Explained: How hard is it to start a new bank in NZ?
Tuesday, 3 September 2024
Dosh. Emerge. Debut. Have you heard of them? They’re the Kiwi start-ups wanting to revolutionise New Zealand’s banking sector.
They’ve been building the foundations for a few years and all three have apps with customers - but it’s a David v Goliath struggle. It’s actually more like three infant Davids v 4 massive profit-hungry body-building Goliaths.
Digital banks are big overseas. In the UK, Monzo is what all the cool kids are using - and most expat Kiwis. It’s easy to open an account without faffing around with address confirmations, income details, utility bills and all the rest (you have to do all this stuff with the legacy UK banks which is a pain in the butt when you’ve just arrived there and want to set up your new life).
But in New Zealand, digital banks are still in their infancy. And the big banks like it that way, and probably want to keep it that way.
A bit of context
The Commerce Commission’s latest report into personal banking competition in New Zealand was pretty grim but it concluded what most of us have known for a long time:
“The major banks do not face strong competition”
The report makes a number of recommendations to make the personal banking sector more competitive. And that’s exactly what needs to happen.
More competition will make the sector more innovative, more diverse, cheaper for customers, and will force the big banks to properly earn their money rather than have it handed to them on a plate like they essentially do now.
“There is no maverick provider”
It also reveals how hard it is to create that competition. KiwiBank is trying, but it’s not even classified as a ‘maverick player’ (a particularly aggressive or innovative provider) because it doesn’t have enough capital (access to money to then loan out) to be considered a maverick.
We have no maverick players. Just four big Australian-owned banks that dominate the landscape, one Government-owned bank that’s under capitalised, and only four other NZ-owned smaller banks that are too small to make a dent in the big guys. The seven other overseas-owned banks aren’t focussing on personal banking.
“Fintechs face several impediments”
Financial Technology companies are called ‘fintechs’ and usually offer low-cost digital banking services to rival legacy ‘bricks and mortar’ banks. But the report says it’s tough to do this in NZ because of regulation, access to capital, restrictions on using the word ‘bank’ and the slow progress towards open banking (your banking data being accessed by other companies with your authority).
It concludes: “New Zealand customers are missing out on the competition and innovation open banking can provide”. Amen.
NZ’s digital banking landscape
They’re technically not allowed to be called ‘banks’ and they technically don’t offer ‘banking’ because the Reserve Bank’s rules forbid this. Instead, they are called things like ‘neobanks’, ‘digital wallets’, ‘app-based wallet platforms’, or ‘banking alternatives’.
There are a number of companies offering digital wallets here and you might have seen their ads on the back of buses and the like.
NZ-based
Dosh. Launched in 2021, Dosh is the brainchild of Kiwis Shane Marsh & James McEniery. Since then, it’s evolved its personal banking offerings to include ‘stashes’ (separate accounts-that-aren’t-accounts) as well as cashback deals when you buy online from certain outlets. It’s just applied to become a registered bank with the RBNZ and if that’s successful, it’ll be NZ’s first NZ-owned, digital-only registered bank.
Emerge. Born from the same team that created SquareOne, Emerge emerged in April this year with a focus on corporate banking. It’s not a registered bank but is a registered financial services provider. It’s recently launched personal banking services too, but only if you’re affiliated with a business (as I discovered when I went to create an account).
Debut. If you could build a bank from scratch, how would you do it? That’s the driving force behind Debut. Kiwis Sheenu Chawla and Sulabh Sharma saw how digital banking had advanced while visiting the UK, so when they came back home they started Debut. They founded it in 2022 and their app product went live in May this year. It’s not a registered bank but talks have started with the Reserve Bank to become one.
Savvy. A smart way to bank yet invest at the same time. Savvy puts all of its customers’ money into one managed investment account. Everyone gets to benefit from bigger returns while still using the account for day-to-day transactions.
Kernel Save. Kernel started as a Kiwisaver fund and now it’s expanded into the world of digital banking. That feature is called Kernel Save.
Overseas-based
Revolut. It arrived in New Zealand in 2023, although it was founded in the UK in 2015. It has grown to serve 45 million personal banking customers and half-a-million business customers across 160 countries. It supports 200 currencies, including cryptocurrencies.
Wise. It’s been in New Zealand since 2018 and was founded by two Estonians in London in 2011 as TransferWise (because it was initially just used to transfer money between currencies). It’s since expanded into personal and business banking services and is used by 17 million people across 50 currencies.
