I find that if the operational side is working, so too will the strategic side. But if there is something occurring operationally, I will often find there is a strategic issue also needing to be addressed. I don’t think you can separate them.”

Intrinsically linked activities continue into Nichol’s life outside of the office, as he confesses to being a very early riser, who never stops thinking about work. “I get up at 5:30am every day and head straight to the gym. My day quite literally starts on a treadmill, where I will start think and planning out the important meetings I have that day. I also think about any big risks that may have surfaced overnight or an issue that I have to jump on.”

Embrace the risk

Before I let Nichols run to his next meeting, I ask whether he can share any advice for risk managers. “Ask questions and then ask more questions. And if you still think you aren’t getting the right answer, ask questions a different way. Look for data that is supporting or going against the trends. And get tech-savvy. It isn’t just the future for banking or even business. It is the future for managing people, for risk management and for managing your time. “Finally, see risk management as a strategic guiding force as opposed to an infuriating compliance mentality of just ticking boxes. Risk has evolved significantly from that old mentality. It rightfully has a place at the boardroom table but we, as risk managers, will only get there if we are genuinely adding value to the business and not just managing risk.”

In classic Matrix-mimesis, Nichols and Xinja are promising technology is going to show us a banking world where anything is possible; it is just a matter of taking a leap into the unknown world of neobanking.

Please note Xinja is not a bank yet but is working with regulators to become one. Equity crowdfunding is risky. If you are considering investing, read the offer document available at www.equitise.com and consider the general risk warning contained in the offer document.