The Commonwealth Bank of Australia (ASX: CBA) share price has been under pressure over the past two years due to the fallout from the 2018 Royal Commission, which highlighted bad practices and allegations of misconduct. At the time of writing, CBA's share price is $81.83.
Now the big four banks are facing another threat to their business – 'neobanks', a new digital-only way of banking that has no legacy systems or branches. According to the Australian Financial Review (AFR), several of these neobanks have already applied to the Australian Prudential Regulatory Authority (APRA) for full banking licences.
It could just be a matter of time before customers start to make the switch.
Neobanks have a clear target in mind: millennials. Appealing to them with their mobile apps, high introductory interest rates and low costs, the eventual goal is to gain market share in what APRA identifies as a $1.7 trillion home loan market.
The AFR reports that these dynamic start-ups are aiming to provide customers with a more "interactive, intuitive and transparent online experience". If these neobanks qualify for the $250,000 government-funded Authorised Deposit-taking Institutions (ADIs) guarantee (whereby the Australian Government guarantees deposits up to $250,000, should anything happen to the institution), there's a chance that many customers could give neos a try.
Is the CBA share price at risk?
The traditional banking model in Australia could be under threat following the introduction of neobanks. People's belief in the banking system is already shaky, with many customers showing distrust in the big four banks, including Commonwealth Bank.
So, what does this all mean for the big four banks?
It's hard to say definitively, as it will take time to see the full extent of the neobanks' impact, however, this new category of competitor does represent some risk for banks.
We saw a similar pattern with consumer-friendly home-loan start-ups in the 2000s. Companies like Aussie Home Loans shook up traditional institutions, until the 2008 global financial crisis caused many to collapse.
The difference now is that neobanks can learn from these businesses. Currently, neos are offering limited products to specific audiences.
Competition is normal – it's not something shareholders should fear. Some businesses even thrive on it and improve themselves in the long term. However, the extent of the neobanks' impact all comes down to whether the consumer will trust these start-ups or stay chained to the traditional banking systems.
Foolish takeaway
For those already holding CommBank shares for their above-market dividend yield, this isn't a sign to sell, but it is something to think about.
In good news for shareholders, the neobank market's relatively niche audience, with specific products and demographics, means your holdings in any of the big four banks won't become worthless overnight.
And the banks won't be taking the news of a new competitor laying down. CBA is already combatting this by investing $5 billion over 5 years to deliver a more interactive experience for its 5 million daily logins.
While it's still far too early to make a call about how Commonwealth Bank shares will fare based on this news, investors should keep an eye on the rise of neobanks.
