Xinja Bank Submission Select Committee on Financial Technology and Regulatory Technology

January 2020

Table of Contents

1 Introduction to Xinja 3 2 Benefits and opportunities for Australians 4 2.1 Enhance customer and consumer value 4 2.1.1 Opportunities for better experiences 4 2.1.2 Competition 6 2.1.3 Financial education & financial capability 7 2.2 Increased productivity 7 2.2.1 Data Sharing 8 Sharing Transaction, product, account and other Data with customer consent 8 Government Property Data 8 Digital ID 8 AML / CTF 9 2.2.2 Integrating Fintech 9 2.3 Job creation 9 2.4 Create export opportunities 9 2.5 Attract and maintain investment in technology 11 3 The operating environment for a Neobank startup in Australia 12 3.1 Competitive Environment 13 3.1.1 Entrenched Oligopoly at market and industry infrastructure level 13 3.1.2 Switching is hard 13 Porting Bank Account Numbers 13 Porting / Redirecting Payment Authorisations between bank accounts 13 Lack of competition and data sharing metrics 14 3.1.3 New ADIs being regulated in ways existing ADIs haven’t 15 3.1.4 ADI lenders more strictly regulated than non bank lenders 15 3.2 Demand for ethical bank behaviour 16 3.3 Capital & Funding Environment 16 3.3.1 Banking is capital intensive 16 3.3.2 Capital is hard to find; Fundraising is resource intensive 17 Connecting to investors and investment communities 17 Attracting international investment 17 Crowd-funding 18 Lower limits than UK 18 Chapter 6 Implications 18 Government Grants 18 Reallocation of industry fines to fintech startups 19 Fundraising from institutional investors (e.g. superannuation funds) 19 3.4 Tax framework 19 3.4.1 Access to the R&D Tax Incentive 19 3.4.2 Tax incentives for early stage venture capital limited partnerships (ESVCLP) and venture capital limited partnerships (VCLP) 20 3.4.3 Reduce GST payable by early stage companies 20 3.4.4 Other tax initiatives 20 3.5 Being a tech and being a fin 20 3.6 Challenging Labour Market 20 3.7 Changing, Complex & Fragmented Regulatory Environment 22 3.7.1 Regulatory Complexity and Change 22 3.7.2 Fragmented Industry Reforms & Strategies 23 3.7.3 Costs of lack of regulatory guidance in an evolving regulatory environment 24 3.8 Industry & regulation lagging behind technology 25 3.8.1 AML regulations 25 Outdated and not technology neutral 25 Inefficient use of data between institutions creating suboptimal consumer outcomes 25 3.8.2 Regulator nervousness on technology innovation 25 3.8.3 Legacy Payments infrastructure 26 Need to integrate with, and build on top of, existing payments infrastructure 26 3.9 Barriers to connection / access to the NPP 27 3.10 Barriers to CDR Accreditation 28 4 Thank You 29

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1 Introduction to Xinja

Xinja Bank (‘Xinja’) welcomes the opportunity to submit a response to the Senate Select Committee’s Inquiry on Financial Technology and Regulatory Technology. Xinja is a brand new neobank, delivered to customers via the Xinja App on their mobile phones, designed to help customers to get more out of their money.

We fundamentally believe that if we make it fun to manage money, people will naturally become good at it. Xinja is creating new digital banking experiences that combine data, technology and fun, where customers are motivated to develop and maintain good financial habits. Xinja is a ‘FinTech’ as defined in the issues paper i.e. technology and a business that enables, enhances and disrupts traditional financial services.

We architected and built one of the most advanced end to end digital banking tech stacks in the world. Xinja is an example of technology designed for customer centricity, bringing personalisation and automation into day to day banking. Xinja’s event driven architecture enables a ‘Netflix’ – like experience for customers, providing immediate contextualised responses to their financial activities, nudges towards their desired financial outcomes and recognition and reward for good financial behaviour. Xinja seeks to provide secure and streamlined mobile banking experiences, new ways to securely transfer funds and share information, whilst making new choices more readily available to customers than what is provided by the big four banks.

Our retail banking services became available to Australians in September 2019 with the launch of the consumer mobile bank account, and further extended in January 2020 with the launch of the savings account, ‘Stash’. Xinja’s services include banking, deposits, savings, and lending, and will expand to include non-conventional products and services such as digital wallets, multicurrency wallets, investments and technology services.

In September 2019 Xinja also became the first and only independent digital bank in market in Australia with the launch of the consumer mobile bank account, delivered via the Xinja App for iOS and Android devices. Xinja has significant brand equity with a prior customer base of 15,000+ from its first beta travel card product. Xinja uses no legacy systems and operates no branch networks to ensure low overhead, low operating costs and great value to customers. Xinja is led by a unique and highly skilled team of bankers, experience designers, technologists and former regulators.

On its startup journey Xinja launched Australia’s first retail equity crowdfund. Xinja has since raised more than $5 million across two record-breaking equity crowdfunding campaigns in January 2018 and January 2019. Xinja has raised a further $45 million from private and industrial investors around the globe to provide an alternative way of banking for Australian consumers.

Xinja recently achieved its full, unrestricted Australian banking licence in September 2019, joining a highly profitable cohort in a sector with an oligopoly of 4 banks repeatedly listed in the Top 5 most profitable banks in the world. This also coincides with a time of great consumer dissatisfaction with and distrust for incumbents. With one exception all other successful new entrants to this market are owned by existing Australian banks. Xinja’s mission is to build a bank with our customers, designed in their interests, that helps them make better money decisions without the angst, and is delivered through a brilliant mobile experience.

Since entering the market Xinja has also seen numerous industry and regulatory developments including the 2018 National Financial Capability Strategy, the introduction of the National Payments Platform, the Restricted ADI licensing framework, Open Banking and the Consumer Data Right, The Royal Commission and the Productivity

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Commission Inquiry into Competition in Financial Services, and the introduction of the Banking Executive Accountability Regime.

Xinja fully supports the objectives of the inquiry, in particular:

• promoting the effective and sustainable growth of Australia’s FinTech and RegTech industries • ensuring the best Australian ideas can be taken to market in Australia • attracting global capital to generate future employment. • uptake of new technologies in the financial sector • opportunities for the RegTech industry to strengthen compliance but also reduce costs • promoting a positive environment for FinTech and RegTech start-ups • creating employment and technology • creating new opportunities • enhancing customer and consumer value • increasing productivity • job creation • creating export opportunities • attracting and maintaining investment in technology

Xinja offers its views as an Australian FinTech start-up and Neobank that has taken the entire startup journey from capital raising to public product launch for the purposes of informing this inquiry. This submission specifically focuses on two overarching themes relating to fintech and neobanking in particular:

1. The benefits and opportunities for Australians; and 2. The current operating environment for Xinja (inclusive of challenges and opportunities).

2 Benefits and opportunities for Australians

Xinja would like to highlight a number of benefits and opportunities that fintechs, neobanks and Xinja in particular offers Australians.

2.1 Enhance customer and consumer value

2.1.1 Opportunities for better experiences

Neobanks are a world-wide phenomenon, disrupting traditional banking structures and systems and providing innovative alternatives to consumers who are looking for more from their banks. Consumers across the globe have embraced neobanks as digital game changers and products and services are improving every day. In fact, all consumers benefit whether or not they choose to use the product, as neobanks are increasing competition and putting a downward pressure on fees and charges in the markets within which they operate.

Xinja is designed to give customers a real choice to be able to bank with a financial institution who looks after them. We see a significant role for data and technology to reduce service and product complexity and allow customers to make better, faster money decisions without the angst. We believe it’s time Australians had access to this kind of technology already available in other parts of the world, especially pertaining to the use of data for more personally relevant, real-time, event driven services. We want a better

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banking experience for Australian consumers and see a thriving neobank market that is ripe with innovation making customers’ lives better.

