Wednesday, 28 July 2021

Volt Bank's Weston and Railsbank's Xiao: “BaaS allows us to do banking differently in Australia"

By Neeti Aggarwal

Steve Weston, founder and CEO at Volt Bank and Justin Xiao, chief operating officer at Railsbank, Asia Pacific discuss plans to leverage their partnership for banking-as-a-service in a bid to launch in a competitive Australian market where two neobanks have already folded up.

  • Volt Bank differentiates its approach through a banking-as-a-service model in a difficult market where neobanks face strong competition from bigger, more established incumbents
  • Volt Bank and Railsbank have partnered to enable business customers to launch embedded finance services in Australia
  • The bank is focused on building its technology and expects majority of its customers to come from partnerships 

 

The following is the edited transcript of the discussion:  

Neeti Aggarwal (NA): I have with me Steve Weston, co-founder and CEO of Volt Bank, a neobank in Australia. A seasoned banker, Steve co-founded Volt in 2017. Previously, he was the CEO of mortgages at Barclays UK. Prior to that, his experience spans National Australia Bank and St. George Bank in Australia. And I have with me, Justin Xiao, chief operating officer at Railsbank, Asia Pacific. Railsbank is a leading banking-as-a-service (BaaS) platform. He was previously the senior director of digital solution at Visa. Prior to that, he worked at Citibank.

Volt Bank and Railsbank have recently entered a partnership for embedded finance offering in Australia.

Volt is the first new bank to be granted full licence to operate as an authorised deposit-taking institution in Australia. What has been your strategic approach in building this bank? How you are bringing a different experience to customers and where are you in this journey?

Volt Bank differentiates its approach through a banking-as-a-service model

Steve Weston (SW): If I go back to 2017, after spending many years working in large banks, I have a strong belief that banking could be done in a better way for all stakeholders. One day, I said, stop talking. If you think you can do better, go and work with a talented group of people and show that it can be done better. If I go back to 2017, on day one, we said, what do we want Volt Bank to look like? There were two crystal ball moments or methods that we looked at. One was, what would customers want, in particular from banks in the future, that they weren't necessarily getting from incumbent banks around the world? That's what we've done, designed and built. The second thing, we looked at the future business models of banking. How would that evolve? That's where Railsbank had evolved at about the same time, or maybe a little earlier than Volt. They had this same view that in the future - customers will do more of their banking through their trusted partner whether they're big technology, firms, retailers, airlines, or fintechs. And sitting behind that, there would need to be a bank set capability for these businesses. Railsbank said there is an uncontested market. They have gone and built this fabulous business and are now the global leader in BaaS. We went and built the technology capability that would enable us to provide products and payment solutions to businesses. We've kind of quietly going about our business. We haven't talked about it a whole lot. Recently, we announced that our business model largely would be BaaS and with Railsbank’s incredible experience, they will be able to get really quick traction in Australia. We're delighted to be partnering with them.

NA: Neobanks in Australia face unique challenges. Some of them even face an existential crisis. We saw Xinja close its operation, and then we saw 86 400 being acquired by NAB. Give us a perspective on what you see as the biggest challenges faced by neobanks in Australia today.

SW: It often sounds a bit more scary. There have been four players who got unrestricted banking licences in Australia. Volt, Judo, a small and medium-sized enterprise (SME) lender, has raised $1 billion and has a balance sheet of over $3 billion and is doing exceptionally well. 86 400, yes they have sold but they have very happy shareholders and customers. There was Xinja, which in this record time grew deposit balances very quickly. I'm not sure exactly what happened there. But they had told the market they expected over $400 million worth of equity to be invested in them and that for whatever reason, didn't turn up. That's more of the problem. When people say neobanks in Australia face problems, they've done an outstanding job. One has handed back a banking licence and that was more to do with raising capital than any sort of concerns that customers had. We haven't even launched to the public at the moment. The whole idea behind is you are just raising the huge amounts of deposit balances until we are ready to lend that out for profit. Otherwise, what you do with your deposits is you put them with other banks, usually at a lower rate.The timing of the announcement with Railsbank has coincided with us commencing mortgage lending. You'll see in the future months, Railsbank will bring more partners. It will bring more deposits for Volt and then we'll start accelerating our mortgage lending activity.

NA: We've seen a lot of new banks in the UK. They've grown in scale and are very innovative but there are also financial sustainability challenges that they face. What will be your strategy? How are you looking to have a more sustainable model as a neobank in Australia?

