For fintech companies to thrive in Australia there needs to be a shift in culture and a change in the way banks look at opportunities. The most successful start-up companies in this sector have been able to balance collaboration and disruption, to offer customers a genuine alternative to traditional providers. At a recent roundtable in Sydney, start-up entrepreneurs came together with venture capitalists and an executive from the superannuation industry, to talk about ways to strengthen co-operation and rebuild trust with customers.
FINANCEASIA: For many years the industry has talked about fintech start-ups disintermediating the core business of banks. Do you believe we have reached a stage where the focus is collaboration rather than disruption?
TRACY WHYBROW: I was at the recent Sibos conference in Sydney and one of the speakers asked about the future for large corporates. The consensus is that large companies need to create propositions with fintechs and build relationships. It is about choosing the right relationship and creating a mutually beneficial partnership between neo businesses and established institutions.
PAUL MCCARNEY: The level of collaboration can depend on where your business is located in the world. Different countries have different regulations, particularly around open banking and open data. Banks have two key assets: distribution and access to customers; and data to help them price assets more effectively. Some governments are now trying to open that data to allow fintechs to access it more effectively. Other governments are more cautious, constrained by what they think about innovation and how to protect privacy. In China there is a huge over-investment in innovation that’s probably to the detriment of individual privacy. In Europe it is going the other way where there is a shift towards greater privacy for individuals. Geopolitical tension is being caused by these regulatory differences. We believe it is possible to solve this with a federated environment where data and application layers are coalesced for all businesses to access. This is where collaboration will really start to flourish.
NATHAN WALSH: The most interesting fintech businesses are often balancing collaboration and disruption to offer consumers a genuine alternative to the legacy banks. For example, Athena Home Loans is giving borrowers a better deal by combining a disruptive digital mortgage platform and a unique funding model connecting to superannuation funds.
FA: This sounds like collaboration also requires buy-in from the regulators. One of the issues for the start-up sector is over-regulation of the market to the detriment of innovation. Where does Australia stand on this point?
MCCARNEY: When I speak to the Australian Competition and Consumer Commission or other regulators, there are concerns about how to manage risk as it branches out from larger organisations to a plethora of smaller organisations. Australian regulators are definitely supportive of start-up innovation through data, having just introduced open banking legislation to enable customers to port banking data between banks and fintechs. The challenge for them is how to appropriately define the detail around accreditation, data handling and use. Regulators are caught between giving consumers better choices while also managing the risk of policy innovation.
ROHEN SOOD: In a market like Singapore the same regulator oversees data privacy and innovation. The Infocomm Media Development Authority has both the Personal Data Protection Commission which looks after consumer data and the Data Innovation Programme Office as paired sub-entities to help strike a balance between privacy regulation and data innovation. In Australia these organisations are separate, and it would be more helpful to the industry if these were under the same umbrella to allow for a better balance. FA: Several of the large banks in Australia now have venture capital arms that invest in fintech start-ups. Tell us more about these alliances.
TODD FOREST: The establishment of these venture capital arms has changed the way banks approach collaboration. In the past, innovation was often fostered by the four banks coming together and developing a product, such as the payments platform BPay, which was ahead of its time. These days, the banks are using their capital to invest in start-up entrepreneurs – people who are running their own companies and are building businesses that move fast and are agile.
SOOD: Three of the big banks in Australia have venture arms. We have co-invested with other banks in a number of companies even though sometimes, we might be competing for the same customers. Investment is easier when it is related to cost-out or industry-wide utility opportunities rather than customer facing ones.
LOUISE WESTERLIND: In Sweden, where I most recently worked with Accenture, the banks have collaborated in a big way by developing BankID, an electronic identification, unique to each customer and used, not only by banks, but also companies and government entities. BankID has been really helpful in setting the stage for new and valuable innovations. One such innovation is Swish, also started by the banks, which is an app initially intended for consumer-to-consumer transactions but now also for consumer-to-business payments. When Swish first launched, there were concerns among the banks about losing business, but over time that discussion has changed. Swedish banks are aware that innovation must be embraced, and there is a need to find ways to work together.
FA: I wonder if this attitude truly exists in Australia. Some would say that the evolution of the fintech sector here has been slow. What are some of the impediments to collaboration?
CHARLOTTE PETRIS: As the founder of a fintech business, I would say that on the surface there seems to be a willingness to embrace innovation by financial institutions. Yes, we’re both in the same industry, we absolutely compete, but we operate in very different ways, reflective of our culture, so the approaches are different. The challenge for financial institutions is embracing a new type of culture, to think in a totally different way. Culture is the biggest hurdle to overcome when we talk about collaboration.
FOREST: The big banks are caught up in processes and chains of command. They aren’t used to operating in an environment that is agile and where the risks are sometimes hard to quantify. I think that is why many banks have set up venture arms or innovation labs. These units are there to bring an outside perspective and to slowly shift the culture.
