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Neobanks run into a classic problem

Lex Hall  |  05 Feb 2021Text size  Decrease  Increase  |  
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Neon pink, neon purple, neon turquoise. The lurid colour scheme of the average Aussie “neobank” website is perhaps the first warning sign of its viability—or lack thereof. I still have the breezy welcome email I received from Xinja, exhorting me to “ditch Dad banking” and sign up to what was set to become Australia’s “first 100 per cent digital bank”. I never did sign up or invest.

Granted, Xinja is a snappier name than, say, Bendigo and Adelaide Bank. But despite the seductive advertising and the promised conveniences, I had a nagging thought: aren’t the major banks doing this stuff already? And if not, surely they soon will? Three years on, Xinja has been forced to freeze customer accounts and relinquish its banking licence.

I was reminded of Xinja’s demise this week when I read an article about another neobank, Volt (livery: neon turquoise; motto: “proudly neo since 2019”). In it, chief executive Steve Weston, pictured in the customary neobank uniform of suit jacket and company t-shirt, said that its offer of “banking as a service” would help its mission to “disrupt” the conventional banks. I admire the entrepreneurial drive—and excuse my ignorance—but again: aren’t the big four—with their wide moats—and other established banks already doing this? A Morningstar analyst had a nice answer when I put this to him. He likened the neobanks—with their funky colours and tracking features—to kamikazes in the way they set out to take on the banks, knowing that they will likely get swallowed up.

And that’s what’s happened with another neobank, 86 400, which has been acquired by NAB. (The gimmicky name 86 400 refers to the number of seconds in a day, a title the company hopes will remind you of how you use—or misuse—your money). The headline on this week’s NAB note by Morningstar banking analyst Nathan Zaia captures the thinking: “NAB takes a short-cut on its digital bank growth via 86 400 acquisition”.

There’s a couple of key reasons why the majors are so hard to disrupt: sustainable cost advantages and switching costs. And an established brand can help too. The neobanks may have slick tools but it’s nothing the majors can’t replicate or simply buy up. Take for example the purchase of the free instant-payment app Beem It by Commonwealth Bank, NAB and Westpac in 2018.

As Zaia notes: “Features such as predictions on regular payments, upcoming bills, and visibility of balances with other banks, are attractive, but we expect will be replicated by peers. A lack of scale means operating costs burn through cash balances and new capital injections are required to fund growth. Even without a branch network, digital banks still need to spend on marketing, technology, credit decisioning, customer support, and ensure all regulatory requirements are being met.”

In Firstlinks this week, Graham Hand ventures among the Redditors to hear the latest thinking on the GameStop frenzy. “Reading the Reddit posts,” Hand writes, “a lot of individual users seem to think this is a game, with people saying GME is going to US$1,000. Apparently, holding the stock of a struggling retailer is a way to finance their education or buy their parents a car. Well, investing is not that easy, and this was always going to end badly for many.”

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Indeed, investing can be boring, confusing and frustrating, but it shouldn't feel like a game, says Morningstar analyst Jeffrey Ptak.

Elsewhere, we sit down with Morningstar veteran John Rekenthaler who explains why the GameStop story reminds him of what was happening in the late 1990s.

If stock prices become irrational, hedge funds rather than individuals stand to benefit, Rekenthaler argues.

Speaking of frenzied trading, Amy Arnott wonders whether your portfolio needs bitcoin. The cryptocurrency has soared, so it's no wonder investors want a piece of the action.

Tell that to retirees, though, or those close to it, writes Christine Benz, for they are courting serious risks by standing pat with too-aggressive portfolios.

That said, there are some undervalued names worth investigating, writes Susan Dziubinski. She surveys five global innovative stocks from the Morningstar Exponential Technologies Index.

Who are the fast fashion winners? Competition is fierce for fast fashion retailers such as Asos, H&M, Zalando and Inditex. Morningstar analyst Jelena Sokolova takes a look at the sector.

Emma Rapaport reports on the exit of Platinum's portfolio lynchpin Joseph Lai, which has forced a Morningstar review of its Asia equities ETF, PAXX.

Another week of local earnings. Prashant Mehra weighs up the performance of Australian companies that have reported so far. And don’t forget to consult the Morningstar Reporting Season Calendar February 2021.

And in Your Money Weekly, Peter Warnes comes at the GameStop frenzy from a hitherto unexplored angle: that of the US Federal Reserve and its role in stoking risk appetite. “Are the actions of Redditors yet another symptom of the widening wealth and income gap between Wall Street and Main Street?,” writes Warnes. “Or is it a further extension of risk-taking by investors/traders convinced their losses will be underwritten by the Fed? After all, the Fed has encouraged bond traders to buy junk paper and has itself purchased junk bond exchange-traded funds.”

Morningstar Reporting Season Calendar 

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.

is senior editor for Morningstar Australia

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