Trading conditions are remarkably tough for banking minnows at the moment.
The orchestrated loosening of monetary policy by central banks is testing the business models of hundreds of digital startups around the world.
In Australia, most are being forced to defer product rollouts as the fractional rate environment cripples the viability of price offers that were intended to lure deposit customers.
Xinja Bank’s demise less than a year after the spectacular launch of its high interest savings account is now something of a portent of what persistent low rates can do to the ambitions of market entrants.
In a peculiar development a few days after Xinja signalled its withdrawal from banking in December, the country’s largest annuity provider – Challenger Limited – announced it was acquiring Catholic Super’s tiny digital banking business, MyLife MyFinance Limited.
APRA is yet to approve the proposed A$35 million buyout but an announcement is expected in the next month.
Many banking industry watchers are still a tad mystified as to how a banking operation will fit within Challenger’s core annuities business and whether it can possibly deliver the promised returns by the end of 2022.
Challenger chief executive Richard Howes has been selling the acquisition to investors as a “highly strategic” long-term play that will complement and extend the company’s existing retirement income business.
Howes has mostly focused his public commentary on the acquisition around the value of adding term deposits to Challenger product menu.
“Challenger will initially focus on expanding MLMF’s term deposit offering by replicating the investment strategy used to support Challenger’s term annuity business,” Howes said last December.
“Under Challenger ownership, it will be able to provide term deposit customers compelling value across a range of tenors.”
A problem for Challenger in the current rate cycle is that there are drastically fewer savers finding “compelling value” in the term deposits market.
Since the pandemic hit last March the composition of retail deposits held at Australian banks has skewed more heavily to at-call accounts.
Term deposits are out of favour because no bank can find an economic way to offer depositors a sufficient premium to lock their savings away for 12 months or longer.
That presents a strategic dilemma for Howes and his “initial” point of entry in the banking market.
While Challenger’s push into term deposits makes sense as a long term strategy for shielding the annuities business when rates start heading north, one might speculate that Howes will have to review his product roadmap for rolling out the bank to the group’s customer base.
That might mean delaying the ramping up of term deposits until the rate cycle turns or focusing the early product launches on revenue-generating activities.
Challenger has not yet clarified the types of lending markets it wants to grow in, but it’s a fair bet that it will continue MLMF’s focus on credit lines that absorb the least regulatory capital such as mortgages.
Perhaps Howes has an even bigger incentive to position his new bank as a manufacturer and distributor of reverse mortgages – a product segment that the four major banks have abandoned in recent