There is a saying in the internet industry “Your margin is my opportunity”. One by one high margin old school businesses are being disrupted by new and agile upstarts. The Finance Industry is no exception.
This week I am going to adapt a McKinsey article on the future of Finance. The writer, Zac Townsend, set out 10 models that demonstrate some of the range of possibilities in Finance Technology or Fintech (as it is called). I will add in various Australian startups that are operating in this space.
Fintech is one of the strengths of the Sydney startup ecosystem. There are specialist co-working spaces for Fintech Companies (Tyco and Stone & Chalk for example) and a growing support system that specializes in this space. The very high margins (compared to the rest of the world) in Australian banking make it an area ripe for innovation. All of the major banks are investing in new startups and actively searching for the next company that will deliver them a new product or reduce their costs. It is an active and vibrant area of development.
This 2018 infographic from KPMG will give you an idea of the current size of the industry in Australia:
New takes on old lending categories.
The first Fintechs were those that tried to change the way that traditional lending was approached. In the US, Lending Club with Personal Loans and OnDeck with Business Loans were the pioneers. In Australia, Afterpay has changed the way that retailers can allow people to pay for goods. Afterpay allows customers to pay for goods in 4 equal installments, each two weeks apart. If you pay on time there are no fees but there are late fees for missing payments. They have in store and online solutions that offer an alternative to credit cards. With a market cap of Au$5.7B the stock market certainly thinks they are an attractive alternative.
Mobile only Lending
Muhammad Yunus pioneered micro lending in Bangladesh and in 2006 he was awarded the Nobel Peace Prize for his work. Tala and Branch are two US based companies that are extending the concept in other developing countries by using the information contained in the customer’s mobile phone (apps, texts, email’s, contacts, conversations etc) to make micro loan underwriting decisions.
Demographic focused products
An emerging set of companies are developing demographically focused products. Australian Superannuation startup Spaceship is targeting their products at the under 25’s. They offer investments in a range of newer and emerging technologies and markets that larger Funds tend to ignore but that attract the younger generation. Their customer profile is average age of about 22 and Super balance of $2,000. This is small however their customers won’t retire for another 40 plus years so it is a business for the future. First Rung is an Australian startup helping young first home buyers to save for their first house deposit. Their mobile only app helps with saving and investing until the buyer has their deposit. Once the customer buys a house they assist with insurances etc. Coverhero is a new Australian insurance company that will launch in the next few weeks. They provide simple and affordable insurance for a range of situations targeted at Millenials.
Digital-first neo banks
Digital first neo banks are starting to emerge. With a blank slate they are creating a mobile and online banking experience that provides services without the infrastructure of branches etc. Last month, Judo Bank, was the first of these neo banks to be awarded a banking license in Australia. Targeted at the SME market they have a range of lending and financing products.
Different fee structures built on digital infrastructure
Robinhood, in the US provides commission free stock-trading. To make money they sell the retail order flow (not the customer data but the data relating to what is being bought and sold), they are able to lend out invested cash (as Banks do with deposits) and they also make money on their other advanced products (margin loans, premarket and after market trades). Moneyloop is an Australian startup providing insurance companies with white labeled finance solutions for insurance companies to offer interest free financing for clients excess payments during emergencies. Moneyloop uses a machine learning model to predict and price risk for providing a valuable new service.
API platforms and ecosystems
Application interface products such as payments systems for online commerce are growing rapidly. Stripe and Braintree from the US are two examples of startups that are rapidly expanding globally. You probably won’t hear about these companies when you buy online as they handle the payment processing from the online site to the relevant banks in the transaction. Kabbage is an online lending system for short term business loans.
Bank as a service (BaaS)
The UK’s first new clearing bank in 250 years, Clearbank is an example of the emerging Banking as a service model. Clear have built a state of the art technology platform specifically designed for clearing services, connected to all UK payment schemes. Treasury Prime in the US sells BaaS enablement software to multiple banks.
SaaS (Software as a Service) for bank cost reduction
A new wave of finch companies are building the infrastructure for banks and other financial institutions and selling their Software as a Service. Sargon in Australia is building a range of infrastructure for superannuation and investment funds in Australia, New Zealand and Hong Kong.
Blockchain for infrastructure cost reduction
A new generation of blockchain based companies are focusing on specific use cases to improve the cost, efficiency and function of the infrastructure used in Finance. Flash FX in Australia is using Ripple (a blockchain based transfer system) to send money internationally. Their process is faster and cheaper than traditional transfer infrastructure.
Tech companies entering Financial Services
Finally the tech companies are coming. Apple Pay, Google Pay, Alipay (Alibaba in China) and WeChat pay (owned by Tencent in China) are available almost everywhere and growing in application and use. In China a majority of payments are now made via one of the major mobile payment platforms. Sweden is aiming to remove cash as a payment method in 2020. Cashless stores are growing in number in the US and this is providing an opening for the major tech companies.
The traditional banks still currently have a role in this new world however the universe of smart and technologically enabled competition is rising. Make sure that you thoroughly investigate any new company that you use. These emerging new products can be valuable when used appropriately.
Paying it Forward
If you have a start-up or know of a start-up that has a product ready for market please let me know. I would be happy to have a look and give the start-up a shout out to my readers if it is something that I think they could use. If you have any questions or comments please email me via my website craigcarlyon.com
Till next week.