Xinja is particularly interested in using customer data in new ways in the credit assessment and lending origination processes so that customers with good financial behaviours can be rewarded with access to credit at lower than standard interest rates. Key enablers for these propositions are real-time access to customer financial behavioural data – which in turn requires more regulatory certainty and cost effective access to customer data with customer consent. See the discussion below at section 2.2.1

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Data Sharing.

Xinja notes that there are dependencies on industry infrastructure and innovation which essentially limit the experiences that any new entrant can provide, no matter how new or innovative their technology. For example, real time payments and data rich services are a function of an entire ecosystem, not a single neobank. Therefore to fully realise the opportunities of fintech and regtech for the benefit of Australian and global consumers and businesses alike, systems thinking is required by industry participants, regulators and policy makers alike. This would ensure that Australia’s financial services industry infrastructure for payments and data does not become the weakest link in the customer journey as Australia implements its NPP and CDR frameworks.

2.1.2 Competition

Xinja was created with the belief that it’s time for Australians to enjoy the benefits of banking competition, innovation and quality of service already enjoyed by customers in other parts of the world. Despite Australia’s high level of mobile technology adoption, we haven’t been able to fully embrace the possibilities of innovations such as real time payments, digital wallets, big data, open APIs, artificial intelligence and machine learning. While consumers in the US and UK are already benefiting from new capabilities brought by neobanks and digital challenger banks, Australian customers have told us they still struggle with even the simplest of banking needs, such as recognising each merchant and transaction on their bank statement. It is our hope that a more competitive banking sector will encourage greater investment in new entrants and make much more possible for Australian consumers and businesses when it comes to dealing with their banking and their money.

We acknowledge the introduction of the RADI licensing framework which opened the door for startups such as Xinja to enter the banking industry. We support the intentions of the ASIC regulatory sandbox, however note that it does not extend to deposit products which are regulated by APRA. In many ways we are dealing with regulations that never envisioned the possibility of start-ups being new entrants into the banking sector. We appreciate that it will take time to expose and rectify all the regulatory traps waiting for new banks.

We believe it is possible to bring competition into the sector in a safe, scalable and commercially viable way, keeping customers’ interests at the centre of what we do. We believe it’s time Australians experienced banking as it could be, and we value the opportunity to make that happen.

Xinja has already started to bring competitive offers to market for customers with the launch of its fee free bank account and Australia’s highest base rate (2.25% pa) online savings account, the ‘Stash’ account with no conditions (no minimum deposits, no minimum balance, no minimum transactions, no fees). This will be the first of many new offers to market, with a genuine desire to provide great value and transparency for customers that major banks are not providing, even in the aftermath of the Royal Commission.

As Xinja is able to avoid the considerable costs associated with maintaining (and transitioning from) legacy banking systems and bricks and mortar branches, we can directly pass on savings to customers by way of offering more competitive rates and lower fees. Xinja does not charge its customers currency conversion fees, domestic or international ATM fees. This compares to the approximately 8 million dollars spent by Australians on bank fees per annum, with limited consumer utility in return. The pace with which Xinja can continuously bring new competitive offers to market will only be limited by regulation and capital funding.

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2.1.3 Financial education & financial capability

The national financial capability strategy 2018 calls out the important role of timely and relevant data in lifting our national financial capability:

“People need accurate and impartial information to make the best financial decisions for their personal circumstances. To make informed decisions, it is important that Australians have timely access to relevant information in a user-friendly format." 1

Fintechs and neobanks, by nature of their design to be data driven, real time and customer centric, are ideally placed to bring services to market that can make a significant difference in this area. This can be fully realised with an open banking and consumer data right regime that is capable of bringing the benefits of rich, relevant and real time data to Australians via high levels of cross industry adoption and participation. Xinja looks forward to bringing these capabilities to its customers, however notes a number of challenges below in delivering these services as early as we would like. See the discussion below on open banking and the CDR.

2.2 Increased productivity

In addition to the lower end consumer cost, Xinja is built on new technology designed for flexibility; a platform that will allow it to rapidly roll out additional services to customers, driven increasingly by the dynamic use of data.

Xinja architected and built one of the most advanced end to end digital banking tech stacks in the world. The tech stack is cloud enabled, scalable, resilient, secure and event driven, with the ability to readily integrate to other platforms and services via APIs. This means day to day activities such as customer onboarding, payments, fraud management, data processing and analytics, customer service, systems monitoring, credit decisioning and approvals and overall launch of new products and services can happen significantly faster and at lower cost, due to being unencumbered by legacy systems, technology and manual processes.

The slowest or weakest links in the chain are typically the points at which Xinja needs to interface with legacy industry infrastructure, or the capital funding available to deliver new functionality. Xinja expects that over time, the potential for neobanks and fintechs to bring new and innovative experiences to market will not be limited by technology but by regulation, and capital funding. Below we expand on the opportunities for increased productivity from data sharing and integrating fintech into other sectors.

1 https://financialcapability.gov.au/strategy/#how

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2.2.1 Data Sharing

Sharing Transaction, product, account and other Data with customer consent

There are numerous use cases for enabling customers to share their bank account and transaction data with chosen trusted service providers. Today this is technically feasible with the use of screen scraping , however there hasn’t been sufficient clarity provided to confirm that screen scraping will not be prohibited in the near future, impacting Xinja’s ability to make investments in this capability until open banking becomes available.

Xinja fully supports providing customers with the ability to share their data without necessarily having to share their bank account usernames and passwords, however Xinja challenges the commercial viability of open banking accreditation as a means to access and use customer data, compared to the cost of using screen scraping, in order to provide customers with the ideal seamless, personalised and secure experiences they expect. The regulatory uncertainty related to screen scraping , combined with the commercial costs of open banking accreditation, limit the speed with which new startups can embrace technology data and make new value propositions available to customers. The promise of the CDR and open banking can only be fully realised when there is a wide ecosystem of accredited data recipients. See the additional discussion below at 3.10 Barriers to CDR Accreditation.

Recommendation 1

Specifically legislate to allow screen scraping style data sharing (with customer consent of course), with appropriate safeguards in place to manage risk of loss to customers. These measures should include a consumer education campaign on screen scraping, the CDR, and how they provide alternative ways to share data.

Recommendation 2

Allow screen scraping as a means of sharing data between ADIs as they are already required to meet specified standards for information security, KYC and data recovery. This regulatory certainty is important to have in place until Australia’s Open Banking framework provides a sufficiently cost-effective alternative. In the absence of such certainty, there will be limitations on how quickly Australia’s data economy can evolve and grow into a national exportable capability.

Recommendation 3

Alternatively, Xinja would support assurances that regulators will not seek to expressly prohibit screen scraping until the CDR and CDR data is readily and widely available across the economy such that there is no need for companies to use screen scraping .

Government Property Data

Xinja supports making government property data more readily available and accessible to fintech startups. This will foster innovation, reduce the delivery cost of services which depend on such data, and increase competition in the industry.

Digital ID

Xinja supports the implementation of Digital ID as a means of reducing the cost of opening bank accounts, improve AML practices, and providing better security for customers. The current use of electronic verification can become problematic in cases of

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identity theft; and Digital ID would enable customers to recover their identity when it’s stolen e.g. NSW drivers licence numbers, which they currently are not able to do.

Xinja would welcome being part of any government pilots relating to GovID and Digital ID etc. Such services would also give customers better access and control over their own data, a principle which is core to Xinja’s desired customer experience.

AML / CTF

Xinja supports measures to share KYC data to reduce duplication and costs to end customers. Ideally there would be a centralised registry for customer onboarding, which provides the KYC validation results to ADIs, who can then take additional steps on top of that validation for their own internal risk-driven processes. Currently every ADI is essentially paying the same service providers to conduct the same screening each time a customer’s identity needs to be validated, leading to unnecessary duplication of costs across the industry.

Xinja would also support sharing of AML-related data between ADIs and believes a centralised government database to be one option for enabling this.

