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The globalisation of fintech - the Australian example (part 1)
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.
I have been watching the development of the Australian fintech ecosystem with interest for a long time. When I lived there 10-ish years ago, the banking system felt so behind that of the UK it was exasperating and there were practically no alternatives to the major high street banks.
Fast forward to today, and I’m pleased to report the situation has improved. That’s in large part thanks to a national strategy of “watch and learn”, whereby the Australian industry (including government and regulator) has observed fintech ecosystems develop in other jurisdictions and cherry picked the most successful elements to implement at home.
The new banks have arrived
As I’ve covered before, a new licensing structure brought in last year has resulted in a wave of banks launching in Australia in a pattern very similar to that seen in the UK. While none have banking products in the hands of customers, yet, brand new banks Volt, 86 400 and Judo are all in possession of banking licenses and a fourth, Xinja, is operating under a “restricted” license as it builds out its technology.
Volt, Xinja and 86 400 are looking to the retail market with full service, digital-only banks and bold branding, while Judo is going after the SME space.
So far, so similar to the UK model. That said, one area where the Australian startups do differ to their UK counterparts, at least for the moment, is that they are mostly using large technology providers for their core systems. Volt is working with Temenos, Xinja with SAP, Judo with Unifii and 86 400 chose local provider Data Action. It remains to be seen whether they will follow UK challengers and build in-house systems as they become more established.
The neobanking community in Australia is a tight knit one
Other brands in Australia are following a model more commonly seen in the US, whereby they work in collaboration with an established bank to avoid the need to get a banking license independently. Douugh is one (more on them later), while Up Bank is another.
Up is working with Bendigo and Adelaide Banking Group which allowed it to beat the independent startups to launch 8 months ago.
Not only was it first to market, it also doesn’t need to pour resources into keeping a license, allowing it to focus on developing its technology-first product suite. To date it has 100,000 users and a supportive community who wear Up t-shirts and are vocal on social media — a familiar concept to users of Revolut and Monzo.
The future of the Australian banking market
The neobanking community in Australia is a tight knit one, with founders regularly working together on common industry problems and even looking to form an industry association for neobanks in time, according to Steve Weston, co-founder and CEO at Volt. There is undoubtedly room in the market for all of the above players to make names for themselves, but they will need to quickly differentiate themselves from one another in order to stand out.
That’s especially true when you look at the size of the Australian market. The country has a total population of 25 million, in contrast to the UK’s 66 million, so even assuming that people will be multibanked, the Australian neobanks will face a harder battle for market share than their UK counterparts.
They also face a further hurdle when it comes to customer acquisition given the incumbent banks in Australia, particularly the biggest 4, have been in positions of strength and profitability for a long time. That means they’ve had time and resources to dedicate to ensuring they are technologically up to speed, putting them well ahead of their global counterparts in terms of digital services, says Dom Pym, co-founder of Up.
They face a fight for a piece of a smaller pie, against stronger competitors
All of that means that while the Australian neobank industry is borrowing a lot from elsewhere and seeing growth in the process, there is still no certainty that the eventual outcomes will be the same as in other jurisdictions. They face a fight for a piece of a smaller pie, against stronger competitors.
The payments industry is evolving
Fintech ecosystems elsewhere have followed a pattern of disruption that starts with payments and then moves onto banking, and this has been followed to a certain extent in Australia.
The New Payments Platform (NPP) which went live in 2018 is modelled in part on the UK’s Faster Payments network and is owned by major FIs. Like other instant payment networks around the world, it enables instant account-to-account (A2A) payments. It has also gone one step further than most of its global counterparts, and allows customers to link bank details to an email address or phone number making for easier P2P payments. Another example of the “watch and learn” strategy at play.
It’s worth pointing out that what are arguably Australia’s biggest fintechs at the moment are also payments firms. AfterPay which allows customers to pay for online purchases in instalments is probably the most well known. The Melbourne company, founded in 2014, is now operational in the US, UK and New Zealand as well as Australia, and is listed on the Australian Stock Exchange as of 2017.
Forex company OFX (previously known as OzForex) also operates internationally and continues to grow while Airwallex, which offers international payments for businesses, recently raised US$100 million and is now valued at over US$1 billion.
Arguably Australia’s biggest fintechs at the moment are also payments firms
Outside of these few big names, the picture is a little hazier. There are certainly a number of startup payments firms in the country but either they have expanded into the country from elsewhere, or they are struggling to make themselves heard.
One reason is that connection to the NPP costs up to $1 million for a fintech and it's hard for startups to provide innovative services without access to these rails. That’s frustrating for many as they believe they could do better than the incumbents’ efforts when it comes to payment products and services.
There is also a general belief that NPP could provide more, such as pull payments and scheduled payments. In these respects, it should be hoped that the network’s owners will continue to seek inspiration internationally, perhaps looking again to the UK where the Faster Payments network offers such services and is also open to non-bank participants for a much lower fee.
The Australian fintech industry has gotten this far by watching and learning, and following some established patterns of development. The next phase will be by far the more interesting, and it’s already started. More on that next time...
You can hear more about what Anthony Thomson is doing with 86 400 in this Fintech Insider interview.