Fintech. It’s the buzzword that’s got the world’s attention as the banking and finance industry teeters on the brink of disruption.
In 2007-08, consumer confidence in the sector was shattered with the onset of the GFC, and it has never really recovered. In the wake of the financial crisis, innovations in Fintech – financial technology – began to offer more transparent, accessible and efficient alternatives to traditional banking and finance services. And its popularity only grew. Now, instead of visiting a financial advisor you can seek robo-advice. Or instead of getting a bank to finance your business idea, you can crowd-fund it. And these innovations are just the beginning.
Here, we chat with corporate innovation specialist and Fintech entrepreneur, Toby Gardner, about these disruptive new technologies, and what Australia can do to get on the front foot with what is promising to be one of the biggest shake-ups to modern finance that the world has ever seen.
“Fintech is really about challenging the status quo,” says Gardner, who splits his time between Silicon Valley and Australia. He says that Fintech start-ups are getting their foot in the door by targeting smaller markets that are often ignored in favour of their more profitable counterparts.
“Banks are spread too thin to focus on minority groups within the consumer institutional or retail market, and so start-ups focus on those niche groups,” explains Gardner. “Then, through customer word of mouth and great experiences, the startups scale and grow until they start taking on the banks in their own backyard.”
He adds that this shift is helped along by consumers comparing their customer experiences in other sectors with their experiences in banking and finance, and realising they should deserve more. Take peer-to-peer (P2P) lending, for example. Connecting borrowers and investors in an online marketplace, P2P lending sees non-bank organisations offering a more bespoke lending experience.
“Banks traditionally look at everyone as if they are a number and assign an associated credit risk,” he explains. “With peer-to-peer lending, they look at the individuals that the banks don’t care about, such as students who don’t have the credit score.”
By focusing on the individual credit risk of each customer, and operating under a lower cost business model than traditional banks, P2P lenders are able to offer more affordable credit and more rewarding investments to their customers.
“Through customer word of mouth and great experiences, start-ups scale and grow until they start taking on the banks in their own backyard.”
Lending Club in the US is considered the trailblazer in P2P lending. Posting a revenue of just $2.3 million in 2010, it’s currently on track to rake in half a billion in 2016. Last year, it originated more personal loans than any single US bank. In Australia and the UK, companies such as SocietyOne and Zopa are also making their mark.
But P2P lending comes with risks. There is the obvious risk inherent due to the type of product offered (unsecured loans). However, far more concerning is the risk caused by a lack of regulation in the sector. Just a year ago in China P2P lending was in rapid growth, but a crackdown of fraud in the sector has resulted in almost 40% of P2P companies shutting down or defaulting on payments. (That said, as of June, China still remains the biggest P2P market in the world.) And even LendingClub hasn’t been without controversy.
Gardner himself admits to being “a little bearish” on P2P lending. He’s far more interested in what’s happening the digital wallet space.
“I think the biggest disruption for banking lies in consumer finance, in everyday transactions,” he predicts. “Historically, if you own the bank account, then you own the relationship with the customer. This is backed up by research; almost all surveys show that people overwhelmingly associate their transaction account with their bank account. With the advent of digital wallets, however, it will be interesting to see how smartphone companies start to be associated with an individual’s transactions.”
He cites the new partnership between ANZ and Apply Pay as an example.
“In time and branding, I may start to think of myself as an Apple account holder rather than ANZ. And in the future,” he ventures, “who knows? We could be banking with Google.”
Gardner: “There needs to be more support for start-ups.”
The rapid growth in Fintech over the past couple of years has left government, industry and education scrambling to catch up. To help address this, in March the federal government announced a plan to back Australian Fintech, outlining a number of key measures to support the sector.
Gardner says it’s good for the government to be seen as a promoter rather than an inhibitor, but that other major stakeholders need to join the charge.
“I think legislative change is helpful, but there needs to be a change at the university level, investor level and corporate level, in order to really make a difference,” he says. “Corporations should support innovation externally rather than keeping their innovation ideas and spend to themselves. And universities could promote entrepreneurship and internships at start-ups better.”
“Corporations should support innovation externally rather than keeping their innovation ideas and spend to themselves.”
Gardner refers to completing his MBA at University of California, Berkley – a university ranked top three in the world and a feeder school into Silicon Valley – as a university that promotes innovation and entrepreneurship. He says that graduates all had the opportunity to join companies such as McKinsey or Goldman Sachs, but that almost half of his classmates chose to launch or join a start-up.
“Since graduation, five years later, over a dozen of those classmates have raised $250,000 million for their start-ups. They had the talent, and they had the culture to feel that they could succeed,” he says. “And, those that failed could still fall back on a job at Goldman Sachs, because in the US, I’ve found they value the experience and lessons learned from entrepreneurship and start-ups more than they do in corporate Australia.”
A new focus on innovation and internships
But Australia is on the cusp of change. Sydney has nabbed a spot as a top 20 international start-up hub, hosting around two-thirds of Australia’s start-ups. And innovation is now firmly on the government agenda.
In WA, Curtin has been running entrepreneurial programs and providing support to start-up companies for several years through the annual event, Ignition.
Run by the Curtin Centre for Entrepreneurship, Ignition provides mentorship and advice for entrepreneurs and innovators. The program aims to take an initial idea and to develop it so that is ready to pitch to investors.
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Curtin has also announced a new partnership with the Chamber of Commerce and Industry of WA, which will provide business internship opportunities for undergraduate students. Currently, around 20 to 30 per cent of these internships offered are with small or micro-businesses.
“We’re very much working with that sector to provide a mutually beneficial arrangement whereby our students are gaining industry experience, while providing skills that benefit the entrepreneurs who need the support,” says Curtin’s manager of the internship program, Marc Stoitis.
The future of Australian Fintech rests in its people
Ultimately, whether Australia can successfully position itself as a leading Fintech hub will rely on how effectively they can foster a culture in which talented entrepreneurs can flourish.
“I think the talent pool here needs better people, smarter people, who see start-ups and other technical skills at university as viable opportunities to pursue,” says Gardner.
“Fundamentally, it comes down to people, talent and culture – if you’ve got the wrong business model but you’ve got the right people, you’ll work it out because you’ll collaborate and talk it out. And, in my experience, once the right people find the right opportunity, investors will find them.
About Toby Gardner
He studied undergraduate finance at Curtin University, where he received a bursary award to study his final two semesters in the US – an award he credits as the catapult for his career success.
He spent the next 10 years working in the US, from Silicon Valley to Wall Street with stops in Rome and London along the way. In 2010, he completed his MBA at the University of California, Berkeley.
Gardner is currently building a Fintech start-up between US and Australia, which he hopes will be the next unicorn.