2.2.2 Integrating Fintech

In addition to financial services, Xinja believes the following areas / use cases in the Australian economy could benefit from the integration of innovative fintech and regtech technologies, particularly financial data:

• Welfare payments – to help recipients better manage cash flow and how those payments are spent to get the most out of them • Medicare, medical costs, health insurance and financing – by providing greater financial certainty to reduce financial stress related to managing health concerns • Services that involve regular fees and payments - such as car registrations, school fees, utilities – again with simple integrations such as renewal reminders and notices that can be delivered via a customer’s banking app rather than having to be mailed to customers.

2.3 Job creation

Since Xinja was founded in May 2017, it has grown from a starting fulltime team of 6 to almost 90 working from its head office in Sydney, including its customer service team. The Xinja team broadly comprises of technologists, developers, bankers, designers, marketers, risk and compliance, customer service, operations, program delivery and management. Xinja expects to continue to create more employment opportunities as it scales, enters new markets and exports its technology outside of Australia.

2.4 Create export opportunities

Xinja sees itself as a banking technology company with a banking licence, rather than a bank with new technology, and seeks to export its scalable neobanking technology and capabilities outside of Australia in the next few years. Xinja Bank Australia is the proof point for the bank grade capabilities of the technology platform, and the next steps are to productise the platform and make it available to overseas markets. Xinja is already in discussions with potential clients for its technology capabilities. Xinja seeks to create a global innovation ecosystem of partners running on Xinja’s technology platform, sharing IP and innovation across markets to bring new digital value propositions to market faster

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and make a greater impact on the unbanked, underbanked and otherwise underserved segments across the globe.

Xinja also provides yet another great case study for Australia’s strengths as a test market for new technology for global tech companies. Xinja was the first SAP global implementation of its cloud based lean core banking system, and Mastercard’s fastest Apple Pay implementation globally. Australia also provides a strong demonstration of the bank grade capabilities of the Xinja technology platform, positioning it for export to other markets around the world. In particular Xinja’s partnership with SAP is not only a collaboration of startup and established technology companies, but also a new disruptive Australian brand with an established, global technology brand.

There is already international recognition of the quality of digital mobile banking experiences and adoption of mobile banking available to Australians compared to those available in other markets. Xinja also sees opportunities to establish operations overseas, either through partnering with existing banks to provide technology and mobile user experiences, launching international operations with its own banking licences in other jurisdictions, or providing cross correspondent arrangements and passporting arrangements for international banks and neobanks, which may also provide for more seamless travel experiences for Australian customers.

Xinja is already seeing its staff enjoy the benefits of attaining globally recognised skills and experiences that they are able to use at other neobanks across the world – with one of its staff now working at Starling Bank in the UK. The export opportunities for fintechs and neobanks are not only available for their products and services, but also their people.

Xinja believes Australia’s ability to compete internationally is best served where there is sufficient support for new entrants to compete domestically, particularly in a highly regulated and capital intensive industry such as banking (compared to other financial services or tech startups). When looking at international neobanks that have been able to expand outside of their home territories, e.g. Revolut, N26, it is important to note the critical role that domestic growth played before they were able to step into new markets.

Recommendation 4

Provide increased promotion and support for partnerships between Australian fintechs and global tech companies such as the Xinja – SAP partnership. Xinja would welcome further support to partner with global tech players to bring world class innovations to its Australian customers, as well as developing home grown capabilities that can solve global problems in the banking and financial services sectors.

Recommendation 5

Develop measures to support local fintechs and neobanks to grow domestically so they have a more well worn path to be able to step into international markets.

Recommendation 6

Increase government funding and support for Australian Fintechs to participate in regional and international Fintech festivals such as Money2020 and the Singapore Fintech Festival. Fintechs that are represented as endorsed or supported by the Australian Government are more likely to be considered favourably in international markets. This is especially important when seeking overseas investment.

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Recommendation 7

Extension of the Australia – UK fintech bridge to:

• Establish similar fintech bridges for the US and Asia Pacific region • Specifically connect neobanks and digital banks between Australia, UK and Asia Pacific, creating a role for Australia in leading initiatives to create a global digital banking ecosystem that could facilitate instant payments between bank accounts globally at much lower cost

Recommendation 8

Provide more cost effective, faster and simpler pathways for Australian fintechs to set up companies and operations overseas. Where fintechs already meet Australian regulatory standards, bilateral arrangements with other jurisdictions could help to reduce the time and cost of regulatory compliance. This is particularly important where such compliance is a barrier to market entry.

2.5 Attract and maintain investment in technology

Xinja has found the appetite and funds available for startup investment in Australia to be particularly limited, and investors difficult or costly to reach. Xinja’s initial funding came from direct founder networks rather than from the investor community at large. Xinja was a strong advocate for the introduction of equity crowdfunding in Australia and is the only equity crowdfunded bank in Australia. This has enabled Xinja to raise ~$5.3m from retail and sophisticated crowdfund investors to date. As Xinja progressed through to its later rounds of funding, the majority of funds have come from high net wealth individuals and family offices, and less so from venture capital, private equity, or institutions. Xinja has deliberately not sought nor accepted equity funding from the major banks. Xinja has also found its ability to attract and maintain international investment in its technology is a function of being able to demonstrate that the technology is scalable and solves or provides for a global use case.

The opportunities to attract and maintain investment in technology can be better realised with a number of initiatives including:

• More cost effective ways for startups to reach and be introduced to investors interested in investing in technology, including direct introductions facilitated by government agencies or bodies • Better access to grants and tax subsidies or CGT exemptions for shareholders in companies developing or deploying new technologies • Removal of regulatory barriers that penalise investors for investing in tech companies that later get banking licences as proof of their tech capabilities • Active promotion / funded promotion of Australian fintechs and neobanks deploying new technology at international Fintech festivals and conferences such as the Singapore Fintech Festival • Subsidies and grants for establishing or creating connections to national payments infrastructure such as the NPP, and Open Banking • Ensuring that Corporations provisions that would not normally apply to a company that had not crowdfunded, do not inadvertently stifle the ability of those companies to continue to raise funds e.g. the Chapter 6 takeover provisions • Lifting the cap on how much a company can raise via crowdfunding, or the net assets for the company, to continue fundraising; ADIs are particularly disadvantaged because of the amount of capital they need to hold for regulatory purposes that might otherwise not be included in asset calculations.

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3 The operating environment for a Neobank startup in Australia

Australia has significant unmet demand for increased competition and improved customer outcomes in the banking and financial services sector. Xinja particularly notes the findings of the Productivity Commission from its inquiry into competition in the financial services sector and believes there is a link between the undesirable behaviours noted in the Royal Commission the severe lack of competition from new entrants in this sector.

The operating and competitive environment for Xinja in Australia has improved in recent years, with key initiatives such as the restricted ADI licensing framework, the introduction of equity crowdfunding, streamlined FSSA approval processes, the CDR and open banking expanding market opportunities, and the National Payments Platform becoming operational. In particular Xinja has found an increasing willingness from regulators to engage with startups and better understand the opportunities of new technologies as well as the commercial realities of the startup journey. We are particularly encouraged by the pragmatic approach that resists the creation of documents for regulatory purposes, in favour of strengthening documents that are used in day to day practice. We continue to value timeliness, transparency and proactive engagement with APRA as our primary regulator.

At the same time, there has been a tightening of regulation from a reduction in the R&D tax exemption, the introduction of the new Banking Executive Accountability Regime, new prudential standards such as those relating to information security, international regulation such as the GDPR, and new AML and lending requirements.

Whilst there has been significant progress, there are still challenges ahead and Australia remains a tough operating environment for startups, especially when compared to global markets. There is a significant lack of on shore venture capital, almost no government support to help startups raise capital, and a highly concentrated banking market keen to stifle the impact of new entrants.

Further, there have not been any structural improvements to the industry structure that already favours major banks in terms of access to wholesale funding, due to their size, scale and tenure, to the disadvantage of newer and smaller players – whereby the only pathway to being able to access comparable rates is to be supported to grow to similar volumes.

