How fintech is disrupting traditional banking
Today, it seems traditional banking faces an existential threat: either adapt to new technologies, or risk losing its customers to its more agile fintech competition.
Of course, technological change has continuously reshaped the finance industry from its inception. Think metallurgical advancements that introduced coins as currency. Think the invention of the printing press that heralded paper money. And think ATMs that changed the way we access our cash, which evolved into today's online banking options.
The latest disruptions may prove somewhat different, however. Tech firms are increasingly entering the banking space directly, offering novel customer solutions rather than simply providing the technology to financial institutions.
Australian consumers are defecting in droves.
Why? Because fintechs offer greater choice, access and empowerment for consumers, and that's a powerful incentive to change providers.
How is fintech shaping the future of banking? As banks work hard to incorporate the new technologies their customers crave, the question is, will it be enough to win back consumers from the growing tide of fintech disruptors? And how much will fintech change the face of the financial services industry?
Read on to discover our take on the current state of play.
Ripe for change: Is fintech a threat to Australian banks?
There's no denying the Australian banking industry has been ripe for disruption for some time. And the power of Australia's big four banks – ANZ, NAB, Westpac and Commonwealth Bank – is undeniable. They control 76 per cent of the banking industry, with their underlying profits equating to almost 3 per cent of GDP. That’s up from less than 1 per cent 25 years ago. That means of every $A100 spent, nearly $A3 goes to the Big Four in profits – or around $A35 billion per year.
Traditionally, lack of competition and regulatory restrictions have made it difficult for new players to crack the industry. This leaves legacy banks with serious market power to determine their own costs.
Before the advent of big data and increased computing power, banks had extensive access to consumer financial information not readily available to new businesses entering the market.
The Big Four still control more than 75 per cent of all bank assets, and banks account for over 90 per cent of all lending by Australian financial institutions.
But – thanks to fintech – that's all set to change and while legacy banks are likely to survive the wave of new technologies, they’ll need to adapt quickly to changing consumer expectations and behaviours to stay relevant.
Who are the major players in fintech?
The 2021 Fintech100 list (powered by KPMG Bank and H2) named seven Australian fintech companies as technological innovators. Three made the Top 50 list.
Fintechs from 29 countries competed to make the top 100, with 42 from the Asia-Pacific, 36 from the UK and EMEA (Europe, the Middle East and Africa) and 22 from North and South America.
Visa, Mastercard and Ant Financial took out the top three spots. Australian companies Airwallex and Judo Bank took 32nd and 33rd places, while Afterpay Touch was ranked 47th.
The emerging category listed four Australian fintechs: Athena Home Loans, Daisee, Slyp and Sempo. All were founded in 2017, making their meteoric rise even more impressive.
Disrupting the status quo: how fintech affects legacy banking
Fintech companies have been highly successful in targeting customer pain points that traditional banks have ignored for far too long.
From phone apps to cashless commerce and beyond, digital disruption is the new normal for consumers. It's changing what banks do, creating a prime opportunity for technology to reshape the finance industry in 2022.
As digitisation changes customer expectations and behaviour, lowers barriers to entry and blurs industry lines, innovative technologies are working hard to understand customers' needs more intimately.
The new era of digitisation empowers customers to chart their own financial destiny, bringing greater access to data, financial tools and advice and personalised finance options. Examples include:
- Payday loans. Fintech is making short-term borrowing simpler and more efficient, with consumers able to access loans in just 60 minutes.
- Peer-to-peer (P2P) lending. Fintech online platforms match lenders with credit-worthy borrowers, offering individuals seeking smaller loan amounts a viable alternative to legacy banks.
- Credit decisioning platforms. Credit-checking platforms can rapidly assess borrowers' financial information and transactional data from thousands of cloud sources to expedite the loan decision-making process and level the playing field.
- Payment platforms as lenders. With banks reducing lending to SMEs, online payment platforms like PayPal have stepped into the breach to offer capital to merchant customers as cash advances.
- Internet giants as digital banks. Online powerhouses like Alibaba are mining big data to understand their customer base and offer higher interest rates on deposits than legacy banks.