SW: When we were starting Volt, we looked at every neobank that we could find on earth. We looked at their model. We looked at what traction they got. As an ex-banker, I had from day one, a very keen eye on compliance, and all financial sustainability. The way that banks have made money over centuries is they raised the funding that are usually deposits. They pay this interest rate and then they go and lend the money out at a higher rate. That difference we call a net interest margin needs to cover your expenses and you return to shareholders. That's exactly what we have done. We may have a very modern business model BaaS. That's the technology we've built and the partnership with Railsbank and in turn their partners. The economic model is traditional banking - raise deposits, lend that money up at a higher rate, and that needs to cover your costs, then that's where your profits come from.

NA: Are you looking at a differentiated business model to scale going forward? What would be the core products or areas where you would be looking to scale your services, especially because of the market characteristics and  stronghold of traditional banks in the market?

Volt Bank partnered with Railsbank to launch embedded finance services in Australia

SW: That’s where the relationship with Railsbank is so important. The vast majority of our customers will come from business clients. Most of those will be introduced via Railsbank so it’s lower cost of acquisition. It is just building capability that both customers and businesses are demanding. With the mortgage processing model that we have today in Australia to refinance a mortgage from one bank to another, look if you can get it done in six weeks. You're probably happy. But most times, it's taken well beyond that. We can do that same day. We did one a couple of weeks ago for one of our earlier customers. The loan was unconditionally approved in 11 and a half minutes and the refinance was completed in two days. Anything that we do in any part of our business, we are doing it better and really leveraging digital capability and data analytics. That is exactly the situation in our partnership with Railsbank. It can be done better and it’s being utilised. It's not only possible, it's incumbent on us. Railsbank and Volt are working together to show that banking can be done in a different way, and importantly, in a better way  for customers.

Justin Xiao (JX): In terms of differentiators, we’re really pioneers in BaaS and in bringing embedded finance to the Australian market, as well as throughout Southeast Asia and the broader Asian markets. We bring the best in class platform from UK into this region. We've been in Singapore in the last two years, established a base of customers, and they want to launch their products and services in Australia. We're allowing them to do that. Our customer base in UK, Europe where Railsbank was originally founded. They also want to come over into Australia. We look at fintechs. You look at the foundation that we're bringing. We're making it a lot easier for them to lift and shift their services across regions. This includes what we're doing with Volt Bank Australia. When they want to prototype launch, scale, they're able to work on our platform. They don't need to redesign their platform. They stay on Railsbank. They customise a consumer journey to Australian market and they're able to go to market quite quickly.

NA: What are the biggest opportunities that you see in Australia as a market for BaaS? What are some of the key segments which could be growth drivers in bringing innovation and financial services to customers better through BaaS platform?

JX: As Steve said, in 2015-2016, we started BaaS. In the gig economy, the likes of Uber and Airbnb built a financial services journey that blew people away. Everyone remembers their Uber ride. They got out of the car and they're able to make payment. They brought seamless payments within their consumer journey. This has inspired the likes of other fintechs or brands to do the same thing. They want to build a differentiated financial journey. They want to do it without having to invest in a lot of infrastructures. A lot of developers and we come in and we provide that stack. There's the fintech. There are brands. Whether it's an insurance company, a supermarket brand, airlines, they want to control that journey rather than partnering with the bank, which is the more traditional sense of how they went into the market with that consumer journey.

NA: How are you leveraging this partnership and this BaaS platform? What can you see as growth potential in Australia?

SW: We must have crossed over 100 businesses that we are engaged in some shape or form that will offer embedded finance to their customers. We have not proactively reached out to one of those customers. At least 30 new businesses have spoken to us since we announced the Railsbank partnership. We sit down with Justin’s team and look at all the different sorts of business models at the stage of evolution; and see how do we onboard them in priority order. But it is quite amazing. The different sorts of businesses that want to offer embedded finance or integrated finance to their customers. They always have some things in common and some different. Things that are in common are - I want to deepen engagement with my customers. When doing more with them, I want to know more about what they're doing. I want to remove friction in my interaction, my engagement with those customers. There's always a commercial motivation there as well. There are a whole variety of use cases that different businesses have. We did the research in 2017. Now, you see all of the consulting houses are doing articles, research pieces on BaaS, integrated finance, embedded finance but it wasn't all that well-known four or five years ago. It is amazing how from the Ubers and the Apples and the technology companies, right through to brand new fintechs are saying, if we want to do the best job with our customers, and we want the best financial returns, we need to offer banking and payment solutions with them. There isn't just one particular model. There are a variety of different use cases. But always some common themes, common motivation for businesses.

NA: What’s the BaaS that you're providing in the Asia Pacific (APAC)? What are the emerging trends that you're seeing? How adaptable are institutions in APAC to this approach? What do you see as the biggest challenge and opportunities?