Below we highlight particular aspects of Xinja’s operating environment:

• The competitive environment • Demand for ethical bank behaviour • Capital and funding environment • Tax framework • Being a tech and being a fin • Challenging labour market • Changing, complex regulatory environment • Industry and regulation lagging behind technology • Barriers to connection / access to the NPP • Barriers to CDR Accreditation

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3.1 Competitive Environment

3.1.1 Entrenched Oligopoly at market and industry infrastructure level

Xinja is operating in a market with an entrenched oligopoly – not only in terms of market share but also in the ownership and influence of Australia’s major banks in significant payments infrastructure such as the NPP, BPay and EFTPOS. Xinja notes that the NPP is often misrepresented as national public infrastructure when it is in fact primarily owned by Australia’s major banks. It is difficult for any startup to be internationally competitive if it does not have a chance to be domestically competitive.

The major banks oligopoly power is supported by regulatory settings, making price competition difficult even after you consider barriers to entry, which are difficult enough. We also note that current structures also favour larger new entrants e.g. overseas banks, Amazon, Facebook, Google at the expense of local startups.

3.1.2 Switching is hard

Xinja Bank supports the federal government’s efforts to kickstart ‘open banking’ in Australia, particularly its potential to shift the balance of power back to the consumer to make new and informed choices particularly in relation to their choice of primary bank. The current challenge for the industry is removing friction in the exercise of that choice – making it easier for customers to switch banks.

Porting Bank Account Numbers

Currently there is no way for Australian customers to ‘port’ a bank account number between banks in the same way that consumers are able to port a mobile number between mobile carriers. This can be compared to ‘data portability’ legislation currently in place in Germany and the UK through the EU’s Payment Services Directive 2 (PSD2) legislation, which allows customers to transfer bank account numbers from one institution to another, and requires institutions to share this data readily and securely. This legislation has strengthened and streamlined AML/CTF regulatory operations in the UK and worked within further national security interests of the member counties within the Five Eyes intelligence alliance (UK, Australia, Canada, US and New Zealand). We believe the standardising of this data would also strengthen the regulator’s ability to act in the interest of Australia’s national security, better combating money laundering and operations or individuals financing of terrorists, sex traffickers and organised crime groups.

Recommendation 9

To compliment the CDR legislation, Xinja Bank recommends that the Select Committee assess the merits of implementing ‘data portability’ legislation currently in place in Germany and the UK. Particularly, legislation that allows customers to transfer bank account numbers from one institution to another, and the requirements for institutions to share this data readily and securely.

Porting / Redirecting Payment Authorisations between bank accounts

Xinja has heard from its customers that one of the primary friction points for switching primary bank accounts is dealing with direct debits and subscriptions – there is no easy way to ‘port’ them, let alone even identify and find them with your current bank.

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If a customer wanted to switch bank accounts today, they would need to manually identify all their own recurring subscriptions and direct debits, usually by looking back through their own transaction history – something their bank is unable to provide for them. The burden is then on the customer to contact each merchant to provide new banking details.

Today Australian banks are not able to confirm for customers all the direct debit authorisations they have provided against their bank account. This is because these authorisations are not held by the authorising bank, or even a central database, but by the receiving bank only i.e. the merchant’s bank. The customer’s bank is not aware that an authorisation has even been provided until it receives a payment instruction from the merchant’s bank. For the same reason, there is no way for a customer’s bank to ‘cancel’, ‘reject’ or ‘unauthorise’ a direct debit; the cancellation can only be done at the merchant’s end, requiring a customer to contact all their direct debit merchants rather than simply contacting their current or new acquiring bank.

There is no data standardisation that enables direct debit transactions to be easily identified, or to be classified as standalone direct debits vs recurring direct debits. Further, when the direct debit instructions are placed against a debit card (as opposed to the bank account directly), each scheme arrangement (Visa, Amex, Mastercard) has their own rules for how transaction data is created and captured e.g. for point of sale terminal configuration.

Whilst the foundations have started to be laid for the CDR and Open Banking, there is still some work to do for open banking to fully realise the promise it held for consumers, particularly in making it easier for customers to not only make more informed decisions but also to facilitate service ‘portability’ in a similar way to mobile number portability.

The CDR arrangements for banking currently provide for data sharing to enable a customer to compare benefits and costs and determine if there is a better ‘deal’ available from switching to an alternative bank or service provider. The current CDR arrangements in and of themselves are not sufficient to enable customers to seamlessly redirect all payee details, direct debits and scheduled payment authorisations from one bank account / service to another.

Recommendation 10

Xinja would support initiatives to enable direct debit payment instruction porting / switching / redirection; in particular:

1. Technology investment in a central database; for consent and authorisation 2. An industry wide electronic framework for authorising and identifying direct debits 3. Standardisation of direct debit transaction type data for recurring card payments and subscriptions 4. Enabling the acquiring bank to initiate a port / transfer / switch via direct data feeds to an existing bank

Lack of competition and data sharing metrics

Xinja is not aware of any specific measures of success for Open Banking or other initiatives designed to drive competition, to determine if they are translating to the desired customer outcomes. For example, there does not appear to be any time series data reporting of customer data sharing activity or bank account switching activity before and after the introduction of Open Banking.

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Recommendation 11

Xinja proposes that if any measures of success are developed for the CDR, that they should reflect desired consumer outcomes, particularly if the rate of customer switching or take up of new services was an envisaged outcome.

Xinja also has a keen interest in the extension of the CDR to other industries to facilitate competition, and neobanks being able to play a role in facilitating cross industry competition and easier switching of services providers so that customers more readily access better deals. For this purpose Xinja is also represented on the CDR Energy Advisory Committee. We support extending CDR to all financial services including superannuation and insurance, and digital assets e.g. shares and FX, digital currencies, to give customers a full view of their financial assets and the fees they are paying for services and areas of duplication – product reference data particularly in relation to superannuation.

3.1.3 New ADIs being regulated in ways existing ADIs haven’t

Xinja has found itself in many situations where it is the first ADI to test or be tested on a number of regulatory requirements in ways that established ADIs haven’t. This has meant that APRA has not been able to advise Xinja on practical options for compliance as other ADIs have not been asked to demonstrate compliance in such scenarios. This places an unfair compliance burden on smaller ADIs relative to their capital funding (especially startups), compared to more established ADIs. Such unexpected requirements make it difficult to forecast burn rates and compliance costs, which further challenge a startup’s commercial viability and ability to compete. Xinja has had to co- develop industry first solutions to regulations that have existed long before its time, but which had not been tested or enforced with other ADIs before Xinja, such as the APS 910 requirements. Whilst Xinja supports Regulators testing new regulation with startups, Xinja would welcome more certainty from regulators when dealing with longstanding regulation that should have already been tested on more established industry players.

Recommendation 12

Regulators be more cognisant of the disproportionate impact of new compliance requirements on startups in their supervisory activities, and to provide as much regulatory certainty as possible upfront on the application of, and compliance with, various regulations and standards.

3.1.4 ADI lenders more strictly regulated than non bank lenders

Xinja notes there is an uneven regulatory playing field between ADIs and non-bank lenders, with non-bank lenders having less restrictions and regulations in their business operating environment. In bringing lending products to market, Xinja competes not only with other established ADIs, but also with non-bank lenders who do not, for example, have similar governance requirements on technology partners they may work with whereas all ADIs are expected to consult with APRA when their material outsourcing activities involve activities conducted offshore.

Recommendation 13

Regulators be more cognisant of the competitive impact of regulations on the ability of startup ADIs to compete with non-bank lenders, particularly in the context of regulatory capital impositions, and to seek to minimise any inadvertent competitive disadvantage where possible.

