Rise of FinTech

A large Australian bank in its 2019 annual report* stated being the best digital bank is a strategic pillar. Digital banking makes sense, as we increasingly use mobile phones for everything. But the large incumbent banks are also reacting to the rise of FinTech.

Fintech’s promise to do to banking what Uber did to taxis or Airbnb did to accommodation.
Investors may be asking two questions;
• can I take advantage of any growth potential by investing in fintechs; and
• does the rise of fintechs change the return potential on traditional banks?

Not an overnight success
Fintech - Financial Technology - is broadly the application of technology to deliver new or improved financial services. The ATM was once the pinnacle of banking technological innovation. Point-of-sale (POS) terminals and tap-and-go payments then took the baton for innovation in payments. But FinTech is not just limited to payments. A World Economic Forum report^ identified that fintech engages in six core traditional financial services including payments, insurance, deposits and lending, capitalisation, investment management and market provisioning. For example, ‘Buy Now Pay Later’ (BNPL) lenders, such as Zip and Afterpay have changed how people buy goods on credit.

Even if you don’t use BNPL services, it may have already impacted your investment portfolio. At the end of 2019, the Commonwealth Bank announced an exclusive agreement with a global BNPL company called Klarna. After an initial investment of US$100 million, CBA invested a further US$200 million in Klarna Group to increase strategic alignment, bring additional rights, and gain exposure to Klarna’s international growth¹. Klarna launched its Australian and NZ businesses on January 30, 2020.

What distinguishes today’s fintech revolution is that much of the innovation occurs outside the existing banks. Smaller, agile companies and challenger banks are building creative, technology-enabled financial services that are changing consumers’ expectations.
In some cases, we could call it ‘TechFin’, as technology companies, such as Amazon, Apple and Google look to expand into financial services.

Following the money
According to a 2019 KPMG reportⱽ, global investment in fintech companies doubled in 2018 exceeding US$100 billion, led by three mega-deals of over US$10 billion each. The Australian fintech market is equally dynamic. For example, Volt, a new challenger bank or neobank, recently raised AU$70m of capital from private investors.

The KPMG report identified some underlying trends driving the industry changes. The trends impacting Australia include:
• consumers’ acceptance of mobile banking;
• a shift in the banking regulator’s attitude to licensing challenger banks; and
• open data sharing regimes such as Australia’s Consumer Data Right.

Yet for all this activity, the World Economic Forum° suggests that many consumers are still reluctant to switch away from incumbent banks and that fintechs have made incremental improvements rather than fundamentally created new financial services. Some commentators argue that the large incumbent banks will just acquire any successful fintechs.

Ready to set
The key to successful investing is due diligence, knowing your financial goals and aligning your decisions with those goals. Research is particularly critical for investing in fintechs.

A margin loan may be a way for suitable investors to take advantage of any fintech opportunities. It may give such investors:
• the flexibility to participate in a fintech’s initial public offering (IPO) on the Australian Securities Exchange (ASX);
• a way to diversify without selling an existing portfolio of traditional banks shares; or
• the ability to invest in fintechs listed on international share markets.

For the latest Leveraged Acceptable Investments List click here .

To find out more or to discuss how we can work with you and your clients, please contact your Leveraged Relationship Manager or us on 1300 307 807.

This information is correct as at 6 February 2020.

<sub>Source
* Commonwealth Bank Annual Report 2019
^ The Future of Financial Services, June 2015
¹ https://www.commbank.com.au/guidance/newsroom/klarna-launches-in-australia-with-cba-202001.html
ⱽ KMPG The Pulse of Fintech 2019, 31 July 2019
° Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services, August 2017</sub>