Market inefficiencies

To safeguard the interest of the customers, the Australian Prudential Regulation Authority (APRA) created stringent customer remediation processes for each bank to fulfill before customer onboarding and/or lending activities. However, the big banks incur over US$ 1.8 billion as an annual cost in customer remediation with dedicated 3000+ employees for this process.

This expense cascades to the customers in terms of low-interest rates on deposits and high loan repayment interest charges. As a result, Australian banks are showcasing an elevated cost of banking and bringing in interest rate volatility in the market.

Introduction

The bank’s founding members include Alex Twigg, Chris Bayliss, David Hornery, Jacqui Colwell, Joseph Healy, Kate Keenan, Mal Hiscock, Tim Alexander, where David Hornery and Joseph Healy are Co-CEOs and Alex Twigg is the CIO.
While it was founded in 2016, Judo Bank secured an unrestricted ADI license to conduct full banking operations in April 2019. The bank aims to cater to the funding gap of AUD$ 90 billion between small-medium enterprises (SMEs) and financial institutions
According to Joseph Healy Co-CEO, “one in every four SMEs has been knocked back for bank finance, which means that every year, thousands of SMEs have had their business dreams quashed.”

Judobank’s 2-S framework analysis

1. Scalability

• Growth

According to APRA statistics, Judo Bank has total resident assets of AUD$ 1,512 million and AUD$ 1 billion deposits. It is offering the best interest rates on term deposits i.e. 2.15% for a 5-year term and between 1.80% to 2.10% for other term periods. It also offers the customer a 0.10% loyalty bonus if the deposit is rolls over into a new term after maturation.
Post receiving the banking license, the bank has received over 171 news reports across online, print, and broadcast media, reaching an audience of 11.4 million people. The bank has also named in 2019 LinkedIn top startup list Australia.

• Funding

In July 2019, Judo Bank created history by raising a capital of AUD$ 400 million, single largest fundraising in Australia. Previously, the bank had raised AUD$ 140 million in equity and AUD$ 350 million in debt. The receipts from the funding are to strengthen its SME lending offerings and invest in their technology infrastructure to boost efficiency and compliance.
Post the two funding rounds, Judo Bank is reaching a market valuation of nearly AUD$ 2 billion in 2 years of operation. In addition to that, the bank gets its support from approximately 15 large institutional shareholders, seed capital investors, and employee-shareholders.

2. Strength

• Reachability

Judo Bank’s 2019 SME Banking insights highlight the growing demand for SME lending with 15% of SMEs are desperate for funding, while 25% face rejection by big banks. In addition to that, the trust continues to decline. The report also states that on a scale of one (mistrust) to ten (complete trust), the average rating SMEs gave the big banks has dropped even further following the Royal Commission into misconduct in banking, superannuation, and financial services industry, falling to an incredibly low base of 2.4 out of 10.

These statistics have helped Judo Bank formulate the right strategies to target SMEs in Australia, providing a fertile field to build a growing base of customers with a loan book of over AUD$ 100 million. As a result, in January 2020, the bank announces AUD$ 1 billion deposits, 9 months after receiving its banking license, where 95% of the deposit amount is for SME lending. Further, the bank aims at growing its lending market size to AUD$ 3 billion by 2020.

• Technology infrastructure

The bank leverages the power of Artificial Intelligence (AI) to mitigate the risk of inaccurate information and maximize the ability of human judgment in making lending decisions. Further, Judo bank has collaborated with Temenos T24 to build its SME offerings.

We selected Temenos as our strategic technology partner to help us with our goal to become the most trusted business bank in Australia. Temenos worked closely with us from the beginning, and with its cloud-native digital front and back-office products enabled us to launch fast and with a low-risk implementation. This allows us to cut through traditional bureaucracies and the sales-driven and property-secured status quo to transform the SME banking in Australia through a focus on close customer relationships.
Alex Twigg, CIO Judobank

Additionally, Judo Bank has partnered with InfraRisk to integrate its cloud-based credit value maximizer (CVX) technology with Judo’s infrastructure. This helps the bank enhance risk analytics to support efficiency in customer evaluation and compliance.

With our advanced and mature cloud-based solution, we can help Judo Bank service SMEs efficiently to meet their increasing credit needs.
Nicholas Davies, InfraRisk CEO and Founder

• People infrastructure

The bank has over 150 staff members working across verticals, while Judo has partnered with FINSIA (Financial Services Institute of Australia) to design a curriculum that supports the team’s professional needs. Moreover, Judo bank is continuously receiving applications from business bankers part of major banks due to soaring bureaucracy and obsolete technology that currently exists in these
incumbents.

The number of people who want to join the bank has exceeded our expectations. Never a day goes by when we are not approached by several people looking to talk to us about joining the bank. We are currently employing one for every 15 applicants we are seeing, with 90 per cent from the major banks.

Joseph Healy, Co-CEO

• Banking know-how

Judo co-founders, Joseph Healy and David Hornery have gained multiple years of banking experience from National Australia Bank. The duo identified SME’s were being ‘left behind’ by the major banks. Consequently, as banks prioritized mortgage lending, industrialized their operating models, drove down costs, and fundamentally dehumanized their approach to relationship banking.

To cater to this underserved segment with their banking expertise, the duo along with a small group of colleagues formed Judo Bank. As stated in Judo Bank’s 2019 annual review report, their lending philosophy is underpinned by the principles of 4C’s of credit decisions: Character, cash flow, capital, and collateral.

Actionable lessons learned from Judo Bank

• Identify the pain points in the respective geographic market to serve the right segment of customers rather than mimicking a successful neobank model from another region.
• Partner with the right set of technology and service providers to upscale and improve the existing infrastructure for building an efficient, agile operating model
• Invest in upskilling and reskilling the workforce to create a continuous learning environment and support professional banking qualifications.