The globalisation of fintech - the Australian example (part 2)

 Sarah Kocianski photo
Sarah Kocianski Head of Competitor Strategy
5min read

In her latest column for Forbes, 11:FS Head of Research Sarah Kocianski returns to one of her favourite topics: the Australian fintech and challenger bank market.

In my previous blog post I outlined how the Australian fintech ecosystem was developing by watching and learning how it had been done elsewhere. In this post, I take a look at what’s next for the industry.

Open Banking

In keeping with their habit of looking at what’s been done elsewhere and speedily replicating it with improvements, the Australians decided to implement Open Banking but on a grander scale.

The Australian Consumer Data Right Bill (CDR) aims to give consumers access to and the ability to transfer their personal data to third parties, and banking is just the beginning. Not only will it include more types of financial product than seen elsewhere - eventually it will cover mortgages, loans and investments - it will eventually go even further to include telco and utility data.

The first big phase of CDR will require the big four banks release APIs that give access to credit card, transaction and deposit account data by February 2020.Three of these banks are already up and running to some extent (the initial implementation date was July 2019) although it’s too early to tell with what success.

The general consensus however is cautiously positive; fintech leaders see the potential it offers and are confident the industry can learn from mistakes elsewhere. The major hurdles remain, as with open data programs elsewhere, consumer awareness and concerns over data security — although there are learnings to take in these areas as well that could give Australia a smoother ride to open data for all.

Fintech leaders see the potential it offers and are confident the industry can learn from mistakes elsewhere.

The British have arrived

When it comes to consumer finances, the Australians and the Brits are very similar, according to Steve. His own bank, Volt, has borrowed a number of ideas already implemented by the UK neobanks, which it believes will also suit Australian consumers.

Up and Xinja also have features that will prove familiar to users of Monzo et al, although it should be noted that they, and Up in particular, have products and services unique in the neobanking market as well.

That’s inspired a number of UK fintechs to look to Australia for expansion. P2P lender Ratesetter, founded in 2009, opened a subsidiary in the country back in 2014, and business lender ThinCats made the leap the same year. Anthony Thomson, founder of UK banks Metro and Atom, is partly behind 86 400, having decided he can take what he’s learned in the UK and apply it in Australia. Most recently, Revolut launched in public beta in June 2019 and there are likely more to come.

The UK and Australian governments have established a Fintech Bridge which aims to make it easier for firms to move expand across both countries which will add to the incoming flow of Brits. The UK Department for International Trade (DIT) has also brought delegations of fintechs to Australia with the aim of showing them the opportunities that exist in the region and introducing them to key contacts such as regulators and investors

VCs are too small in Australia to provide the high levels of funding these businesses need.

While these developments are good for the British fintechs, they may not be quite so beneficial to the Australians. The UK fintech scene is very crowded, so gaining traction in the market may prove difficult for Australian firms. At the same time, the Australian market is still relatively nascent, which may mean British firms with more experience and resources behind them can get a firm hold in the country at the expense of domestic firms.

The inflow of overseas firms isn’t going to stop any time soon, indeed Australian regulators are encouraging it, so it’s to be hoped that this increase in competition spurs domestic firms on and they up their games in response.

The Australians are leaving (sort of)

At the same time as overseas fintechs are moving into Australia, some domestic companies are moving out on the basis they feel they have more chance of succeeding elsewhere.

The major reason is the struggle to access capital, according to Andy Taylor, Founder and CEO of Financial Wellness platform Douugh. The firm (which remains headquartered in Sydney) moved to the US, where it is now live, ahead of an Australian launch coming soon. VCs, a dominant source of funding for fintechs in Europe and the US, are too small in Australia to provide the high levels of funding these businesses, need, says Taylor.

That hinders growth, and while Australian firms do have the option of listing on the ASX, that’s not an option for all. It’s worth noting that Taylor has high praise for the ASX, viewing it as a great way for Australian tech firms to access growth capital, particularly if they are expanding abroad.

The lack of available large partners also encourages startups to look for a new home.

Another reason to leave is that the talent has already gone, suggests Pym. The size of the market and relative lack of opportunities for those wanting to work in the sector, along with the fact that for many Australians moving to the UK or Europe is relatively easy, means the outflow of talent is high and there is a smaller pool from which to replace it.

And finally, the lack of available large partners also encourages startups to look for a new home. Having relocated to the US, Douugh now works with Choice Bank. The Australian banks all have investment arms, and some have innovation labs or similar programs, but they are only just coming around to the idea of a two-way beneficial relationship, which is far too late for the early innovators. In the US on the other hand the idea that a licensed bank sits in the background while the fintech interacts with the customer, avoiding any clash over the customer’s primary point of contact, is widely understood.

Opportunity spaces - pensions and mortgages

Innovation in pensions and mortgages has been slow in Australia, as almost everywhere else, but activity here is starting to heat up.

When it comes to pensions, Australians are more aware of their retirement savings than citizens of many other countries thanks to compulsory employer contributions having been in place since the early 1990s. That said, most still use the provider recommended by their employer and pay little attention to the idea of switching funds or aggregating them if they have more than one.

Positive movement has started in this space, with a number of fintechs gaining traction, and the financial services industry body, theFSC, encouraging the development of “retiretech”, but Australia has a real opportunity to charge ahead and be a global leader in this space.

There are huge opportunities in the mortgage industry as home ownership is high and the property market is relatively strong.

In particular, the domestic neobanks have a chance to differentiate themselves here as they likely understand the nuances of the Australian retirement market well. They could partner with specialist startups in the space, or even look to build their own solutions.

There are also huge opportunities in the mortgage industry as home ownership is high in Australia and the property market is relatively strong (despite recent dips). The four big banks have historically dominated the space, but there are signs that is starting to change — only 24% of new loans to owner-occupiers in the last six months were settled with the incumbents. That’s partly due to recent changes in rules around mortgage broking which came off the back of the Royal Commission, but is also helped by the encroachment of startups in this space, in turn spurred by borrowers’ dissatisfaction with the typically slower, more expensive big four. Australia’s smaller mutual banks, building societies and credit unions have a huge opportunity to bolster their presence in this space too.

So what?

The Australian fintech ecosystem is an excellent case study in the “watch and learn” strategy of government and regulator fostered fintech development. Everything from regulation to branding, and consumer behaviour to industry structure has been borrowed from elsewhere (largely but by no means exclusively the UK). Mistakes have also been noted, and strenuous attempts to avoid their repetition have been made.

So far, this strategy has been relatively successful in establishing a strong base on which a fintech ecosystem can flourish. To ensure that continues, efforts must now be made to encourage more country-specific tactics, particularly when it comes to funding structures, business models and more local expansion. In turn, that should reduce company and talent flight, encourage more overseas investment and help a unique and diverse industry grow.

And if they can solve the consumer awareness and security concerns surrounding open data and API usage, then they will become true world leaders.

For more insights on the major trends on global financial services and fintech, visit 11:FS Pulse.