APRA will impose stricter requirements on applicants for authorised deposit-taking institution licences, in the wake of one neobank, Xinja, handing back its licence and another, 86 400, selling out to a big bank after only a short period in operation.
“New entrants face heightened risks and uncertainty as they establish the business. In some areas these risks are markedly different from those faced by established ADIs, such as the high ongoing resourcing needs to fund the growth of business and operational expansion,” APRA said in a discussion paper issued yesterday.
It conceded that there may be fewer licence applications as a result of its planned changes, which may be considered a “slight raising” of barriers to entry.
The regulator has started consulting on its revised approach to licensing, which includes a requirement that new entrants have more advanced planning for a potential exit, including “a credible return of deposits option”.
Another proposal is that restricted ADIs must achieve a limited launch of both an income generating asset product and a deposit product before being granted a full ADI licence.
Applicants for a full ADI licence should have these products in the market shortly after authorisation.
Another neobank, Volt, has a savings account in beta and no other products in the market more than two years after getting its licence.
APRA is also planning to provide “increased clarity” around capital requirements at different stages for new entrants, aimed at reducing volatility in capital levels.
One possibility is that new ADIs will have deposit restrictions where this is necessary to improve confidence in the efficacy of a return of deposits.
The regulator recently completed a review of the ADI licensing regime, which found there was a need for a greater focus on the longer-term sustainability of applicants.
“Achieving an ADI licence is a milestone, not a destination, given the considerable development that continues in the years following authorisation,” the review concluded.
APRA deputy chair John Lonsdale said in a statement: “The revised approach effectively targets key risks for new entrants, setting a higher bar for gaining a bank licence, while enhancing competition by making it more likely new entrants can find their feet and gain a firm foothold in the market.”
APRA has called for submission by the end of April.