Overseas-based not available here (honourable mentions, not a complete list)
Starling. The UK’s first digital bank (with an actual banking licence) that celebrates being ‘paperless, branchless, and running on renewable energy’. It was founded in 2014 and it’s the UK’s first ever bank founded by a woman - Anne Boden.
Monzo. With its fluorescent coral-coloured card, Monzo is a favourite for expat Kiwis in the UK. It launched in 2015 and is lauded for the fastest crowd-sourced capital raise in history (£1m in 96 seconds). They now have 10 million customers and employ 2000 people.
Up. This 2018 neobank has taken Australia by storm. It has nearly a million personal banking customers (they’re called ‘Upsiders’) and it celebrates being on the list of Best Places to Work.
Judo. Another Aussie startup which started up in 2016. Judo is a self-described ‘challenger business bank’ with a main focus of lending to small and medium sized businesses (SMEs).
What the ComCom says
There are very few mentions of the startup Kiwi digital banks in the ComCom report I mentioned earlier. It mentions Dosh 10 times, Debut three times, and Emerge twice. Savvy and Kernel aren’t mentioned.
Most of those mentions (all of the Debut and Emerge ones) are on page 265:
“We are aware of several fintechs (including Debut, Dosh and Emerge) that are seeking to expand to provide digital banking services. Obtaining bank registration under the current regulatory framework and particularly the $30m prudential capital requirement for bank registration are major hurdles for digital banks.
“Dosh, Emerge and Debut note that, although they provide some personal banking services, they are not registered banks. Dosh and Debut aspire to become registered banks under the current regulatory framework, and Dosh has recently applied for bank registration under the existing banking supervision regime.”
So not much focus on the NZ digital banking sector, even though it’s a huge part of breaking the domination of the Big Four banks.
Fun Fact: The ComCom report mentions ANZ 271 times, BNZ 215 times, KiwiBank 210 times, Westpac 95 times, ASB 84 times, TSB 34 times, Heartland 29 times, SBS 24 times, and Co-Operative Bank 22 times.
How to become a ‘bank’
You have to apply to the Reserve Bank to become a registered bank and it’ll cost ya! If you’re brand new and starting out, the fee is $36,000. If you’re an existing bank opening a subsidiary or an overseas bank expanding here, the fee is $21,000. (That’s just the beginning).
There is a minefield of stuff you (understandably) need in order to convince the Reserve Bank that you’re going to be a good bank. They don’t want cowboys. They’ll look at your ownership structure, your governance, management structure, constitution, where you’re getting your money from, business plans, forecasts, and risk assessments. It’s incredibly rigorous and will probably make your brain hurt.
You must have at least $30m of capital. This is the absolute minimum and the Reserve Bank typically wants much more than this. There are also minimum capital ratios and prudential capital buffers - whatever they are but they sound intense.
If the Reserve Bank doesn’t like your application, it can decline it and you can’t do anything about it: “there is no appeal process available to the applicant”, it says.
For start-up banks, the system is against you from the beginning because you have no financial history. This is what the Reserve Bank says:
“Start-up applicants may find it more difficult to achieve registration. Such applicants, by their nature, have no track record and unproven systems and controls. It will, therefore, be more difficult for start-up applicants to demonstrate sufficient financial market standing, adequate systems and controls and likely financial outcomes”.
It’s no wonder then that FUN FACT: the last start-up to become a registered bank was KiwiBank in 2001. We haven’t had a new start-up bank for 23 years.
BUT ALSO FUN FACT: In 2003, SuperBank became a registered bank in New Zealand. It was technically not a start-up because it was registered under the name of Australia’s St George Bank. But it was essentially a start-up because it was a completely new brand and was a joint venture with Foodstuffs. They used their supermarkets as the bank branches with a focus on online and phone banking. But in 2006, it shut down with its operations transferring to GE Money.
Let’s meet the Kiwi players.
Dosh
Where it’s based. Dosh’s office is in the Jarden building in downtown Auckland. Anyone who knows Auckland knows that’s a pretty fancy address. It’s right next to Commercial Bay.
But Dosh isn’t that fancy (yet) - its office is part of a shared space. Over the last three years, they’ve had to move to bigger and bigger offices within that shared space as the company has grown.
Given they’re a digital business and the vast majority of their employees work remotely, this office space model works perfectly for them and it helps keep overheads down.
How it started. Co-founders Shane Marsh and James McEniery came up with the idea for Dosh while having a beer in a swimming pool during Covid.
They’d been neighbours when they lived in Singapore where Shane was a banker and James was in the beer business. Over there, digital banking was the norm and when they moved home, they were shocked at the lack of evolution in New Zealand’s banking sector.
