One of the recommendations from the Productivity Commission’s report on competition in the financial services sector is for the government to expand the scope of the “regulatory sandbox” that allows fintechs to test their products without the full burden of regulation.
“At the same time, ASIC should take a more hands-on approach to approving and supporting fintechs in testing their products or services, particularly to help with judgments on whether and how products may harm consumers.”
While the number of firms playing in the sandbox is relatively low, the central message here is that the Productivity Commission sees the establishment of a thriving fintech sector as a key way to reinvigorate competition in a sector sorely lacking it.
Venture capitalist Paul Bassat, the co-founder of venture firm Square Peg Capital, is equally keen to see fintechs thrive – but for a very different reason.
“There are enormously large profit pools,” he said of the potential $50 billion prize for Australian fintechs at an event held by wealth management group Crestone last week in Melbourne.
“There is $2000 of pre-tax profits for every man, woman and child in Australia. It’s an extraordinary number.”
Indeed, it’s one of few sectors where Square Peg is prepared to invest in companies that are only focused on their home market.
Failed to list
Square Peg is an investor in a range of fintech start-ups, including mortgage disrupter Athena, global payments hopeful Stripe and small business lender Prospa, which spectacularly failed to list on the ASX in June.
Just last week Square Peg led a $30 million Series B round for Indonesian financial technology start-up FinAccel, which makes micro loans in a nation where a high proportion of consumers struggle to access banking services, let alone credit.
But while the opportunity is big, Bassat told the audience it’s crucial to be very discerning about the entrepreneurs you back.
“We find, frankly, in fintech two groups of people,” he said.
“People who have had long careers in banks and who have absolutely no idea how to start and run a business, to be candid.
“And kids who know nothing about financial services. They are super smart, high energy, but there’s a lot of domain knowledge required, there’s a lot of regulation – it’s a complex industry.”
Models matter too, and Bassat is not convinced by the rising group of neo banks, which hope to challenge established banks by providing a digital alternative.
“We think that’s a really long, expensive, high-risk play,” Bassat said.
“I met with some really, really impressive guys this week, they were super smart, super bright, and they looked across the table from me and said ‘we’re going to raise $1 billion over the next two years’. And then after falling off my chair, [I thought] that’s a really, really hard play.”
Bassat said that neo bank might be successful with its raising, but pointed “there’s five or six companies trying to do this”.
“That’s $5 billion or $6 billion of capital that’s got to be raised, if these companies raise what they think they’re going to raise,” he said. “Probably most of that will end up being lost, in reality.”
Bassat contrasted this with Athena, which was founded by former NAB executives Nathan Walsh and Michael Starkey and aims to match mortgage borrowers with superannuation funds. It won’t be an authorised deposit-taking institution and as such won’t face the regulatory burden that a neo bank would.
“They’re not an ADI, they’re not going to have the same capital requirements,” he said. “We think their cost of doing business is going to be way, way less and more than enough to overcome funding disadvantages.
“We think it’s a very clever, innovative model that’s been very successful in the Netherlands.”