Australian neobank Judo secures $247 million in Series B funding

Judo's AU$400 million ($272 million) raise values the digital lender between AU$1.5 billion ($1 billion) and AU$2 billion ($1.4 billion), per The Sydney Morning Herald. The round brought new investors, including Bain Capital credit and Tikehau Capital, along with existing backers like OPTrust and the Abu Dhabi Capital Group, reports Finextra.

In total, Judo has raised AU$540 million in equity funding, marking the largest individual private funding for an Australian startup, per the Herald. Judo has also secured $450 million in two debt financing rounds from Credit Suisse and Goldman Sachs.

Here's what it means: Judo's latest round is evidence that Australia's neobank ecosystem is set to catapult into the country's mainstream.

Judo only launched a year ago aiming to bridge the small- and medium-sized business (SMB) lending gap. Australian SMBs, like in other countries, are significant contributors to employment: They employ around 5 million people, or about 20% of the country's 24.5 million population.

While these firms are vital to the country's economy, SMBs have had a harder time accessing financing in recent years, per the Reserve Bank of Australia (RBA), equating to an A$80 billion ($58 billion) funding gap, per Judo. This gap likely explains why Judo's SMB-focused platform has caught on quick: It's on track to lend AU$1 billion ($678 million) by the end of this year, per the Herald.

And regulatory change in Australia is enabling the likes of Judo to compete with the country's established lenders. This year alone, the country's financial watchdog, the Australian Prudential Regulation Authority (APRA), has granted full banking licenses to three neobanks: Volt, 86 400, and Judo.

These licenses enable neobanks to compete against Australia's established lenders, especially because they allow fintechs to guarantee consumer deposits as incumbent institutions do. As well as granting these players licenses, the country has started onthe road to open banking as it looks to stimulate competition in the sector.

Australia's big four banks — ANZ, Commonwealth Bank, NAB, and Westpac — collectively control around 95% of the banking market on the country, per ZDNet. This dominance has been damaging to the country's consumers, according to research by Australia's top economic advisor, according to Reuters. And in recent years, amid a slew of financial misconduct within the sector — like charges being levied against accounts of deceased consumers — concerns have become especially acute, per the outlet.

The bigger picture: Australia is the latest geography neobanks are flourishing in, and these players would be wise to learn from the experiences of their peers in other countries.

While Europe, and the UK in particular, have been at the forefront of the neobank movement — we're now seeing players crop up across the world. A number of players from the UK have gained substantial traction, millions of customers and investor capital, with many now beginning expansion into new territories like the US.

Judo's mega-raise, which comes a week after Brazil-based Nubank closed a $400 million round, is evidence that the neobank segment is gaining traction around the world. However, European neobanks have also had issues, with the likes of N26 and Revolut finding themselves on the wrong side of the law.

For some, the consequences have been existential: For instance, yesterday we reported UK-based Ipagoo entered into administrationfollowing an order from the UK's financial watchdog to halt regulated activity. While Australian regulation is increasingly facilitating the growth of neobanks, these players should ensure they don't skirt regulations for the sake of growth.

And avoiding bad press that stems from regulatory issues is especially critical in Australia, as consumer inertia is already higher than in more competitive markets. Any negative perception could extinguish consumer desire to switch from an incumbent.