A$.$ BACKGROUND

Traditional banks are being challenged by new entrants or neobanks, as well as non$-$bank providers of financial

services such as fintech's and payment platforms. In November $2023,$ Elon Musk announced broad plans to

turn the X social media platform $($formally known as Twitter$)$ into a 'super$-$app' such as AliPay or WeChat. Following is an extract from a recent news article:

Elon Musk gives X employees one year to replace your bank

Elon Musk wants $x$ to be the center of your financial world, handling anything in your life that deals with money. He expects those features to launch by the end of $2024,$ he told X employees during an all$-$hands call

on Thursday, saying that people will be surprised with "just how powerful it is$.$

The news was received with concern from some banking executives fearing competition while some analysts

raised fears for the established 'world order' of bank regulation. Others still saw it as being similar to Big$-$ Tech's creation of super$-$apps facilitating payments across many services as had been done in China by Alibaba in the Alipay digital wallet, for example.

Your role in this assessment is that of an analyst examining various aspects of the implementation Elon Musk's idea and some related questions. While the proposal is to dominate the global financial services industry, you are to restrict the scope of your analysis to its implementation in Australia as an example, since we have learnt in this course that banking regulations affecting individual institutions operations are typically enforced domestically.

In your preliminary research, you have done some background reading on fintech driven new entrants into banking services. You have also established the process of applying for appropriate licensing to offer banking$-$related services in Australia and come across the "Licensing guidelines for authorised deposit$-$taking

institutions" published by the Australian Prudential Regulation Authority $($APRA$).$

You have discovered that the key matters that APRA will need to be confident that an applicant can satisfy are: financial soundness; the ability to manage risk effectively; the fit and proper expectations for key persons; a sound risk culture $-$ both conduct and financial; the ability to satisfy prudential requirements; public protection $-$ that the applicant does not pose a risk to the safety of the depositors' funds or the stability of the financial system.

Question $1.$ Based on your understanding of the APRA licensing requirements, describe what you imagine to

be the type$($s$)$ of organisation$($s$)$ that Elon Musk should seek to register in Australia to fulfil the ambitions of

his proposal without reliance on any other bank. Your answer must specify the types of licence$($s$)$ that would

be required and enumerate examples of the services they would cover.

Question $2.$ In reality, to fulfil X$\text{'}$s super$-$app ambitions in Australia, the proposed financial services operation

may need to collaborate with other licenced commercial banks. Briefly discuss three examples of operational

risk that a bank working in partnership with $x$ would be exposed to$.$Your answer should make clear the

sources of such risks.

Question $3.$ Assume that Elon Musk succeeds in registering a digital bank in Australia with the followingbalance sheet $($in millions$),$ with risk weights in brackets and no off$-$balance$-$sheet activities yet.