The Australian banking sector used to be dominated by “the big four” banks—ANZ, Commonwealth Bank, National Australia Bank, and Westpac. Competitors were prevented from entering the Australian market through significant entry barriers such as exclusive access to payment systems, non-transparent pricing, and oligopolistic practices, allowing the big four banks to enjoy some of the highest profit margins in the world.
This changed when the global financial crisis of 2007-2009 put heightened public scrutiny onto the big four banks. This scrutiny intensified after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry unveiled numerous scandals in 2019, including money laundering and customer mistreatment. In response, the Australian Prudential Regulation Authority (APRA) took decisive steps to lower entry barriers to foster competition and enable innovative new players to enter the market. This directly resulted in APRA granting four new banking licenses to start-ups in 2019.
One of the four licenses went to Judo, a fintech start-up founded in 2016 that focused on Small and Medium Enterprise (SME) lending. When Judo was granted its banking license and became Judo Bank, it was operating in a financial services landscape dominated by a push towards minimizing operating costs via self-service technologies. This approach reflected a broader industry trend of banks adopting an asset-based lending model, offering standardized loans based on the availability of assets that could be used as a collateral for the loans. This approach neglected the unique needs of many SMEs which for example, often had positive cash flows and growth potential but little assets to offer as collateral.
By contrast, rather than focusing on standardized asset-based lending to increase operational efficiencies, Judo Bank dedicated more time to personal interactions between bankers and customers to better understand individual customers and their circumstances so that they could provide them with tailored banking solutions. Judo Bank was doing well with this approach. By the beginning of 2020, Judo Bank had successfully raised about AUD540 million in investments and secured substantial debt facilities from lenders such as Credit Suisse and Goldman Sachs.
Its moment to shine, however, came when the COVID-19 pandemic hit. When an unprecedented number of SMEs were suddenly affected by border closures and lockdowns, and with the global economy coming to a grinding halt, Judo Bank was uniquely positioned to help. Based on the legitimacy Judo Bank had already gained through major investments and debt facilities, the Australian government singled out Judo Bank—not one or more of the major banks operating in the Australian market—as the first recipient of its SME funding scheme. Judo Bank received an additional AUD500 million from the Australian government, and other investors followed. This propelled Judo Banks meteoric rise, providing it with an unparallelled SME customer base and a valuation of AUD 1.9 billion by June 2021.
This case illustrates that external enablement can set in gradually and allow start-ups to prepare for it, such as when Judo Bank entered the SME lending market in the lead-up to the release of the Royal Commission outcomes which resulted in regulatory changes and paved the way for it to become a bank. However, it also shows that external enablement can set in suddenly and unexpectedly, as when the ravaging COVID-19 pandemic created surging demand for Judo Bank's market offering and cemented its raison d’etre in the Australian banking landscape. The case also provides an interesting illustration of how a combination of a) intentional and predictable enablement (deregulation), b) unintentional and unpredictable enablement (the pandemic), and c) strategic action (capturing the underserved SME market) can lead to business success.