JX: Yes, we're working with banks. We've been in Singapore for two years. We're plugged into DBS Bank which is the largest bank in Singapore, as our banking partner here.  We’re able to stand up on many different use cases in Singapore. One of which, I was sharing with Singlife which recently merged with Aviva, is providing an insurance policy that looks like a bank deposit account. With that account, which sits on the Railsbank platform, they're yielding high interest rates and with the money that people put in, it's tied to a Visa card so they're able to spend on that account. Singlife is able to engage with its consumers. They're getting more insights into the consumers.  It is different from your traditional insurance companies where you buy a life policy and you set it and forget it. Here the engagement is more natural because you have a Singlife card. You're spending on that and when you spend, you are earning in your insurance policy. The more you spend, the richer your policy becomes. This is an example of a traditional insurance industry that is adapting, that's getting into the insuretech space.  In terms of challenges, consumers are very receptive. When they launched, they don't need the physical branch. It's all digital. They're putting incentives in getting adoption.  Now, they're a well-known brand in Singapore. That's an example of where we are with insuretech in Singapore.

Another from UK, we partnered with Wagestream, a financial well-being platform looking to improve the financial health of people at work. They have employers such as the National Health Service (NHS), Holiday Inn, where they offer Wagestream to their employees, and which gives them power over their pay with a set of tools to track access, save and manage earnings in real-time. During the COVID crisis, when they have Wagestream, with NHS in UK, when your health worker and you've done extra time, you don't have to worry about getting the paid end of your financial health because you're able to stream your wages and get access to your wages a lot quicker.  Those types of new solutions are coming out, that Railsbank is powering. And because we're a global platform, we're able to bring the likes of Singlife Aviva to Australia or the likes of Wagestream into Australia. For the fintechs in Australia, they also have global ambitions. When they're looking for a provider, every entrepreneur, every company they want to expand outside of Australia, so they choose real estate to work with Railsbank for the  long-term view of growing their business.

NA: How easy or difficult is it for an existing financial institution with legacy technology to adopt this BaaS approach? Do you find banks in APAC take that approach of BaaS?

JX: Every market is very different. It's driven partially by the regulator. Regulator has a big role to play and government agencies in pushing the agenda. We work with the Department of International Trade in the UK and we're evangelising fintech solutions and businesses from UK into Asia. That's been very helpful. Now, when we go into different markets, there are different views on open banking and BaaS. It’s evolving. Now, the more emerging markets, it's going to take more time because of demand. It's driven largely by fintechs that want this service by forward-thinking leaders within banks. Now, what we're doing in Australia, there are banks looking at how Railsbank is working with Volt and take inspiration in building a business case. For the regulators, look at how do we bring regulation to allow this model to exist in our market.

NA: What has been your journey like so far? Share with us some indicators to show your growth until now. How effective is a BaaS platform? Is it already launched? Or is it still in process of being launched?

Bank is focused on building technology and customers from partnerships

SW: We haven't launched to the public. If you're an individual and you want to open a Volt Bank account, you can go and register. We have 50,000 people who have expressed interest. We've invited 8,000 of those and all opened up bank accounts. We have just under AUD 90 million ($69.7 million) deposited with those accounts. It doesn't make any sense for us to go and launch deposits to the public because all we do with the money until we begin lending. We deposit it with different banks at a lower interest rate. It costs you money, so we've recently commenced mortgage lending. Now is the time for us to bring on more customers and partners with Railsbank. We're at that very exciting phase. What we have done up until this point is gone through that very labourious and complex process of getting a banking licence and building all of this technology. For building technology, that is architectured that can serve embedded finance needs of customers which is very different from building a traditional banking technology stack. It takes longer. It's more expensive and complicated. We have done our job. We've set beneath the radar. It's only recently that we've come out to say here's what we've been building. There are cases around the world where banks have gone into building BaaS in a half-cooked way. It's not just difficult for a startup. It's doubly difficult for incumbent banks because you have this pressure of having a business and saying to the customers, “We don't need you to come to us directly. You can go and bank via your favourite retailer. Your favourite technology company”. That mindset is a really big obstacle for banks to overcome. The brilliance of the Railsbank model is they've recognised how difficult it is for banks to do it directly. They've gone in between and said, thanks, let's take the pain out of this for you. We'll do all the heavy lifting and integration for you. I just love the model and the thinking behind it and what they have done. We are slightly different. We built the technology where we could deal with partners directly. We have these tiny teams now to have the calibre of the business like Railsbank as part of the family. It's just so fantastic but it isn't easy.

NA: What is the roadmap like? What is the plan for the future? What new innovations can we expect from Volt in the next 12 months or so?

