Earlier this week the Sydney CBD saw some first-hand evidence of the flourishing new sector where financial services meets technology, when no fewer than 100 ‘‘fintech’’ entrepreneurs moved into the new so-called Stone and Chalk facility on Bridge Street
Stone and Chalk, a consortium of leading financial institutions and the NSW government, is set to be a hotbed of fintech innovation.
Innovation has always underpinned capital markets but a heady mix of low-cost technology, cloud computing and mobile devices is turbocharging a new wave of disruption today.
Fintech — financial services underpinned by technology — may not be new but the pace of change has never been faster. It is a crucial trend that Australian investors need to be aware of, given financial stocks make up almost half of the S&P/ASX200.
Australia’s big banks dominate the local bourse, but almost one-third (or almost $27 billion) of total banking industry revenue is at risk from digital disruption, according to a Macquarie Research report released last year.
The new wave of start-ups is attacking financial advice, payments and lending, as well as more esoteric outliers such as crypto-currencies and crowd-funding. And the banks are aware of the threat.
Last year, Westpac chief executive Brian Hartzer said the bank was trying to think and act like a 200 year-old start-up company in an effort to tackle sweeping technological change.
The bank has already invested $50 million in venture capital fund Reinventure which has, in turn, invested $5 million in peer-to-peer lender SocietyOne.
Other major banks are also exploring fintech opportunities — consider NAB and its low-cost online UBank venture, CBA’s innovative small business payment facilities and ANZ’s goMoney mobile app.
For investors, it’s crucial to follow this trend, as it is the payment and wealth advice sectors that are attracting the bulk of investment, with global fintech financing activity quadrupling to approximately $US12bn ($16.4bn) in 2014 from just $US3bn the previous year, according to KPMG.
In the US, major tech firms such as Google, Apple and Facebook are bolstering their payment technology — an area that PayPal has already proved was ripe for disruption. Traditional financial advice is also being undercut with low-cost ‘‘robo-advisers’’ such as Betterment and Wealthfront, which collectively manage more than $US4.5bn.
Australia’s major financial institutions may have the most to lose but they also have the firepower to defend their territory.
In the US, larger players such as Vanguard and Charles Schwab are entering the robo-advice market and, while it’s still early days, they are quickly dominating, proving just how important an existing customer base and distribution power really is.
In such a quickly changing landscape, investors will need to carefully sift the truly innovative from the hype-driven fintech business models, whether they are launched by start-ups or within major institutions.
Those disruptive fintech businesses that succeed will naturally be able to deliver their service more efficiently than their rivals and be cheaper for customers.
This is a core function that is made possible by low-cost technology.
And finally, successful fintech businesses must enhance the quality of the service they are trying to disrupt.
If the service is simply cheaper, it will not be sustainable.
For example, robo-advisers must deliver more than cheaper portfolios — they must deliver a better net return to investors or customers will ultimately move elsewhere.
There’s money to be made — and losses to be averted — for those investors savvy enough to pick those winners as the next wave of innovation shapes our markets over the next decade.
This article was first published in The Australian Online