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3.2 Demand for ethical bank behaviour

The revelations of the Royal Commission and the recent high-profile prosecutions of incumbent banks highlight that perhaps our industry has underestimated how serious the business of being a Bank in Australia truly is. What has emerged is an even stronger appetite for ethical modern banking. Xinja believes that it is about time Australians had access to a bank designed for their interests. There is an overwhelming policy imperative from a regulatory and competitive perspective to welcome and support new entrants into the banking and financial services markets that seek to lift the standard of industry behavior and provide customers with the level of service and decency they should be able to expect. This is particularly important when we consider the inherent imbalance of power between the individual consumer and their bank – a balance that is even more entrenched in favour of the bank where a customer’s home loan is held.

Recommendation 14

Xinja would like to see a portion of funds recovered from the Royal Commission applied directly to increasing competition and consumer outcomes in the Banking sector. For eg. to fund data portability and bank account portability (or redirection), reduce the cost of access to the NPP, Open Banking Accreditation for new players, to reduce costs for fintech startups, to increase R&D incentives and the deployment of new technologies.

3.3 Capital & Funding Environment

When it comes to access to capital, local startups like Xinja begin at a disadvantage both because our capital needs are high (in banking compared to startups in other sectors), our access to capital is limited (Australian vs overseas market) and key sources of funding in this market come from competitors (ADIs for wholesale funding) or force startups down an IPO path.

There is also a lack of available government grants and incentives for startup founders, staff or investors, and no government grants that Xinja is aware of, that are specific to fintech startups. Further, financial services are often excluded from existing grants and tax exemptions such as the commercialisation grant and ESIC exemptions (even where there is innovative use of technology).

3.3.1 Banking is capital intensive

The startup costs for a Neobank that is acquiring its own banking licence are significantly higher than the startup costs for a fintech generally, or a tech company generally. The costs of licence acquisition include:

• Industry and regulatory expertise to develop policies, prepare various licence application documents and program manage licence acquisition • Regulatory capital requirements ($millions) to meet licence conditions • Technology implementation and testing not only of core banking systems, but also information security, data recovery, end to end systems and processes for orderly exit • External independent validation of systems and controls • Hiring of key persons at application (even before a licence is granted) • Establishment of risk management frameworks, strategies, controls and reporting • Legal and compliance costs • Costs associated with fundraising in order to meet capital requirements

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This creates an environment where one must ‘pay’ and be licenced (even under a restricted banking licence) before one can ‘test’ and ‘validate’ banking products and services in market i.e. test product market fit – which goes against the grain of a lean startup whereby product testing and validation typically happens at concept level before significant capital investment.

At one point throughout 2019, 60% of Xinja’s staff were working on licensing materials to put before regulators in one form or another. We estimate that this process has cost us well in excess of $6m in salaries and consultancy fees. The process caused delays to launch and a crunch on the money we had available to build the bank. Investors, not unreasonably, wanted to wait until we had our licence before investing more, meaning we had to ration our expenditure further, slowing the development of the bank.

After the cost of the licence acquisition, there are further costs involved in building a bank including building the remaining technology systems and processes, mobile app development, operating costs of running the bank including customer service, marketing and related customer acquisition costs.

3.3.2 Capital is hard to find; Fundraising is resource intensive

Connecting to investors and investment communities

Xinja has had limited assistance to date from the Australian government to reach investors, whether by way of introductions and connections to local or international investors.

Attracting international investment

Whilst international capital is available to Xinja, it has primarily been sourced from ultra high net wealth individuals and corporate investment rather than from venture capital, impacted to varying degrees by the following factors:

• The Australian market is seen as too small, even with world leading industry profits per capita • Regulation seen as anti-business (complex, restrictive, expensive and anti- competitive for startups) • Public statements from regulators setting expectations that some newly licenced banks would fail • Perceptions on Australian productivity • Perception that Australia is not engaged in environmental concerns, particularly following the recent bushfires

Recommendation 15

Xinja would welcome consular assistance with raising funds from overseas, for example through:

• Direct introductions to investors or investor events • Briefings on international investor ecosystems • Access to embassy offices or meeting rooms as a location for investor meetings • Meetings hosted by the embassy

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Crowd-funding

Xinja was Australia’s first equity crowdfund and raised more than $5 million from Australian retail and sophisticated investors in two record-breaking equity crowdfunding campaigns in January 2018 and January 2019.

Lower limits than UK

In Australia a maximum of $5M can be raised via crowdfunding in any given 12 month period, and crowdfunding is only available to companies with consolidated gross assets of less than $25 million. By comparison, in December 2018 neobank Monzo was able to raise £20M via crowdfunding2 when it had reported net assets of over £56M.3 Xinja’s customers and early investors have asked for additional crowdfunding opportunities to buy Xinja shares, however Xinja is unable to make these opportunities available to Australians to own their own bank, due to the $25M asset limit.

Chapter 6 Implications

Xinja’s use of crowdfunding early in its startup journey resulted in Xinja being a public unlisted company with over 50 shareholders, making it vulnerable to the takeover provisions (s606) of the Corporations Act, limiting its ability to offer an individual shareholder more than 20% equity stake in a fundraising round without a resolution. This creates an erroneous situations whereby one form of fundraising (crowdfunding) stifles other forms of fundraising (private equity fundraising) that would normally be available to a startup. This situation creates an unnecessary level of red tape for a situation / scenario for a startup, combined with regulatory uncertainty relating to alternatives such as seeking as ASIC exemption. None of these factors particularly promote or support capital raising for startups that have ongoing capital funding needs after having exhausted eligibility for crowdfunding.

Recommendation 16

Xinja would support expedited measures to exempt the operation of s606 to this specific scenario, and strongly recommends that future regulations take into account the impact on startups who may need to have a range of fundraising mechanisms available to them in order to maximise investment from within Australia.

Government Grants

There are no government grants specific to fintech that Xinja is aware of. Whilst we welcome government grants that are available for startups looking to scale (such as the accelerating commercialisation grant), we have been advised that financial services are specifically excluded from this grant.

Recommendation 17

Expand grants programs to specifically fund fintech, especially where financial services are excluded from other types of grants.

2 https://monzo.com/blog/2018/12/05/crowdfunding-closes; 3 https://monzo.com/static/docs/crowdfunding-prospectus-2018.pdf

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Reallocation of industry fines to fintech startups

Xinja supports an apportionment of fines levied by AUSTRAC against banks to be put towards the establishment of an Australian equivalent of the UK Capability & Innovation Fund (CIF)4. The Capability and Innovation Fund Pool A is designed to promote competition in the market for banking services to SMEs in the UK through expansion of each successful applicant’s business capacity, product offering and/or target markets.5 No such similar fund exists in Australia to expand fintech or neobank capacity, product offerings and/or target markets that might currently be underserved by the major banks today, including in areas of financial literacy and capability.

Fundraising from institutional investors (e.g. superannuation funds)

Xinja supports regulatory measures to make it easier for industry and self-managed super funds to invest in scale ups and licensed neobanks, including via crowdsourced funding.

There is a discrepancy between certain investors being exempt from capital gains which has a negative effect on raising funds. Superannuation has not caught up with the FinTech market or long-term growth portfolios.

Australians do not have a current opportunity to invest in FinTech through Australian super funds due to the traditionally conservative approach to investment in financial disruptors. Superannuation has not caught up with the FinTech market and has a low appetite for investment long-term growth portfolios, whilst continuing investments in the four major banking institutions.

3.4 Tax framework

3.4.1 Access to the R&D Tax Incentive

Xinja supports initiatives to increase the R&D tax incentive and to provide more certainty for early stage companies to be able to properly forecast expected tax rebates. Xinja agrees with the findings of the EY FinTech Australia Census that ‘R&D incentives and grants are often the lifeline that provides the runway for FinTechs as they head towards a capital raise or a launch date.’6 In the early stages of a company that is pre-revenue, runway is absolutely critical.

Xinja further supports the Fintech Australia recommendation that “Experiments” in the R&D tax incentive scheme should be interpreted broadly by the ATO to include companies which contribute to building new and innovative services for the fintech sector, even where these are built on top of existing rails. It should include new technology architectures for an industry, e.g. new banking technology stacks.