The pair came up with a plan, came up with the name Dosh (Shane searched ‘money’ in Urban Dictionary and liked the simplicity of ‘dosh’), and then went about building their bank. It launched at the end of 2021.
“It’s really challenging to start a bank,” Shane says. “We saw it as a three step process: design the bank, build the bank, and register the bank”.
Who’s bankrolling it. The first thing they needed was money and they did a number of capital-raising rounds. One for friends and family, a pre-seed round, a seed round, and put in a heap of money themselves. They’ve managed to keep it New Zealand-owned too.
“We’re very early on our journey” says James. “There’s no lack of the right type of capital for Dosh to be a maverick disruptor in the marketplace. We’re fairly confident we can raise future capital and keep growing.”
Becoming a ‘bank’. It’s now grown to a point where they want to become a registered bank with the Reserve Bank. As you’ve read above, that’s a very arduous process and even harder if you’re the new kid on the block.
“That’s a very deep and complex process,” says Shane. “The Reserve Bank requires $30m of capital that you’re not using. So it needs to sit there untouched as a reserve in case you need to access it should you get into trouble.
“We are the first digital bank application. In fact, we’re the first start up bank since KiwiBank in 2001,” he adds. That’s an astonishing fact.
How have they found the process? Is there too much red tape? “The Commerce Commission and the work they’ve done has identified where the red tape is a barrier to organisations such as Dosh to come in and compete. And we’re really looking forward to the government removing some of those barriers,” he says.
If registering as a bank isn’t enough to keep them occupied, they’re expanding their borrowing offerings too.
“We’re looking to launch NZ’s most competitive home mortgage product by the end of the year,” James reveals.
THE DOSH DREAM: “Give all New Zealanders a choice in terms of their everyday banking. Seamless, fast, transparent, and does away with today’s banking market which is slow and cumbersome and not easy for people to do things,” says James.
FUN FACT: They sell merch and claim to be the only ‘bank’ whose merch people actually want.
Emerge
Where it’s based. On the top floor of a building opposite Auckland’s Cordis hotel is the Emerge HQ. They call it the ‘nerve centre’ and it’s exactly what I thought a fintech startup HQ would be like.
There are cool couches, different plants, fairy lights around pillars, workers coding in racecar chairs, a table tennis table with a leaderboard, a wee mini putt setup, and even a small, very refined bar as part of an old bookshelf. They’ve got merch (which the staff wear voluntarily - you’d never get that at the big banks), there are guitars (see below for why there are guitars) in one of the rooms next to a PlayStation, and they had the most comprehensive range of Sharpie colours I’ve ever seen.
There are a few balconies, and one even has a barbeque on it. Epic for summer.
It was a workplace you’d want to work at. Yes people were doing some hard yakka (I couldn’t tell you what they were doing on the computers but it looked like something out of The Matrix and involved computer code, re-skinning app imagery, and all that tech stuff), but there was also a sense of fun and enjoyment. It felt like I was in Silicon Valley. Maybe Symonds St should be known as ‘Silicon Ridge’.
How it started. The roots of Emerge are in London nearly 20 years ago. Co-founders Jamie Jermain and Jovan Pavlicevic (pronounced Yov-arn Puv-litcha-vitch) were living there and were in a band together. Jovan would sing and could play all the instruments, while Jamie stuck to just the guitar.
“You need that in any good duo right? The generalist and the specialist. That’s the yin and yang,” Jovan says diplomatically. They moved back to New Zealand in 2010 and both started families. As the kids grew up, they wanted to teach them how to be good with money but realised there were few resources.
The first child: SquareOne. “Nothing had changed since when I was at school,” says Jovan. “Financial literacy is not in the curriculum, and most parents don’t have the skills to teach kids the skills they need”. Given Jamie’s background was in payments and cards and Jovan’s was in financial services, the pair decided to do something about it.
They created SquareOne - a banking app and card for kids, controlled by their parents. It’s taken off and has more than 150,000 users. It’s teaching kids the value of money, how to save, and some financial literacy.
The second child: Emerge. After the success of their bank-for-kids, the pair dreamed bigger. “The bigger vision was far beyond that. It was ‘could you one day build a bank?’ And so Emerge is that bigger vision coming to life. Emerge is the product company that SquareOne now becomes a product of,” says Jovan.
The motivation behind Emerge is the sluggishness of the big banks. They have computer systems from the 1980s which have been added to hundreds of times, making them hard to change, adapt, and innovate.
