Venture Insights attended the annual AltFi Australasian Conference on April 15th 2018
The key takeaway from the conference was that the Fintech Industry in Australia is growing at a fast rate and the industry is optimistic about the Federal Government’s Open Banking initiative
70% of US SME businesses are aware of online loans available to them compared to only 30% in Australia. Australian Small Businesses need to be educated on the online offers available to them
Regulation will help and not hinder innovation in Fintech. The Open Banking initiative, Royal Commission and Comprehensive Credit Reporting will open consumer data to fintech players
Millennials are the key demographic to target for fintech players as they make up 62% of customers for online loans. It is vital that lenders improve the user experience so that it appeals to the younger generation.
Fintech companies need to play by the rules as they are seen in a similar light to the banks from people outside of the industry
It is only a matter of time before Tech giants like Amazon enter the online loan market in Australia as they have done already in the US, UK and Japan
Venture Insights recently attended the 2018 AltFi conference which included panel discussions from industry leaders in the Fintech space. Keynote speakers included Noah Breslow, CEO of OnDeck, and Mike Cutter from Equifax. The conference focused on the current state of the fintech market both globally and in Australia along with discussions around the future of the Fintech industry. One of the key themes of the conference was the future of online SME lending and the soon to be implemented Open Banking reform in which the banking industry will be the first sector to implement Consumer Data Rights (CDR). Australian fintech leaders debated how CDR and Comprehensive Credit Reporting (CCR) will affect businesses in the fintech sector with differing opinions. Below we have highlighted some of the key takeaways from the conference.
AltFi Conference 2018 – opportunity for growth with greater transparency
Figure 1. Key session takeaways from the AltFi Conference 2018
SOURCE: Venture Insights
SME lending in the limelight
Growth and Opportunity
Australia is one of the fasting growing markets for the Fintech industry. Noah Breslow, CEO of OnDeck presented various stats on the potential of disruption in the SME lending space. Australian SME businesses are not as well informed when it comes to lending options as compared to their counterparts in the US and UK. Only 30% of Australian SME business owners are aware of online lending compared to 70% of small business owners in the US. This indicates that the huge untapped potential of Fintech players in the SME lending space. For SME businesses who are considering loan options, only 38% in the US consider online lending as a valid option and in Australia this is as little as 33%. As such, there is still a long way to go for fintech companies when educating small-medium business owners on their options. OnDeck believe that the Compound Annual Growth Rate (CAGR) for online SME loans in Australia is 151% which again highlights the optimism about growth in the Fintech industry. If this CAGR reduces to half of their current growth rate estimate, total online loans would reach A$2bn by 2021.
Figure 2. Small Business Awareness of Online Lending Options
SOURCE: Venture Insights, OnDeck USA
Understanding the Consumer
Another important theme that emerged from the conference was the critical need for fintech businesses to understand who their customers are so that they can develop products which targets the customer’s pain points and/or needs. 62% of online retail loan applications come from millennials. Companies like Afterpay and zipMoney are leading the way by targeting younger consumers with buy-now pay-later schemes that are attractive for cash-strapped millennials.
For business lending, 98% of companies who are enquiring about an alternative finance loan are small in nature. The proportion of Australian small businesses who state that they cannot find a loan has increased from 45% to 58% in 2017. Making it easier for small businesses to get loans was again highlighted as one of the key potential growth opportunities for Fintech players
In addition, a number of the speakers also highlighted that SMEs have historically placed a negative connotation on borrowing money as they see it as only necessary when you are desperate or facing financial stress. SMEs therefore need to be educated by the industry that borrowing can facilitate growth in a business and can in fact be essential to longevity.
Open Banking, CCR and the Royal Commission
There were many discussions around Open Banking, CCR and the Royal Commission into Banking throughout the day which highlights the importance of current regulatory changes. Fintech, being part of the finance and banking industry, is heavily watched by regulators because of the impact that these companies can have on individual consumers.