Finally Xinja would support initiatives to makes the R&D Tax Incentive more accessible, with more funding available, to early stage companies and fintechs in the startup phase, where there is the most risk taken by investors, founders and staff alike. This should especially be the case where they are new entrants into highly uncompetitive markets.

4 https://www.fintechfutures.com/2019/02/starling-bank-promises-400-new-uk-jobs-with- 100m-grant/ 5 https://www.fintechfutures.com/2019/02/metro-starling-and-clearbank-win-rbs-fund/ 6 EY, EY FinTech Australia Census 2018, p. 28.

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3.4.2 Tax incentives for early stage venture capital limited partnerships (ESVCLP) and venture capital limited partnerships (VCLP)

Xinja notes that tax incentives intended to support investment in technology no longer become available once a startup becomes a bank – notwithstanding that it is bringing new technology to an industry that severely lacks it. This puts at a disadvantage technology companies that also have banking operations, and limits the ability for investors to fund technology innovation that would otherwise be eligible for tax incentives in the absence of banking operations or use for banking operations. Xinja views its primary activities to be technology development, applied for the purposes of banking value propositions, and that its investors should not be deprived of tax incentives simply because the technology is deployed in this way. Once the same technology is applied to be sold as a product, the incentive would become available again. The irony is that the technology would have needed to have been deployed to provide banking or financial services in order to demonstrate that it was fit for purpose, in order to be sold as a technology platform.

Recommendation 18

Strengthen the tax incentive framework to enable fintech companies to still be considered tech companies even after they are applying or deploying their technology to deliver financial services.

3.4.3 Reduce GST payable by early stage companies

Another way that fintech startups can be supported is via a GST exemption or exclusion for their first few years of operation, reducing costs for fintechs.

3.4.4 Other tax initiatives

See section 3.6 Challenging Labour Market for further discussion of tax related initiatives to enable startups to better access skills and talent.

3.5 Being a tech and being a fin

The current regulatory framework for ADIs was designed for traditional banking, not for technology companies with banking licences whereby financial services are just one of many parts of a business model. This creates a certain level of complexity in introducing innovative products and services in additional to traditional banking and financial services, as they become inadvertently regulated as if they were banking and financial services when in fact, they are data or technology or other services. This regulatory creep slows down the development of new business models and innovative products by neobanks, limiting domestic and international competitiveness as a technology export.

Recommendation 19

We recommend more specific guidance from requlators on how ADIs can engage in non- banking and non-financial services (e.g. data or technology or other services) without those business lines becoming unnecessarily hampered by regulation only intended for banking products and services.

3.6 Challenging Labour Market

Finding technically proficient staff, particularly developers & technologists, is challenging especially given the significant competition for tech talent not only locally but globally. To date Xinja has been able to attract talent representing former employees of Atlassian and

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other Fintechs, as well as from other ADIs. We have encountered difficulties in recruitment resulting from a STEM shortage in the Australian talent pool relative to other countries. Not only is there a shortage of talent, but there is also a shortage of capital funding available to fintech startups in their early years. Together this creates a double whammy for fintech startups in the competition for talent. Xinja has been fortunate to be able to attract talent at lower than market rates due to its golden rules, its culture, its purpose, and the opportunities presented to talent to make a difference. Many of Xinja’s staff have taken significant pay cuts, with no guarantee of options, in order to be a part of Xinja’s journey – a risk and sacrifice which we do not take lightly and which we seek to compensate and reward in other ways.

Xinja directly competes with other techs, startups and employers globally who are also seeking talent with modern stack experience (particularly with cloud, containers, kafka, native react / mobile development for example) – we are not just competing with other established legacy banks. This is even when we take into consideration our flexibility to hire the right skills and aptitude even if there is limited experience and even no banking experience. There are significant costs and complexities with sourcing talent from overseas, including visa and sponsorship costs and commitment – which can be challenging for any early stage startup.

To enable startups to better attract talent, there needs to be sufficient compensation for the risk of working in a startup, such as salaries, options, learning and development, or other benefits. Startups in their early years can be limited in their ability to pay the above market rates required to attract tech talent – and are therefore more reliant on non-salary based incentives. Below we make a number of recommendations to not only enable fintech startups to attract the talent they need, but also to raise the profile of the fintech industry as an attractive career and employment alternative.

Recommendation 20

We support subsidies being made available to fintech startups and early stage businesses to make it easier to offer attractive salaries and benefits to attract hard to find and talent such as:

• Local developers and technology talent • Engineers, UI developers, graphic designers, CX designers • Female talent that might otherwise leave the workplace for lack of work flexibility to balance family life

Recommendation 21

We support initiatives to develop closer relationships and partnerships between universities, fintechs and startups to provide a stronger pipeline of talent into fintechs, as well as broader opportunities for graduates and students.

Recommendation 22

Reduce Visa costs and application processing time.

Recommendation 23

Provide a CGT exemption for startup equity, including employee share schemes, to enable fintech startups to better compete for hard to find talent.

Xinja also proposes consideration of reduced tax rates for fintech startup employees, again enabling employees and fintech startups alike to offset challenges in providing market salaries in the early years.

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Recommendation 24

Decrease payroll taxes for startups in their initial years.

3.7 Changing, Complex & Fragmented Regulatory Environment

Xinja has an ADI, AFSL, ACL, Registered with AUSTRAC, part of BECS,

Xinja supports a regulatory and policy environment that promotes:

1. Consumer consent, choice and confidence 2. Local and global investment in technology and innovation 3. A more ethical, human and consumer friendly financial services industry 4. An efficient and outcomes-based approach, targeted to the specific objectives or problems it seeks to resolve with minimal unintended adverse impacts 5. A risk-based approach 6. No unnecessary compliance costs 7. Competitive neutrality in impact on smaller / more technologically advanced industry participants

3.7.1 Regulatory Complexity and Change

Xinja has noticed 7 key regulatory themes impacting the Banking sector:

1. Competition (Lower Capital Barriers to Entry) with new licensing frameworks for new neobanks, virtual banks, startup banks, particularly in the EU and Asia Pacific 2. Innovation (Regulatory Sandboxes & Incentives) 3. Data Protection, Data Sharing Rights, Open Banking: a. PSD2 EU Payment Services Directive b. Consumer Data Right in Australia c. Open Banking (EU, AU) d. GDPR (EU General Data Protection Regulation) 4. Information Security & Cloud (promotion of and regulation of use of cloud by banks – AU, Asia Pac) 5. Digital & Cryptocurrencies, Anti Money Laundering & CTF 6. Financial inclusion, literacy & equality (in some cases a requirement for a new banking licence) 7. Conduct Risk & Accountability (AU) – BEAR & Royal Commission Findings, tightening regulation and expectations relating to credit assessments

As a public unlisted company, an ADI, AFS licensee, AC licensee, reporting entity, Australian employer, banking technology startup and equity crowdfunding recipient, Xinja operates in a complex and constantly changing regulatory environment that demands significant investment to be able to be across all its compliance obligations and changing regulatory landscape of multiple regulatory bodies including ASIC, APRA, AUSTRAC, ACCC, OAIC, AFCA and the ATO. Key regulatory frameworks include the Banking Act and various prudential standards, Corporations Act generally as well as provisions relating to financial services, crowdsourcing and takeover provisions, privacy and employment laws, as well as AML & CTF legislation.

This means for a Neobank, compared to other fintech startups and tech startups, the legal and regulatory costs are significantly higher, in addition to the already capital intensive nature of banking business. That is in addition to the disproportionate legal costs that financial services businesses have over software / tech businesses alone.

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Between ASIC, APRA and AUSTRAC, Xinja has found APRA’s prudential standards and guidelines to have been the most useful and straightforward regulatory structure, followed by ASIC. Xinja would welcome more practical and detailed guidance from AUSTRAC.

