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The Future Examined: Big banks hamstrung in meeting fintech challenge


When attempting to answer the threat of fintech start-ups, big banks are caught between dividend-hungry shareholders on one side and internal resistance on the other. That made the potential for disruption that much more dangerous, according to a panel of financial experts at the Future Examined event, hosted by The Australian and Deakin Business School.

It meant that bank participation in fintech disruption was more likely via venture capital activity than in-house innovation.

Melissa Widner, a general partner at NAB Ventures, who has a long history in venture capital and start-ups in the US, said while banks were spending large sums on digitisation — $4.5 billion in NAB’s case — committing to a potentially cannibalising technology was a huge hurdle for a bank CEO.

NAB Ventures is an investor in cross-border B2B payments platform Veem, which allows businesses to make payments internationally with just an email address and phone number. Such a transaction was difficult and three times as expensive for small business customers to do via a bank, she said, and Veem was achieving Net Promoter Scores of 70 because “their customers really trust them”.

Recent moves by Veem to offer lending were “really scary — that’s where most of our cash earnings come from”, Ms Widner said.

“Something like cross-border payments (is a) billion dollar business for NAB but still not huge,” Ms Widner said. “So you would say as a bank, ‘Well, let’s just give this stuff away’, or, ‘Let’s just cut our margins and let’s provide a better experience’.

“The problem is we’re making a lot of money there, and we’ve got shareholders that want their dividend. The board could say, ‘We’re backing you’, and then the shareholders don’t get their dividend, so they’re going to can all of them. So that’s the conundrum that big companies face, even with all the best intentions and all the knowledge of what’s going on.”

Jason Yetton, the CEO of peer-to-peer lender SocietyOne, who was previously head of retail banking at Westpac, said that big banks knew they had to engage with disruptive technologies but that it became a question of focus.

Photo by Hollie Adams.

“When you’ve got quarterly earnings targets, half-yearly earnings targets, those things you have to run very well,” Mr Yetton said. “They’re dealing with millions of customers, lots of complexity, lots of regulation. The idea that you would go and put your best people aside, set aside large amounts of capital to go and explore, is very unlikely to get through the normal, standard good-governance process of a project prioritisation committee.”

The inertia created by the need to meet company returns meant that banks were increasingly looking at a horizon filling up with nimble fintech start-ups, eyeing a sector that is one of the most profitable in the world, where 80 per cent of all lending is dominated by the big four banks.

“Five years ago, there were less than 100 fintechs in Australia. Now, it’s close to 600 fintech firms,” Mr Yetton said. “The challenge for the banks is can they get the culture of innovation fast enough to offset the 600 players? What’s clear is that it’s not just the 600 players. It’ll be the technology firms out of the US (and) larger technology companies out of China, India, Asia could also do this.”

The entrant of new, well-funded competitors was the biggest potential threat for Ms Widner of NAB Ventures. She told the audience that the trust that the public had in keeping their money with banks was their competitive advantage, and any potential fintech start-ups would have to earn trust to be truly competitive. That barrier to entry broke down if consumers were to be offered financial services from some of the world’s best-known companies.

“Amazon is the scariest thing,” she said.

“Fin techs are able to be nimble because they’ve got 20 people, so they can just create something. It’s a little harder for a bank to do that when we’ve got 30,000 employees. But Amazon’s doing it. They’re not going to worry about short-term profits. So if they really come after our industry, that’s what I most worry about. And customers trust Amazon.”

Originally published on The Australian.

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