FinTech Australia Road Show

This week I had hoped to blog about the latest FinTech Australia Road Show in Melbourne – unfortunately, COVID-19 intervened, and the event has been postponed.

So instead, here is my personal quick take on recent developments in the local FinTech scene:

A tale of 2 neobanks

Maybe Australia isn’t ready for challenger banks, despite the early interest and apparent market demand. Xinja* has decided to give back its banking license, having spent a ton of money on obtaining it in the first place. It couldn’t sustain savings and deposit accounts (even in a low-interest rate environment) without sufficient regulatory capital, the funding for which has failed to materialise; and without deposits, Xinja couldn’t offer loans. There is talk of launching a US share-trading app instead (à la Robinhood) but given the recent shenanigans with Wall Street Bets, Reddit, hedge funds and GameStop day traders I don’t suppose the regulatory path to market will be that easy. Xinja looks like it’s done.

Meanwhile, NAB has just announced that it is acquiring the shares in 86 400 that it does not already own, in order to merge it with NAB’s digital brand, Ubank. Which further suggests neobanks can’t survive on their own in the Australian market, with the dominant and regulatory protected cartel of the Big 4. (My good friend Alan Tsen has described this latest transaction as a turducken….)

Other challenger brands in Australia are having to take different approaches: Up is piggybacking off Bendigo and Adelaide Bank’s ADI license; Volt describes itself as a BaaS provider (“banking as a service”); Judo is focused on business banking; and the UK’s Revolut is bringing a mix of credit cards, payment solutions and forex services (including crypto), rather than transaction banking. Meanwhile, another BaaS from the UK, Railsbank is currently recruiting locally for a GM to leads its Australian roll-out.

Finally, despite some concerns about the BNPL sector (“buy now, pay later”), Afterpay is partnering with Westpac‘s BaaS platform to offer banking services to its customers.

Whither the Big 4?

Speaking of which, what are the Big 4 doing in the broader sphere of FinTech?

Despite (or because of?) buying a neobank, NAB has apparently closed down the Labs part of NAB Ventures, the often-mentioned, but largely silent startup incubator. CBA has created X15, a similar FinTech ventures platform with the ambitious goal of launching 25 businesses in 5 years (I seem to recall NAB Ventures once had a similar mandate?). Westpac‘s own FinTech fund, Reinventure is expected to do well out of the forthcoming Coinbase IPO; so much so that Reinventure is planning to decouple from Westpac, and launch a new fund focused on DeFi opportunities. ANZ has been putting out some commentary on its ANZi platform for FinTech innovation and partnerships – but its remit is limited to trade finance, home ownership and open data, and it is being very coy as to what specific bets they are making. Ho hum.

Did somebody mention crypto?

In case you hadn’t realised, we are experiencing something of a bull market in crypto.

Coinspot just announced they have 1,000,000 customers. Raiz Invest has launched its retail savings portfolio product with a 5% allocation to Bitcoin. Other funds like Every Capital are planning similar retail offerings. Luno is advertising on Melbourne’s tram shelters. And the Australian division of eToro is talking up DeFi. Game on!

Next week: Transition – post-pandemic career moves

* Declaration of interest – the author participated in the Xinja equity crowd-sale a few years ago

Why don’t we feel well off?

The past month has seen a number of reports on the current state of the Australian economy and global financial systems, 10 years after the GFC. The main thesis appears to be: if another crash is coming, can local markets cope, as an extended period of cheap credit and low inflation inevitably comes to an end. Combined with US-Sino trade wars, a softening housing market, and a sense of economic inertia, there is a feeling that Australians see themselves as worse off, despite some very strong economic data in recent weeks.*

Picture Source: Max Pixel

First, the positive news:

The unemployment rate continues to remain comparatively low, and overall job participation is high. This is reflected in higher tax receipts from both corporate profits and personal income. The RBA has kept interest rates low, and inflation remains relatively benign.

Recent data from Roy Morgan Research suggests that personal assets are growing faster than personal debt. Significantly, “average per capita net wealth, adjusted for inflation, is 30.5% higher than it was before the onset of the global financial crisis”.

So, if more people are in work, credit is still cheap, our assets have grown, and prices are stable, we should feel well off compared to the GFC, when interest rates and unemployment rates initially both went up.

Even higher energy bills (a major bone of contention with consumers) need to be assessed against lower costs of clothing, communications and many grocery items.

Second, the less positive news:

A combination of higher US interest rates, more expensive wholesale credit, and more stringent lending rules means that Australian borrowers are already being squeezed by higher mortgage rates and tougher loan to value thresholds. This could only get worse if there is a full-scale credit crunch.

Wage growth has stagnated, despite lower unemployment and higher participation rates. There is also a sense that we are working longer hours, although this is not as clear cut as there is also evidence we are also working fewer hours.

Regardless, Australian productivity output is considered to be sluggish, adding to the overall downward pressure on wages. (More on the productivity debate next week.)

More significantly, Roy Morgan Research has identified a growing wealth disparity based on asset distribution – but this may be a combination of changing earning, saving, investing and spending patterns. For example, if younger, would-be first-time home buyers feel priced out of the housing market, they may choose to invest in other assets, which may take longer to appreciate in value, but may not require as much upfront borrowing.

Third, preparing for a fall….

If a new market crash or a credit crunch comes along, how resilient is the economy, and how will people cope? Worryingly, fewer people are able to cope with unexpected expenses due to lower saving rates and maxed out credit cards. Over-leveraged companies and individuals will be hard pressed to meet their repayments or refinance their loans if interest rates rise steeply or lending standards tighten further.

Then there is the ageing population transitioning into retirement – baby-boomers who are “asset rich, but cash poor”. If they expected the equity in their homes and/or the balance in their superannuation accounts to fund their old age, they may be in for a shock if the housing bubble bursts and stock markets decline, especially if they are expected to live longer.

Finally, the RBA may have few options left in terms of interest rate settings, and a future government may be less wiling to spend its way out of a crisis (more Pink Batts and LCD TVs, anyone?). And while Australian companies may have strengthened their balance sheets since the GFC, overall levels of debt (here and overseas) could trigger increased rates of default.

*Postscript: if there was any further evidence required of the disconnect between the value of household assets (net worth) and a lack of feeling wealthy, this recently published Credit Suisse Global Wealth Report 2018 makes for some interesting analysis.

Next week: The Ongoing Productivity Debate