86 400 deal boosts competition

by Rebecca Schot-Guppy08 Mar 2021

Rebecca Schot-Guppy is CEO of peak fintech body FinTech Australia, which represents and supports more than 300 Australian fintech companies. She has welcomed NAB’s full acquisition of neobank 86 400 as a watershed moment for the sector.

Australians love an underdog. So it’s no wonder that, when we look at neobanking and the rise of fintechs in Australia, we like to position it as some form of David and Goliath battle. We get behind and champion the upstarts looking to upend our century-old legacy financial institutions.

But behind the headlines and clichés, the reality is much more nuanced. The story of the growth of fintechs – both in Australia and across the world – has never been one of mass upheaval. Due to regulations, it simply can’t be. It’s one of partnerships, collaboration, evolution and overall industry growth. Never has this been more apparent than in National Australia Bank’s acquisition of 86 400 last month.

Following the announcement of this deal, the questions emerged about whether the neobanking sector had reached its climax and if fintechs would actually generate competition and improve consumer outcomes.

I want to stress, however, that this deal is a watershed moment for the fintech sector. It’s an exit that will encourage more local and overseas investment into Australian neobanking and bank technology. This, in turn, will over time create more innovation, further competition and better outcomes for consumers.

We talk about improving competition a lot when discussing the overall impact of fintech companies in Australia. With lending, I believe there are two key areas in which the fintech sector in particular has driven change.

The first of these is functionality and accessibility.

I’d argue that all lenders in Australia have improved the way they process and approve loans, and that’s in direct response to the rise of fintech lending. What used to be several meetings with a bank has been boiled down to a few online forms and emails. In some instances, it’s an in-app approval process.

Either through acquisitions, partnerships with fintechs or in-house innovation, most major lenders have shifted their operations around this trend. Fintechs are driving this shift by launching new and innovative services that are forcing other companies to invest in technology to remain competitive.

The second area is the reduction of fees and other hidden charges.

Fintechs have cut many lending fees out of their operations and are applying pressure on the major lenders to follow suit. This is largely being driven by consumer education. Most fintechs promote their services as either fee-free or fee-reduced alternatives to what’s offered by the major lenders. In doing so, they explain to consumers what fees they should be looking out for and trying to avoid. This puts pressure on the entire lending industry to examine what fees they are charging consumers and look at how they can tighten their margins to remain competitive.

Both factors will play a role in increasing competition as open banking technology starts to take hold in Australia. Over time it will become even easier to switch lenders.

When refinancing in a few clicks becomes a reality, those who have the lowest fees and the best technology will be the benefactors.

The underlying point about banks buying fintechs is that, by acquiring their competitors, the major banks will ultimately end up creating more competitors.

Exits encourage investment, and that is instrumental in creating a more robust fintech industry. Going forward, I would expect to see more acquisitions and consolidation in the lending sector as the major banks look to secure themselves a foothold in this new era of hypercompetitive lending. It’s likely that more lenders will introduce banking as a service too, as Volt has done.

But in turn, I would also assume that new lenders will emerge. They may be smaller existing fintechs that are now able to raise a better valuation due to the 86 400 exit; overseas players launching in Australia; or brand-new fintechs that only now see a path towards investment and business success.

What we won’t see is one home loan or business lender emerging as a dominant force and stealing vast amounts of market share off the major banks. It won’t be like Google dominating internet searches, Apple leading smartphone sales or Facebook becoming world leader in social media.

There is no doubt the major banks are moving more slowly in this space, largely due to the compliance obligations and risk they have to manage. But they are not so far behind that they are obsolete. Australians recognise and trust our major banks. The majority have an existing relationship with them, be it through a home loan or a savings account. Banks, too, are key players in the fintech ecosystem, funding fintechs and partnering with them for joint innovation.

The sector is heading in the right direction. Inch by inch it’s becoming more competitive and more diverse, and ultimately that is in everyone’s interest.