Australian FinTech
How policy is shaping the FinTech Landscape
Australian FinTech is booming as Australians are both digitally and financially literate with a banked population of nearly 100%. According to the KPMG FinTech Landscape of 2020, there is now a total of 733 active fintechs up from 629 in 2019. Key insights of KPMG FinTech Landscape 2020 include:
- An increase in the lending category, both consumer and SME lending, together with an increase in Buy-Now-Pay-Later providers;
- Growth in blockchain and cryptocurrency-associated fintechs;
- The evolution of the neobank sectors (neobanks are direct banks that operate exclusively online);
- The maintained momentum of insurtech (insurtech is short for is insurance technology, such as data analytics that personalise insurance policies);
New Policies
Assistant Minister of FinTech, Jane Hume, disclosed an additional $800 million was added into FinTech-related initiatives in this year’s budget. In addition, the Government has launched a world-first platform, the Consumer Data Right, that allows consumers to authorise the transfer of their data to a secure third party. This third party acts as a competing provider to enable consumers to switch to the best products and services, such as a credit card or a phone bill, at the best value for money. This increased competition may encourage more market participants, challenging the status quo, especially in the banking sector. According to PwC, more than 20% of financial service businesses are at risk to FinTechs by 2020.
The next shaping policy is the launching of the new FinTech Regulatory Sandbox which allows FinTech firms to introduce a new product into the market for up to 24 months before needing to apply for credit licenses or financial services which can be complex and costly for a start-up to obtain. However, this may pose greater risks, especially in the Buy Now, Pay Later (BNPL) space. Grant Halverson, CEO at McLean Roche Pty Ltd points out that BNPL is highly unregulated.
“Regulators ASIC and the RBA have declined to act, while Liberal politicians have publicly stated these tech start-ups should not be ‘stifled’ by regulation. The key question is who [will absorb] the risks?” — Grant Halverson
Red Flags
The National Consumer Credit Protection Act 2009 (NCC) doesn’t apply to certain types of loans, which includes “low-cost short-term credit less than 62 days.” In reality, these companies have “very high” and “bad debts” averaging an absurd 30% of revenue, with late fees that convert to an annual percentage rate of 68%. Here are the stats: Australian BNPL apps have revenues A$891 million, receivables A$1.76 billion, bad debts A$262.5 million (30% of revenues) and accumulated losses A$396 million and counting.
Additional red flags include the fact that BNPLs don’t typically assess consumer ability to repay and most don’t use the credit bureau for new applications, nor do the majority report payment defaults to credit bureaus. Furthermore, the recent failure of Xinja bank has sparked some debate as to whether neobanks will be the leading FinTech disruptors as regulators will need to crack down on deposit-only business models. Xinja offered no loans (assets), with which it covers its deposits (liabilities). Xinja burnt through shareholder money to pay for high interest rates on deposits.
Green Flags
It will be interesting to see other products evolve aside from lending and neobank products. In terms of consumer-end products for large audiences, wealth tech and capital markets are set to rise in popularity due to more retail investors entering the market and the younger generations being more tech-savvy.
In terms of products for more a niche/smaller consumer base, the development and adoption of data analytics and blockchain are likely to grow exponentially. In the next few years, a wide set of adoption of both will most likely take place across most fintech products. A personal favourite to look at is Perth-based company Power Ledger. They have created an operating system for new energy markets using blockchain technologies, enabling people to trade renewable energy and environmental commodities. This is truly transformative, a notable spectacle to witness in the forthcoming years as such projects get adopted on a much larger scale.