RON SPECTOR: There is no doubt there needs to be a shift in culture and a change in the way banks look at opportunities. Venture units like ours are there to introduce ideas into the mothership and bring in people who are evangelists for the portfolio. Sometimes it is about partnerships, but it can also be about timing and knowing that banks can have a two-year backlog on technology projects. Our units are there to chip away at the entrenched culture and advocate for taking new risks.
DOMINIC PRICE: There is a risk of getting caught up in the terminology. Disruption, innovation and collaboration are just buzz words that all mean distraction for someone working at a bank who has a million processes to consider. What is required is a deep understanding of why we need to do these things.
SPECTOR: Innovation is very often driven by the need to prop up a failing grows. I remember one instance where we were talking to a particular business unit about a strategic shift in their operations, but they didn’t want to listen at the time because they couldn’t see the benefit. Then we heard that their numbers started to tank and suddenly they were looking for any help they could get to fill those numbers back up. They realised the solution we were proposing could work and they found the funding and the resources to implement it.
PRICE: That sounds like a classic case of reacting to a burning platform. It would be a whole lot better if companies took a proactive approach rather than a reactive approach. Being one millisecond ahead of the curve is infinitely more valuable than reacting when things start to go south. True collaboration only works if there is a genuine commitment to sharing intellectual property so that both parties benefit and the whole venture grows. Most of the time the focus is on what one party can win over another and this only creates friction.
PETRIS: This genuine commitment to sharing requires a lot of trust between parties.
FA: On the topic of trust, there has been a significant loss of trust in financial institutions in Australia following revelations from the Royal Commission into misconduct in the sector. What do you think the big institutions can learn from fintechs when it comes to building trust with customers and keeping it human.
WALSH: The Royal Commission has revealed how the legacy players have been broken by their complexity. Successful fintechs bring a single-minded focus on genuine customer needs. Athena’s mission is to make the journey to home ownership faster, cheaper and stress-free. We have designed Australia’s best home loan experience, enabling a refinance in as little as 15 minutes on your mobile, combined with great rates and exceptional service.
PETRIS: Our focus is on purpose ahead of profit. The only way we can achieve this – and the most successful fintechs all do this – is to put the customer at the heart of everything we do. Financial institutions have made one fundamental error – they stopped putting customers at the core of their decision-making processes. Fintech companies have been able to step in and address this.
PRICE: Start-ups don’t survive unless they are obsessed with making customers happy. Atlassian is now an established business but our focus is still on growing customers – not so we can show bigger numbers, but because customers benefit from interacting with our products and we want them to do well.
MCCARNEY: Focusing on the customer experience is what new and nimble companies do well but ultimately a business is only as strong as its ability to grow and attain market share. In the current banking environment, the cost of capital is still a lot cheaper for the incumbents than for new businesses like Athena. Sure, we may have lost some trust in the big banks, but the funding markets don’t reflect this. The transition to a time when the cost of capital is level for all players – large and small – will take time.
SPECTOR: Another element of trust is finding new non-bank lenders that can survive through a downturn. We need businesses that foster a spirit of trust with customers and are scalable, but we also need businesses that can weather market cycles. Right now, the market is trading well and funding for start-ups is fairly abundant. When the market turns, access to capital can dry up quickly and we don’t want a situation where we have a bunch of neo-lenders that can’t lend anymore.
FA: Could Australia’s superannuation market – which now has assets of A$2.7 trillion ($1.984 trillion) – be a future source of direct capital for start-ups, and maybe even a future source of credit for the loan markets?
WALSH: The scale and growth of superannuation is a strong advantage that Australia has over other global markets. The superannuation system is growing much faster than the stock market and the banking system – on a path to exceed $3.675 trillion over the next decade. Fintechs can play an important role in optimising this system to diversify funding sources for credit markets like home loans and corporate lending. And Athena is leading the charge.
PETRIS: We have been successful in leveraging Australia’s unique superannuation market on our funding journey. Early investors in our marketplace were direct super investors but as we have grown, we have secured larger, more long-term sources of funding. Superannuation funds make great partners because it allows them to diversify their existing portfolio and gives us more flexibility around what we can offer to our customers.
ROBERT CREDARO: The market is evolving fairly quickly. Most superannuation funds invest in start-ups via third-party venture capital funds, but a few are now developing an ability to co-invest in more mature early stage companies, essentially by providing growth equity funding. These steps need to be well thought through as it requires additional internal resources to evaluate and manage, as well as the governance arrangements to support such investments. As far as becoming a provider of credit funding for fintech start-ups, several funds are also taking initial steps in this direction, usually by participating in syndicates alongside the banks, in general lending arrangements to corporates, and in relation to specific asset backed projects. Whether Australian super funds will one day lend into the mortgage markets through disruptors, as you see pension funds in the Netherlands doing, remains to be seen as this is a more competitive market and one where the banks’ cost of capital and funding arrangements may produce a greater competitive challenge for new entrants.