- Bitcoin and blockchain. Since 2008, Bitcoin's P2P system for online payments has grown into a digital currency that uses a virtual ledger (blockchain) to track investments. The system doesn’t require a trusted third-party central authority.
- Personal finance management tools. Software-as-a-Service (SaaS) solutions help integrate and streamline value-added solutions into online lending or finance platforms. This gives consumers 24/7 access to a greater range of tools to manage their money.
- Rebundling. Australians lead the world in embracing fintech. After achieving their initial product-market fit, fintech companies are preparing to offer multiple consumer products to create one-stop shops for financial needs. Their promise is to reinvent the traditional banking experience.
So far, legacy banks have been slow to acclimatise to these alternatives, and fintech continues to whittle away at the Big Four’s market share.
But perhaps a leading reason why fintech has been so effective in rattling traditional banks' hold on consumer banking is the erosion of consumer trust in the Australian finance sector.
When the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry revealed its findings in 2019, it lifted the lid on years of industry scandals.
Despite responsible lending rules set down by corporate regulators, in mid-2020, CBA faced hefty fines for alleged misconduct in the sale of pension products. Later that year, Westpac was called to account for breaking anti-money laundering and terrorism financing laws 23 million times.
Most Australians now believe that the banking market is overly concentrated. Three in four survey respondents (72 per cent) say the big four banks in Australia have too much market power.
This mistrust has contributed to industry disruptors gaining a more significant share of the market. They do this by offering an alternative to the conglomerate (alongside lower prices), providing more personalised options and allowing more convenient access to financial data.
How are banks responding to fintech?
A recent Deloitte report suggests Australian banking is at a make-or-break point. The pandemic tested the industry's resilience, forcing it to rise to the challenge of tectonic shifts shaping the sector: increasing digitisation, product convergence, workplace redefinition and the fusion of technologies.
According to IBM, “Innovation is no longer optional but has become a necessity, fundamental to the success of traditional banks.”
However, industry experts suggest first-generation banks are unlikely to survive the fintech challenge unless they embrace one of four business strategies:
- They need to proactively acquire fintech companies and fold their proprietary technologies into their systems and strategies to enhance efficiency.
- They need to invest in second-generation banking start-ups, diversifying their offering to better weather the storm of technological disruption.
- They must engage in strategic partnerships with synergistic tech firms to leverage both companies' expertise.
- They must engage with the fintech community and establish digital innovation labs to promote disruption from within.
Disruption offers traditional banks a well overdue opportunity to diversify their funding sources, improve working capital management, expand consumer services and lower costs.
According to KPMG, the Big Four have been allocating a "reduced proportion of their capital budgets to transformation programs" following the Hayne Royal Commission. This makes it challenging to compete with emerging, more nimble disruptors in the banking space.
Investing and innovating in core operations to keep up with disruptive technologies means Australian banks may need to increase their focus on fintech partnerships to accelerate innovation.
And while fintech companies continue to disrupt legacy banking with new digital options for consumers and more inclusive lending services, they’re also actively seeking banking industry collaborations to maintain their stability.
Perhaps this, more than anything, offers a roadmap as to how banks can best weather the burgeoning fintech wave. The Big Four are already investing a significant portion of the $4 billion annual technology budget to fintechs that can improve customer experience.
The future of fintech in Australia
With legacy banks now starting to invest venture capital in start-ups that promise to make finance better, faster and less expensive, it’s safe to say fintech isn’t going anywhere soon.
In fact, some pundits have suggested Australia is now a fintech nirvana.
The race is on for the Big Four to find the best, most intuitive technologies for selling financial products via smartphone. CBA and ANZ lead the way in building financial ecosystems that include direct investments in fintechs and partnerships that are investing capital in fintech start-ups globally.
Leading Australian players Afterpay and Zip are currently expanding their businesses internationally. And global investment also continues to power fintech exports – as Square's recent purchase of Afterpay for $US29 billion ($A39 billion) attests.
And FinTech Australia estimates the industry has grown from $A250 million in 2015 to $A4 billion in 2021, with that trend set to continue.
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It's probably no surprise then that fintech professionals are currently in hot demand and the skills shortage in Australia is particularly challenging. And that means it's the perfect time to consider a career in fintech.
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