This week, Australians voted for Scott Morrison, the conservative incumbent. The result surprised everyone: the opposition Labor Party seems to be on the right side of burning issues such as climate change and cleaning up a corrupt banking system.
But Australians preferred caution, and promises of a tax cut, to promises of bold change.
Might the same fate await the country’s digital banks as they begin to swing into action?
Yes, warns Moody’s Investors Service, in a new report on Australia’s banking sector, written by senior analyst Daniel Yu.
Despite promising tech-driven challengers to segments from mortgages to lending to small businesses, fintechs face constraints from regulation and limited access to funding. Meanwhile Australia’s Big Four consumer lenders (ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac, which together account for over 80% of deposits) have the technology budgets to improve their digital offering.
Regulators have been fintech-friendly, and paved the way for digital banks to get licensed and access new open-banking infrastructure.
But now the pendulum is swinging back to increased oversight of digital banks. The securities regulator has tightened scrutiny of “buy now, pay later” services, which serve as consumer-finance alternatives to bank credit cards. These fintechs have grown rapidly because they’re not subject to consumer protection laws and have tech that enables people to sign up within minutes. Banks are both regulated, and still require paperwork to apply for a credit card.
The Australian Securities and Investments Commission is taking a closer look at rising indebtedness among fintechs’ users, however. ASIC has also begun cracking down on fintechs providing unsecured loans to small businesses, demanding more transparency and reporting.
The implication, says Moody’s, is that fintechs and digital banks can expect less leeway in avoiding traditional bank compliance requirements.
…and few deposits
Moody’s also suggests funding limits will crimp digital banks’ ability to mount a serious challenge to incumbent banks’ lending businesses. Most startups rely on founder or VC money, or on crowdfunding equity. Equity is expensive and valuations depend on investor confidence.
This is why digital challengers such as 86 400, Volt and Xinja have acquired or are getting bank licenses, which lets them take deposits. Moody’s says it will be difficult for them to lure deposits from incumbents without paying higher interest rates. (See our recent story on 86 400’s raising funds to meet such expected costs.)
Added together, says Moody’s, digital challengers have not been tested by an economic downturn, and no one really knows how long their business models will take before turning a profit.
Moody’s accepts the argument that mobile banks can use superior technology to risk-manage their loan books more quickly and accurately than an incumbent, but suggests the Big Four lenders can do the same – particularly as they join the New Payments Platform, giving them real-time access to payments data. (A point made by a banker to DigFinlast year.)
Moody’s also notes three banks have also invested in “beemit”, a Zelle-like mobile app for consumer-to-consumer payments.
While some banks have either backed, or partnered with digital challengers (such as Bendigo Bank and Macquarie), the Big Four lenders are investing in technology to reduce their brick-and-mortar footprints, manage risks, and cross-sell products via mobile.
The Big Four have also entered partnerships with U.S. Big Tech companies like Google and Apple for payments, and CBA has a tie-up with Ant Financial to support Chinese visitors’ use of AliPay in Australia.
Moody’s arguments are the same ones that large banks have given DigFin. Digital challengers are confident that their superior technology, nimbleness, light cost base and (they hope) awesome customer experience will help them make a dent. Australians have proven themselves conservative at the polls. Will they vote the same way with their digital wallets?