Warren Buffett’s Berkshire move brings digital banking to the fore

A $US500m bet by Warren Buffett’s Berkshire Hathaway in digital banking has sparked new investor interest in the sector both locally and around the world.

Berkshire Hathaway’s Warren Buffett has made an investment in the digital banking sector. Picture: AFP

A $US500m bet by Warren Buffett’s Berkshire Hathaway in digital banking has sparked investor interest both locally and around the world in the sector, even as views diverge on how much of a force challenger banks can be.

Berkshire poured the investment into Brazilian digital bank Nubank which, has ambitious growth plans and 40 million customers. It was part of an extended capital raising round that global reports said valued privately-held Nubank at about $US30bn.

The backing of Mr Buffett’s Berkshire, which also has holdings in listed incumbents including Bank of America and American Express, comes at an interesting juncture for the global digital banking sector.

Technology giant Google is teaming up with banks to launch its mooted Plex account this year, and large retailers such as US pharmacy group Walgreens are wading into providing bank accounts.

Steve Weston, local digital bank Volt’s chief executive, said Berkshire’s move to back Nubank would be closely watched by other public market investors as focus shifted from customer growth prospects to whether digital players could turn a profit.

“Having someone like Buffett who public markets typically will be watching … lt may be those sorts of moves that change sentiment,” he said. “They (Nubank) are a serious player and he has invested early, giving plenty of time to prove out the model and clearly has taken the bet that they are … going to take that model into other markets.

“There is no doubt since Covid and maybe even just before Covid, from a global investor perspective, there has been more focus on profitability in the neo banking space.”

Westpac is locally providing banking-as-a-service offerings to companies including Afterpay and lender SocietyOne, while Volt is partnering with mortgage broking group AFG to provide it with banking services and loan technology.

But in Australia, the demise of digital bank Xinja hit confidence in the sector after it completed the return of customer deposits early this year, and gave up its banking licence.

Another player, 86 400, was bought by National Australia Bank this year, as the major seeks to boost its online banking services.

Challenger business bank Judo this month ruled off a rapid-fire capital raising which gave it a valuation of more than $1.9bn, supported by international and domestic investors. The equity raising was Judo’s fifth and it has amassed equity capital of $1.2bn.

Commenting on firms such as Berkshire getting exposure to digital banking, Judo co-founder David Hornery said investors were supporting “well-funded competition” that could drive change in financial services.

“The international markets particularly, but increasingly the Australian market, has a lot of capital that it’s prepared to invest in new financial services or banking business models,” he said.

Mr Hornery noted that while some newer players were making good inroads with services the incumbent banks could not offer, others would not survive.

“A natural part of the growth of a whole range of early-stage businesses in this sector is that some won’t make it, but that’s very much a natural part of start-up businesses,” he said.

Judo may pull the trigger on an ASX listing late this year and expects to post profits for the 12 months ended June 30.

Mr Weston said Volt was considering a sharemarket float in the latter half of 2022, around the time the bank is expected to break even.

“We might be a new-age bank but our economics is absolutely bank, it’s net interest margin driven and I think certainly the larger investors are looking for that,” he said.

Volt’s growth plans and regulatory capital requirements mean it will have to secure capital of about $1bn over the next two years, Mr Weston said.

Volt has appointed well-known businessman and corporate stalwart Graham Bradley to take the reins as chairman, as it seeks to roll out mortgages and attract more commercial partnerships for banking services.

“You are going to see more and more of these big businesses that are going to be offering banking accounts and services through their own environment,” Mr Weston said.

Volt’s Series E raising was expanded to $85m, and is being done at a discounted valuation of $150m. AFG is making a $15m investment as part of the $85m.