SW: We're working through a mortgage proof of concept. It's a phased approach because our process is so much more automated and digitised. For every application that we assess in what we call a $50 million proof of concept, we get the machine to make the decision. We also have the human flesh and blood that is going and making the lending decision and underwriting applications in a traditional form. We want to be absolutely certain that our machine is making the same prudent lending decisions that a human would do. Once that is finished, there are some internal assurance and audits. We need to get signed off from the banking regulator. We will accelerate the lending, open our products that we have built and tested to more partners. We will enable customers to sign up directly. But the vast majority of Volt’s customers are going to come via partnerships and not via the more traditional methods. Social media marketing, that is heavily contested. BaaS for us is not just something that we're saying, hey, that's what customers and businesses are going to want in the future. That is right. It also is a less contested market. There are many studies now on the lower cost of acquisition in acquiring customers via partners. There is lower cost of servicing those customers because most of the work engagement is done through the business' technology ecosystem and not via the bank. We are now transitioning from a business that got a banking licence and had to build capability. If that's the car that was built, but it's been sitting in the garage, we've just driven in and out to the local street. With Justin and the team, we're about to take it on the highway and show the world what we have done. So it's very exciting months ahead.

We will finish the proof of concept in the next couple of months and then we'll launch to the public. There will be this journey of crawling and then walking before we run. We'll both launch to the public additional products, deposit products and features that we've built and tested. We will progressively roll them out. We'll go from mortgages to move into then consumer lending, personal loans as called in Australia, and then ultimately into SME lending. But that will be done in a very disciplined way.

NA: What are your plans and roadmap? How do you intend to scale in APAC? What should we look forward to in the next 12 months?

JX: In Australia, there are some very exciting things happening there with our partnership. There's a bunch of domestic opportunities. We see a lot of international opportunities come to us and wanting to open up in Australia. What's excellent is again, the diversity of financial services solutions in the market. Australia is a hub for buy now, pay later. Once we get into the market, we're learning and taking those best practices from Australia to the rest of Southeast Asia. We are looking to expand in Southeast Asia as well as North Asia on the roadmap. First, we have to get Australia. We must make sure that we're able to launch our customers the service that is good. Then we're able to look at our expansion plans after that.

NA: Who is your biggest inspiration among various players that you see overseas who are adopting BaaS? Who inspires you the most in terms of growth, or the strategy to adopt, which becomes a guiding factor for you?

SW: There are so many businesses and leaders particularly in the technology space. But if I go back to when we were starting Volt and I did the market scan of neobanks around the world, it was Starling Bank in the UK that stood out. So we've seen a number of players that we’re hell-bent on customer acquisition and their view. It is one model, and that is, “Look, let's go and acquire a lot of customers. Let's have a great customer experience and we'll work out how to make profit at some future date”. Whereas Starling took a different approach to BaaS. It looked at the UK market and said where are the areas that are less contested and let's focus on that. They've moved into the SME lending space where there were unique opportunities particularly with COVID and they've been able to get to break-even much sooner than players who may have grown customers more rapidly. From day one, and maybe it was the banking background, it said, “Look, it is nothing to be embarrassed about being a bank”. Banks have a very important role. It's just that they can do things in a whole lot better way and Starling has been able to do that. Looking across at other parts of the world, I really like what Starling has been able to do and they deliver what they said. And that is building a financially sustainable business, maybe in shorter order, then different models. That's what we aim to do with Volt as well.

NA: Is there any partnership or model that you want to highlight in BaaS that has taken good scale internationally and that has a success story to be talked about?

JX: Maybe just add some of the things that are happening in North America. The products and services that we're building in North America are very different from Southeast Asia or even Europe. We've recently announced our credit as a service offering. We provide turnkey solutions for fintechs to be able to issue credit cards. US is a heavy credit market and consumers understand credit cards. Fintechs want to issue credit cards so that is the service that we're developing in North America. Once we launch, we are able to bring that model, the proposition to Australia. Within our global Railsbank network, we're able to bring these models that work from other regions into our region. That's extremely exciting. We've been working on application programming interfaces (APIs) to enable our products and services. We can enable you with fintech-based bank with lines of code. Now we're moving into an area whereby we can launch services with a simpler user interface (UI) and user experience (UX). You don't need to have developers who are prototyping. Maybe there's UI and UX designer that you're just dragging and dropping something similar to how you design a web page instead of coding hypertext markup language (HTML). You're able to use the front-end. We're doing towards that stage where there were component services and you just drag and drop to create your user experience. The code is behind those components and then you're able to prototype a lot quicker with less resources. We're also working on bringing that practice. There's a lot of development that's going on within Railsbank. We have launched it; we’re calling it Houston. Be on the lookout for that capability to come.

NA: Thank you so much, Steve and Justin.



Keywords: Neobanks, SME, Sustainability, Bank Partnership, Baas
Institution: Volt Bank, Railsbank, Barclays, National Australia Bank, Citibank, Visa
Country: Australia
Guest: Steve Weston, Justin Xiao
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