Open Banking in Australia
The review into Open Banking was commissioned in July 2017 by Treasurer Scott Morrison which investigated the most appropriate model for an Open Banking policy in Australia. Open Banking simply refers to giving customers access and control over their banking data to facilitate greater trust, competition and efficiency in banking. Open Banking is the first application of the Consumer Data Right (CDR) which aims to deploy a consumer directed data transfer system.
All the speakers at the conference were excited by the effect open banking could have on the Fintech industry in Australia as greater access to consumer data will significantly improve the ability of the industry to meet the needs of customers and assess credit worthiness. 85% of Fintech players believe that ‘Government Mandated Data Protocols’ would be effective in growing the industry. David Stevenson from AltFi.com chose to strike a more balanced view by voicing concerns on Open Banking since it is an ‘opt-in’ system of data sharing where consumers must sign up, it may not actually have the uptake that fintech players expect or desire. A key question will truly be whether consumers trust new fintechs with their data.
Historically greater regulation is seen as a roadblock for innovation and growth, however due to the lack of trust that currently surrounds the banking and lending industry, many of the speakers expect that it will in fact have the opposite effect on the fintech sector. Ian Pollari of KPMG did suggest that the short-term impact of open banking has been overestimated but there will undoubtedly be long-term policy benefits seen in the fintech industry.
Comprehensive Credit Reporting
Mandated Comprehensive Credit Reporting (CCR) will go into effect on 1 July 2018, again highlighting the governments push for more banking data to become available to relevant parties when a loan is applied for. CCR is a government initiative to give every consumer both positive and negative credit ratings. Traditionally when applying for a loan, only negative reports are available to the lenders, however, CCR will provide lenders with new information on a consumer’s current accounts, open and closed accounts and the customers previous repayments. CCR is designed to give lenders a full picture on the consumer they are lending to in an attempt to reduce default rates and provide a greater ability to assess newer borrowers.
Royal Commission into Banking
The Royal Commission into Banking was briefly mentioned at the conference with the consensus being that it will heighten the need for regulatory measures in lending which may assist fintech companies challenging the banks. The conference took place just days before AMP CEO Craig Meller’s resignation due to revelations that AMP associated planners were charging fees to clients without providing any service. The AMP CEO may not be the first casualty of the Royal Commission and as such it is justified to suggest that the Haynes Royal Commission may help strengthen the position of fintech companies in the market.
Neil Slonim from the Bank Doctor did suggest during the conference that in his opinion fintech players have been just as bad as the big four banks when it comes to unfair lending practices and he emphasised that the days of those types of lending practices are behind us. Neil suggested that a future ASIC investigation into contract terms by lenders will help curb unfair lending practices. A key takeaway from the conference is that tighter regulation will be beneficial for the space and the Fintech players who not only meet those regulations but also look after the needs of the customers will be the companies that succeed in the market.
Future of the Industry
Whilst a majority of the conference focused on discussing parts of the SME lending environment and the effect of open banking, there was some mention of what the future of the fintech space would look like. David Stevenson summed up in his closing remarks some of the future possibilities to watch out for in the Australian Fintech industry. We have highlighted the four key takeaways below:
Barriers to entry are likely to become lower for new entrants which could open the possibility of greater competition in the banking sector
Digital only banks without physical branches will emerge as has been the case in the UK
Open banking will not take off as quickly as some people expect with customers being cautious about providing financial services firms with access to their data
A funding gap will continue to grow for mainly medium sized businesses who cannot get loans between the A$1-50mn size.
Risk of disruption from big tech – it’s just a matter of time…
It is increasingly likely that tech giants will enter the Australian SME lending space in the near future as globally tech giants such as Amazon are already making their presence felt in this space. Amazon has built a loan book of US$1bn in small-business loans to over 20,000 merchants in the USA, Japan and the U.K. The discussions from the conference highlighted that it is only a matter of time before large tech players such as Amazon enter the lucrative Australian lending market.