“Challenger banks don’t need to become a ‘fifth pillar’ to serve the Australian community,” Ms Waterford said.

“Their existence alone can force incumbents to up their game.”

The speech comes after APRA granted the Xinja neobank an authorised deposit-taking institution (ADI) licence in September.

Xinja joined Volt and 86 400 as some of the first neobanks to be given unrestricted ADI licences in Australia.

The popularity of neobanks surged following the Hayne royal commission, with startups promising a more transparent process and lower costs due to their lack of brick and mortar branches.

But popularity might not necessarily translate into profitability. While neobanks are growing, it remains unclear whether they will be able to take a significant share of the market from the big four.

“It’s easy to be lured by a new website, heavy marketing, new account discounts and a promise of offering something different,” Morningstar analyst Nathan Zaia wrote in a report in September.

“But history has shown it can be extremely difficult to build requited scale to run a profitable and sustainable bank.”

While the prospect of full-scale disruption remains low, Ms Waterford was optimistic that neobanks would remain a strong presence in the Australian financial landscape.

“APRA would like to see a steady stream of serious ADI licence applicants that enter the market and 10 years later are still there, large enough to be significant, competing hard and providing innovative solutions to Australia’s financial needs.”

Ms Waterford also warned that up-and-coming neobanks shouldn’t underestimate the unique challenges presented by the banking industry, from technology and expertise requirements to the need for a clear funding strategy, saying “optimism is not a capital management plan.”

“Take a pragmatic approach and raise what you can, when you can, at a price investors will accept,” she said.

She also touched upon the need to bring products to market as quickly as possible.

“If that means scaling back your ambitions regarding product range so be it,” Ms Waterford said.