Xinja also needs to comply with domestic and international industry payments arrangements such as BECS (Bulk Electronic Clearing System), Apple Pay and Google Pay, Mastercard, NPP, BPay in order to provide a full suite of services to its customers, adding to the various contract compliance requirements that Xinja manages.

We also note the impact of a lack of national consistency in state based regulation in the home loan industry that slows down the take up of technology innovation – for example the requirements for wet signatures in some states land and titles offices.

Overall this ecosystem represents ever increasing regulatory and technology complexity for any startup digital bank to work with.

Recommendation 25

Xinja would support government measures to provide more regulatory support, clarity of requirements, and closer engagement with regulators so that startups are able to better understand the compliance costs and requirements they need to forecast and operationalise. In particular Xinja would welcome more detailed guidance from AUSTRAC.

Recommendation 26

Xinja also welcomes a more streamlined approach to seeking and approving regulatory exemptions – for both startups and for regulators – so that startups are not draining capital dealing with compliance with legislation that was clearly not intended to apply to their specific situation because it was not envisaged at the time the legislation was created. Uncertainty erodes shareholder value, as well as well-meaning but inadvertently restrictive regulation that did not consider application to new entrants and startups.

Recommendation 27

Xinja recommends requirements for all new proposed regulations and requirements to actively consider the potential impact on new entrants and startups, especially in terms of compliance costs, commercial viability, barriers to entry, and impact on competition.

Recommendation 28

Xinja would support government measures to allow acceptance of digital signatures by all state based land and titles offices, in order to streamline the home loan experience for consumers and enable a greater adoption of technology and innovation.

3.7.2 Fragmented Industry Reforms & Strategies

Whilst there is significant regulatory change and activity in the industry, there is no clear roadmap or overarching strategy of desired industry customer outcomes mapped across all government policy initiatives. Xinja has felt this across the numerous industry consultations and enquiries which are challenging for any startup to keep pace with and participate to the level desired, given our limited start-up resources. Further, existing industry associations do not specifically address the unique value proposition and needs of startup neobanks, to be able to provide a voice. Xinja sits at the intersection of fintechs, startups, and established banks and credit unions in terms of its size, business maturity, use of technology and regulatory environment.

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Our experience is a strong desire for industry change, and numerous solutions, without absolute clarity on the customer or consumer outcomes that are sought to be achieved. In particular, there are no clear measures of success, in terms of concrete public and customer outcomes, for a range of initiatives from the National Financial Capability Strategy to the Royal Commission to NPP to Open Banking to anti-money laundering investigations.

In addition, we see missed opportunities to set broader policy objectives, for example, considering the opportunities for the government to promote fintechs and regtech solutions to address underserved markets and national financial capabilities issues or to deliver on the national financial capability strategy - especially in relation to helping consumers access financial data, make sense of data, and make new choices – as well as ensuring industry structures actually provide for sufficient competition for genuine choices to be available to customers by supporting new entrants and fintech startups. Xinja notes that the national financial capability strategy identifies three behavioural areas in which Australians can be empowered to take control of their financial lives:

• Managing money day-to-day • Making informed money decisions • Planning for the future

However there are no regulatory policies to specifically support, via grants, deductions, rebates, exemptions or other means, fintechs or neobanks that are seeking to invest in technologies and innovations designed to make an impact in these areas.

For example, Singapore’s new digital licensing regime actively requires applicants to ‘incorporate the innovative use of technology to serve customer needs and reach under- served segments of the Singapore market’. Malaysia similarly seeks proposals for new banking licences from those who can help close the gap in underserved segments and the unbanked.

Recommendation 29

Xinja recommends the development of a comprehensive policy roadmap for the banking and financial services industry, framed in terms of clear and measurable customer and national outcomes, against which individual reforms, initiatives and developments can be mapped.

Recommendation 30

Xinja recommends future policies and reforms more closely link to supporting competition and consumer financial capability outcomes.

3.7.3 Costs of lack of regulatory guidance in an evolving regulatory environment

The regulatory environment for neobanks is constantly evolving and Xinja would welcome more regulatory guidance and certainty on practical measures for compliance. It is resource intensive to hypothesise what is required to comply and there is insufficient guidance, particularly in areas where it can no longer be assumed that previous approaches to compliance will be sufficient for new requirements such as those coming out of the Royal Commission findings on Lending.

Recommendation 31

We recommend more specific ASIC guidance being available, as well as better communication channels with ASIC to facilitate questions and answers rather than pure

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reliance on guidelines alone. Regulatory clarity reduces legal and compliance costs as well as opportunity costs for startups who are simply looking to ensure they operate in the right way.

3.8 Industry & regulation lagging behind technology

3.8.1 AML regulations

Outdated and not technology neutral

Xinja notes that Australia’s AML regulations reflect branch based banking and need to evolve to reflect the current digital nature of many financial products and services – in particular online or mobile app based onboarding, transacting, connectedness and consumer demand for ease of access.

For example, existing regulations do not enable Xinja to use live video calling to have face to face verification with customers. Customer account creation and onboarding can only be done through documentation, or via electronic ID verification against approved databases (rather than with the customer themselves). In contrast, the UK enables customers to hold up passports using facetime to take a selfie. Similarly, Singaporean regulators have envisaged the use of facial recognition technology and will accept a selfie video of a customer holding their passport. Our Australian regulations require a customer to physically walk into a branch and do not allow us to accept online siting of customer documents. Moving Australia’s frameworks to be more in line with other jurisdictions would create a fintech market and also enable the customer experience expect of fintechs and neobanks.

Customers expect to be able to onboard entirely digitally with neobanks, and it limits the Neobank value proposition to not be able to do so when document verification fails. Further, the use of video would be safer for customers as any person that has sufficient access to a customer’s ID documents would be able to open a bank account in that person’s name today in Australia.

Inefficient use of data between institutions creating suboptimal consumer outcomes

There needs better connectivity between institutions to deal with AML risk. Currently when a reporting entity identifies customer behaviour that may indicate potential money laundering or terrorist activity, data sharing on AML is restricted. In contrast, the s314(b) of the Patriot Act (US) enables financial institutions to share such information for the purposes of investigating suspicious activity. Being able to do this in Australia would bring down the cost for whole industry and would also provide a use case for open banking between financial institutions.

Recommendation 32

Amend AML regulations to permit data sharing between financial institutions for the purposes of investigating suspicious transactions, similar to s314(b) Patriot Act (US).

3.8.2 Regulator nervousness on technology innovation

There is a slow moving and risk averse by default regulatory environment compared to the pace of technology. Xinja notes that regulators are quick to raise risks related to technology and innovation, but less quick to propose regulatory solutions to enable customers to realise the benefits of new technologies. For example, the use of cloud, automated or AI enabled credit decisioning, or the use of screen scraping and AI for

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lending origination. This lack of regulatory certainty slows down investment in these capabilities for fear of future redundancy in the absence of regulatory approval for use of these technologies.

Xinja also notes that in some cases technology innovation involves bringing innovation to Australia from overseas, and outside of the banking industry this is a much more straightforward process. Xinja has sought to bring technology innovation to Australia from overseas by partnering with leading global suppliers. Competitiveness in the tech industry requires the ability to source best of breed offerings from across the globe. Outside of the banking industry this is a much more straightforward process. However, where ADIs are engaging with international technology vendors based overseas, there is additional consultation required with regulators before this can occur. This slows down the potential pace of international collaboration and innovation with the introduction of regulatory uncertainty when new international service providers are involved.

Recommendation 33

Regulators be given a mandate to proactively look at regulatory measures and pathways that would enable new technologies and innovations to be actively adopted by startups and fintechs and the financial services industry, without fear of future regulatory restrictions that would devalue such technology investments.

3.8.3 Legacy Payments infrastructure

Part of the current operating environment for consumers, businesses, neobanks and fintechs alike is a legacy batch based payments infrastructure for Direct Entry payments (i.e. Australian bank account to Australian bank account).

