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Westpac expands ‘banking as a service’, diverging from CBA strategy

James Eyers
James EyersSenior Reporter

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Westpac Banking Corp has added another component to its banking-as-a-service (BaaS) strategy, adding regtech start-up FrankieOne as its identification service to allow users such as Afterpay and SocietyOne to quickly and seamlessly on-board new banking customers.

Westpac chief executive Peter King. James Brickwood

FrankieOne has assembled a variety of “know your client”, fraud and identity services that will sit alongside 10X Future Technologies’ cloud-based core banking ledger, and – along with Westpac’s banking licence – can be rented out by non-banks. This will allow banking outsiders to provide banking services in competition with Westpac and other banks.

The emerging wholesale fintech strategy is a big strategic bet by Westpac that it will be able to win deposits – and ultimately mortgage referrals – from start-ups seeking to embed financial services into their applications. Westpac has decided getting exposure to the trend is worth the risk of giving up customer engagement to the technology players.

In contrast, Commonwealth Bank is investing heavily in its own technology to enhance personalisation of its app and engagement with its own customers, to prevent them from seeking services elsewhere.

This includes adding a buy now, pay later card to its digital wallet to keep customers looking to pay in four inside CBA’s ecosystem.

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‘Paradigm shift’

The ability to rent a banking licence from a major bank comes after neobanks like Xinja failed after spending heavily on building its own core banking systems, while Volt has pivoted to also supply its licence as a service to others, taking on Westpac in the emerging BaaS market.

“The hardest part of being a bank is getting a banking licence,” said FrankieOne co-founder Simon Costello. “Some banks are realising they already have got that, so if they rent that out, they can capitalise on that and improve the industry as a whole.”

“Everyone thinks to offer banking services you need a banking licence but there is a paradigm shift underway. You don’t need to be a bank to issue a credit card or a BSB and account number. This is lowering barriers to entry and will open up new business models.”

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Volt Bank is also using FrankieOne for ID services on its banking-as-a-service platform, which is being co-developed with Microsoft.

As an ISO 27001 certified party, FrankieOne conducts security checks on all the service providers it connects to; it has developed a network of 170 providers of different third party providers of identity services which Westpac will be able to select from and then provide Afterpay and SocietyOne.

Critics of the Westpac strategy point out that banking licences, capital and software are plentiful and stepping away from customer engagement in favour of supplying banking infrastructure presents a risk to the bank’s retail franchise.

Given low interest rates, banks are not making much from deposits; for the strategy to pay off, Westpac will need to write mortgages off the back of it, under exclusive distribution agreements with the start-ups for a time, but it remains to be seen whether these will flow in.

Macgregor Duncan, Westpac’s general manager of corporate and business development, discussed the shift at a fintech event with Amazon Web Services last week.

“Historically, banks have run closed proprietary banking systems, which meant they were responsible for everything that went into manufacturing and distribution of financial products to customers. Each stage of the journey was controlled, owned, and developed by the bank,” he told the fintech event.

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“Not only was this costly and difficult to manage, it also meant we were unable to tap into the best-of-breed capabilities outside of the bank in order to create the best possible customer experience on market.”

Customers “don’t want to head into a branch to offer up their passport or medicare card, they just want to get an account up and running and get on with their day as soon as possible,” Mr Duncan said.

The Westpac and Volt strategies to offer banking-as-a-service could allow the likes of airlines, supermarkets, telcos, utilities or non-bank lenders to offer banking services inside their own apps.

“BaaS is going to materially change the industry,” Mr Costello said. “You don’t need $100 million to build banking services. You can rent the system plug and play with APIs.

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“This is the big theme this year: many companies will be able to start offering financial services, and if you can cost-effectively start to offer some of those services inside your own company, why wouldn’t you?”

Damir Cuca, founder of Basiq, which is working with Afterpay and more than 100 fintechs on developing services, said: “Banking is not something you will only do with a bank anymore.

“It is a service you will execute through other interfaces that are not banks. Accounts have been centralised in one place within a bank. Now, accounts are becoming decentralised.”

  • Westpac CEO Peter King will appear at The Australian Financial Review Banking Summit on Tuesday morning. For more information go to afrbankingsummit.com
James Eyers writes on banking, payments and fintech. He is a former legal and investment banking editor at the AFR, has degrees in commerce and law from UNSW, and is co-author of Buy now, pay later: The extraordinary story of Afterpay Connect with James on Twitter. Email James at jeyers@afr.com.au

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