FA: What about the challenges posed by the arrival of global tech giants like Amazon in the Australian market? How will this impact the local sector?
SPECTOR: These big companies can have a huge impact on local businesses. The likes of Alibaba, Ant Financial and Tencent through WeChat will eventually make their way to Australia. These companies own customers, they own data and they own platforms that they can push almost anything through. This makes them a real threat.
TONY HOLT: I agree that this lateral competition probably poses more of a challenge to local fintechs than trying to compete with traditional banks. Many of the world’s most successful online financial services companies started their lives as something totally different. They started by offering a product and then found that providing the finance to go with that product was a good proposition. For example, ride sharing companies that became the largest financial services players in their particular market.
FA: Thinking about large global companies like Alibaba and Facebook also brings up the topic of privacy. How can start-ups balance the need for security and privacy while also relying on big data to drive their businesses?
NATALIE NGUYEN: There is a lot of talk about privacy and the internet but there isn’t a lot of education about what privacy means and what actually happens with the data that companies collect and how many people handle that data. More than 60% of credit applications in Australia are still being handled manually through traditional channels and yet there doesn’t seem to be any concern about privacy or data leakage in this area. Full automation of this application process would actually improve privacy in my opinion. We need more education in the marketplace about what data needs to be protected for privacy reasons and what data can be aggregated and shared.
WHYBROW: For many people the platforms we use are so complex that it is almost impossible to choose the right privacy settings. We are entering an era where this is going to become more of an issue for individuals and we might get to a point where people start to turn off their applications because they can’t get comfortable with their privacy being protected.
SOOD: Consumers tend to make a trade-off between privacy and utility, certainly in our younger generations where they are so familiar with sharing via platforms that they don’t even think about what is happening with their data. Open banking is predicated on user consent, and there is a danger it can be sought from people who think their ability to access the service, or qualify for a loan, is dependent on sharing personal information.
WALSH: The launch of a legislated Consumer Data Right will deliver huge benefits for consumers, ensuring security and privacy are key to giving Australians control of their data. But in my opinion, the greatest cost to consumers is that they don’t have control over the data that would help them to make better decisions. In the mortgage market, consumers pay A$10 billion a year more than they should in rates and fees because they don’t control the data that would simplify a switch to a more competitive loan. Today loyalty is not being rewarded. Open banking will unleash real competition.
FA: Who has ultimate responsibility for protecting data – is it the consumer, the company collecting the data, or the regulators?
PRICE: Everyone has to take responsibility. At Atlassian we have a golden rule that we don’t screw over our customers. We host data for 130,000 active customers and we need this data to drive the analytics and product innovation that our customers want. But we also have a responsibility to protect that data. This requires having all staff on board with our values because when a data breach occurs in a company it is usually due to human error rather than a technology failure. If data protection is not a core value you start to make very weird decisions in your business. Privacy and consumer rights can’t be just a line item in a customer contract.
WESTERLIND: Data protection can become a reputational liability for banks when they partner with third-party providers. If a data breach occurs as a result of an error made by the provider, banks may take the blame for the breach. Customers don’t differentiate, and banks need to prepare for this situation.
FA: What is the biggest challenge facing technological innovation, and the future for start-ups, in Australia?
PRICE: I sometimes think there isn’t enough hunger in the Australian market to grow big tech companies and we have become complacent with our good economic fortunes. Of the top 10 companies on the Australian Securities Exchange there is one telco that could be considered a tech company, and even that is a stretch. I would like to see a situation where in 15 years we have a new export market in fintechs.
WHYBROW: We talk about innovation and I hear Australian banks discussing how they might meet the challenges posed by the arrival of the big technology firms but I don’t see them doing a great deal to lead a charge against these potential new market entrants. We need our corporate leaders to be thinking about truly break-out strategies.
PRICE: This will not happen while companies are focused on protecting existing funding streams at the cost of innovation. We have to remember that Blockbuster invented streaming before Netflix but they killed the idea internally because they worried about it eating into their late-fees revenue. The average tenure of a CEO in Australia is 10 years and they are not incentivised to break new ground. There is no reason to put their necks on the line to invest in long-term technologies.
SPECTOR: The venture capital market in Australia is at an interesting point in its evolution. Ten years ago there wasn’t much activity and global funds were not investing here. In the past five years this has changed significantly and big global funds are flying in to invest in companies like Atlassian, Canva, Airwallex, Athena and Culture Amp. Now we have a bunch of entrepreneurs who are bringing a global perspective to the market.
HOLT: We need to celebrate our successes more often. We are underplaying who we are and what we can offer. We are at a tipping point where consumers are demanding a different approach to service and product delivery. Innovative companies that are underpinned by a clever tech platform will be the ones who can meet that demand.
Originally published in Finance Asia.