Currently bank account transfer payments are run in batches 5 times a day and on business days only, with SLAs between banks for payments to be sent within 3 to 5 days. Whilst banks can escalate to each other if these SLAs are not met on a case by case basis, with Auspaynet arbitrating, these payment timeframes are now out of line with customer expectations.

One of the challenges with this legacy infrastructure is that there is no central infrastructure for payments clearing, only a set of bilateral arrangements. The current cost structure for these arrangements still favour the major banks, with rebates based on transaction volumes and charges of 4c per outgoing transaction. Due to the nature of new entrants having a smaller market share (especially where they cannot leverage the volume of parent entities that are ADIs), they pay more per transaction than incumbents, despite the cost advantages of not needing to provide branch networks. Even though these payments go to the maintenance of the network, it creates a higher marginal cost for new players to participate.

The NPP is expected to deliver on instant payment expectations for customers, however it comes at a higher per transaction cost than the current direct entry payments channels, as well as implementation and ongoing access costs. See further comments below on the costs of participating in NPP for new entrants.

Need to integrate with, and build on top of, existing payments infrastructure

For neobanks seeking to become a customer’s ‘main bank’, there are a range of integrations into existing payments infrastructure which customers expect in order to be a viable ‘switching’ option for many Australians. All up there are probably at least 6 payments integrations that Australian customers would expect for a modern digital bank account – all of which are individual programs of work:

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1. Direct Entry payments (BECS i.e. Bulk Electronic Clearing System) 2. Scheme Cards (Visa or Mastercard or Amex) 3. Apple Pay 4. Google Pay 5. EFTPOS 6. BPay 7. NPP (or BEEMIT in the mid-term)

Whilst Xinja launched its bank account with a Mastercard debit card providing customers with international online and POS payments capabilities, as well as Apple Pay and Google Pay for digital payments, this was not sufficient to meet existing domestic needs such as:

1. Being able to get cash out at supermarkets (requires EFTPOS integration) 2. Being able to receive Medicare rebates (requires EFTPOS integration) 3. Being able to pay bills via BPay (requires BPay integration) 4. Being able to instantly pay to other bank accounts (requires NPP or BEEMIT integration)

There is no mechanism by which a new bank is able to access all of these services without another bank’s existing payments infrastructure being available (e.g. as Up has with Bendigo Bank or 86400 has with CUSCAL) or building direct integrations with each payment system.

Xinja was Mastercard’s fastest global implementation of Apple Pay. By comparison, the speed of integrating with local domestic payments networks is significantly slower and more cumbersome. There are also financial barriers and commercial considerations for the update of newer technologies such as NPP – see below for further details. We also note that a number of these payments systems, i.e. BECS, EFTPOS, BPay, NPP and BEEMIT, are primarily owned by the major banks, and in some areas have dependencies on a number of third parties.

3.9 Barriers to connection / access to the NPP

Xinja does not consider the New Payments Platform to be ‘national regulatory infrastructure’ as it is not owned by the public, but primarily by Australia’s major banks. Xinja’s experience is that the pricing and investment in NPP resilience and capability doesn’t match the promise of how easy it should be to connect to the NPP infrastructure.

Further, the use cases for NPP are currently limited to peer to peer payments, which limits the business case for integrating with the NPP compared to other payment systems with higher rates of usage. For example, cards, government payments, and Medicare are not necessarily facilitated via NPP. Whilst there may be a roadmap to expand the use cases for NPP in the long term, it becomes a less attractive proposition compared to other features that a Neobank can build that can service higher volume customer payment needs. For this reason, Xinja deployed Apple Pay for example, before NPP.

We have found NPP accessibility to be expensive, which is not unexpected given that pricing is on a cost recovery basis rather than to promote widespread adoption. We have been quoted $2m to be a direct member of the NPP, in addition to per transaction fees of 8c for each NPP payment sent or received, (compared to direct entry payments on the BECS system at 4c per transaction sent). When we explored indirect access, we were quoted costs of at least ~$350k plus implementation costs plus year 1 tiered transaction volume-based fees. There is no price regulation for indirect access, nor are there SLAs for implementation of NPP connection. When connecting indirectly there are 4 parties involved at a minimum to implement an NPP connection: an aggregator, the NPPA

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(certification), Bpay group (Osko addressing) and us. Xinja needs to integrate with an aggregator, the aggregator and Osko then need to enable Xinja, NPPA needs to enable Xinja, and then 3 and 4 way testing must be conducted. Unlike other neobanks who are leveraging NPP access already provided by their ADI parents (86400 via CUSCAL and Up via Bendigo), we are investing in building these capabilities and integrations from scratch and would be one few new parties joining NPP after it was created. Indirect access essentially puts us at the mercy of another small participant in the NPP.

We estimate that it may take 6 months to implement as a new player, however we don’t believe it needs to take this long. By comparison it took us 6 weeks it took us to do an implementation of Apple Pay and Google Pay, which also involved 4 parties (Apple / Google, our card processor, Mastercard and us). Uncertainty in delivery timeframes has a disproportionate impact on pre-revenue startups like Xinja.

Recommendation 34

Xinja recommends that the NPP be more transparently referred to as industry infrastructure rather than public infrastructure. The ‘public infrastructure’ messaging creates consumer expectations that this is a service that should be readily available as part of any bank account when it is in fact not. Consumers are led to expect this capability in the same way they expect digital payments (Apple Pay, Google Pay) from neobanks, when there are in fact higher barriers to entry than these global payment rails.

Recommendation 35

The government consider either regulating cost of access and/or providing grants and/or subsidising NPP connection and ongoing transaction costs, to reduce the financial barriers to connection and strengthen the business case for investment in NPP capability. This could be funded from fines issued against banks being re-appropriated to increase competition outcomes for consumers, similar to the UK’s establishment of its Capability and Innovation Fund7 which was designed to promote competition in the banking market.

Recommendation 36

Xinja would support the introduction of SLAs for connectivity to the NPP to provide new participants with more certainty of timeframes for connection and associated business cases to invest in NPP access.

Recommendation 37

Xinja would support direct government investment in the NPP to allow some cost recovery by its existing owners / members, whilst also reducing the upfront and ongoing costs of connection to the NPP for new participants.

3.10 Barriers to CDR Accreditation

Xinja shares the concerns of Fintech Australia that the cost, complexity and certainty of Open Banking accreditation currently fails to provide a better commercial alternative to screen scraping for data sharing. Whilst Xinja expects the availability of accredited intermediaries to reduce such barriers to participation, there are learnings yet from the implementation of the NPP, particularly the commercial pricing structure for smaller players, to maximise participation in Open Banking. In the meantime, the most

7 https://www.fintechfutures.com/2019/02/metro-starling-and-clearbank-win-rbs-fund/

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commercially viable pathway for Xinja to participate in Open Banking is via an accredited intermediary rather than seeking accreditation in the first instance.

Recommendation 38

Develop measures to encourage as many CDR and open banking participants as possible with minimal financial and non-financial barriers to entry; learning where possible from what has and hasn’t worked in the take-up and implementation of NPP.

Ensure that the CDR is easier to access and cheaper than screen scraping. To fully support Fintechs and startups, there needs to be the ability to sandbox, test and validate open banking propositions with minimal investment, alongside developing commercial propositions for becoming accredited.

Recommendation 39

Xinja supports the Fintech Australia recommendation to allow screen scraping for the purpose of testing and validating CDR use cases and data parcels.

4 Thank You

We thank the Senate Committee for the opportunity to respond to this consultation and encourage the Committee to continue to engage both informally and formally, with the broader startup and financial services community. We would welcome the opportunity to meet to discuss our response further, especially in the broader context of opening competition in the Australian banking sector and facilitating increased participation by the fintech sector. We believe Australia could be a global leader in innovation in fintech, banking and financial services and look forward to the Committee’s findings in this area.

Regards,

Van Le Co-Founder

Eric Wilson Founder & CEO

Submitted via email to [email protected]

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