“It’s not that the big banks don’t want to innovate, they just have an inability to move at pace because they have a lot of tech that’s built on other tech and spaghetti code and it’s tricky for them to build new products and services,” Jamie says. “Connecting those new innovations to their legacy tech is a challenge”.
Its focus. Small and medium businesses is what Emerge is after. They want to make it easy for them to open an account, manage the account, get digital and physical cards for staff, manage receipts, and spend less time on admin.
“Similarly to what we’ve done with SquareOne, we have this vertical of customers who are underserved, having really bad experiences, friction, and just unrecognised as a customer segment, we can see the same again for business, particularly Kiwi small business,” says Jovan.
“It can often take months for businesses to open an account, we’ve got that down to 5-10 minutes to onboard and set an account up. You can then set up your team instantly, push all your cards to Apple and Google Pay, set up virtual cards,” says Jamie.
Becoming a ‘bank’. They’re not focussed on personal banking just yet, and haven’t applied to become a registered bank with the Reserve Bank. But they say ‘watch this space’.
THE EMERGE GOAL: Becoming a full-service registered bank within 5-10 years.
FUN FACT: The band Jovan and Jamie were in was quite a big deal. They released songs and toured.
Debut
I first became aware of Debut in 2022 when I worked at Today FM. They came on the show one day for a segment called The Pitch where people pitched their business ideas. And full disclosure: in 2023, I was asked to be a judge at Debut’s card design competition and they gave me a gift basket as a thank you. But other than that, I didn’t know much about Debut before writing this article.
Where it’s based. Debut doesn’t have a physical headquarters. Its 14 staff work remotely all over the country. It’s a digital bank with a digital HQ (for now).
But when they need a board room or meeting room or an office vibe, co-founders Sulabh Sharma and Sheenu Chawla head to Generate’s office-share space in Auckland’s Britomart precinct. That’s where I meet Sulabh (pronounced Sue-larb).
“People like flexibility,” he says when I ask him about the setup. “It’s about the output that they are providing not that they are in front of my eyes”.
The Generate space is homely and has the most epic view over the harbour. There’s a barbecue on the balcony and a bar. There’s a massive help-yourself lolly jar too. There are lots of young techy types roaming around too. It’s an energetic vibe.
How it started. With a kiss! Sulabh and Sheenu are married. They’ve spent more than a decade working in the fintech sector, including with the big banks. But they found them slow when it came to innovation and new products.
They spent time in the UK during the rise of neobanks like Starling and Monzo, which inspired them upon return to New Zealand: to build a bank from the ground up.
“Looking at the New Zealand market, I think it’s time to raise the bar of banking,” he says.
“If you look at the UK and Australia and some other markets, we can see some successful players coming through and there’s been a change in the regulatory framework to embrace that digital innovation,” Sulabh says.
That’s how Debut was born. Building a modern bank from the ground up: “Digital only, clean slate, starting fresh, doing digital right”.
How it’s going. There were around 7000 people on their wait list when they launched their app in May this year. They’ve had steady growth since then and Sulabh says it’s “passed our projections for looking at the time for the year”.
I ask if he’s allowed to tell me how many customers Debut has or whether it’s top secret. “Not a secret as such,” he replies. “We are on the projection to reach 10,000 users by the end of the year”.
Becoming a ‘bank’. Debut has started talking to the Reserve Bank about applying to become a registered bank. As you would’ve read above, this will be an arduous process albeit a necessary one.
How have the found the process? “The times are changing, the regulation is catching up but it’s still pretty hard,” says Sulabh. “It’s not a small undertaking. You’re dealing with people’s money so there are rules and regulations for a reason.”
Debut has had a few sessions with the Reserve Bank to get their heads around the process needed to become registered.
“We are working our application as we speak and will be starting that process very soon. It’s a more collaborative approach that we’re looking at for RBNZ. Building up the work, doing the work, and working with them to get the feedback.”
“Yes it will be a lot of work but will it be impossible? I don’t think so,” he says with a calming confidence.
The time frame for registration? “Ideally next year,” he says. That’s very quick! And that’s only if the Reserve Bank approves, of course. Remember, they haven’t done this with a start-up bank since 2001.
Sulabh knows registration isn’t the end goal. “If Debut gets a licence and is not solving any problems then we won’t be in business for long. Customers are very smart today and they understand who is actually looking at their pain points and who is not.”
THE DEBUT GOAL: “Redefine what ‘bank’ means in New Zealand and for Kiwis. Building a bank that is community-led, transparent, and financially inclusive no matter what money journey you’re on”.
FUN FACT: Sulabh poached his two finance lecturers to work for Debut.