Upstarts Find A Way In

The push into transaction banking by Australia’s growing horde of fintechs and other startups has not been less than the push into personal and small-business lending.

The relationship between fintechs and the established transaction-banking players in Australia reflects developments elsewhere in the world, along with some important local influences.

One key factor at play in Australia is the dominance of its financial sector by four major banks, who collectively hold more than 80% of most aspects of the domestic market—which makes it hard for challengers to get traction; despite early promise, most upstart fintechs have struggled to make a dent in any incumbent player’s market share. Even global giant Apple Pay is yet to reach a deal with four of the five largest retail banks.

Stuart Stoyan, outgoing chairman of FinTech Australia and co-founder of MoneyPlace, one of the county’s most successful peer-to-peer lending startups, sees collaboration with second-tier regional banks and mutuals outside the Big Four as the most promising trend for his sector. “The problem with large banks is that they have an existing business they are trying to protect,” he says. “They also believe that they have the best-in-class offering.”

His own experience shows how collaboration can strengthen innovators: MoneyPlace was a startup P2P lender but lacked the scale needed for long-term survival, until Auswide—a small, ambitious regional mutual bank based in coastal Queensland—took a stake in the company. The payoff for Auswide was a capacity to assess risk and offer personal loans to its customers, and while it sold its stake in January, it will remain a strategic partner.

More recently, a deal with Australia’s largest nonbank lender, Liberty Financial, has allowed Liberty’s substantial mortgage-brokers’ network to offer business and personal loans through MoneyPlace. For MoneyPlace, the deal brings in 20 years of data on Liberty borrowers, which it can use to refine its assessements.

Stoyan, MoneyPlace: The problem with large banks is that they have an existing business they are trying to protect.

Collaboration has also worked well for other Aussie startups looking for the scale that partnership with a major financial-services player will bring. Simple KYC, a 3-year-old startup, has been taken under the wing of American Express. “This solution is tackling a regulatory issue, and we believe it also provides American Express with a premium customer experience,” says Bevin Aston, director of product management for Global Corporate Services at American Express Asia-Pacific and Australia. “Simple KYC has been able to simplify the sometimes-tedious processes associated with offline data to create easy and efficient onboarding processes for our customers. We are taking the best practice in Australia and expanding its use around the Asia-Pacific region, including Singapore, Hong Kong and possibly Japan in the future.”

Eric Frost, Simple KYC’s founder, explains in more detail: “The time to onboard new clients was in some cases cut by up to 50%. That is a reduction from 20 days to, sometimes, 10, depending on how they deploy the system.”

Simple KYC identifies the ownership structure of the new client, overlaid with the financial institution’s own policies, to identify what’s needed to open up an account. In practical terms, this means bank clients are able to cut five, 10 or 15 days off the onboarding process for new small-business clients. For a larger client, Frost notes, it can take 60 to 90 days, depending on the documents and complexity involved.

“We help them identify that complexity up front, so that they know what documents are required,” he explains. “Reducing the sales cycle will make for a better customer experience.” Other more-specialized information requires that a system tap into other information sources—for example, identifying politically exposed persons. In some ways, it’s an aggregator of all the systems necessary to plug the gaps in a financial institution’s onboarding system.

Another boost to the local payments industry is the arrival of new state-of-the-art infrastructure.

Changing Infrastructure

Ian Pollari, partner at KPMG Australia and co-leader of his firm’s global fintech practice, describes the two biggest influences emerging in payments as essentially “hard infrastructure” assets. One is the decision by the Australian Stock Exchange (ASX) to move to a blockchain-based system, but the most important, in Pollari’s view, is the New Payments Platform.

Backed by 13 organizations, including the biggest banks, the NPP was developed by SWIFT after a very competitive tendering process and uses the ISO 20022 message schema. This is the global standard for electronic data interchange between financial institutions. Real-time settlement occurs via the Reserve Bank of Australia’s Fast Settlement Service. The NPP was opened for public access in February after several months of testing.

Pollari says that when designing and building the NPP, Australia has been able to observe similar systems around the world—for instance, the UK’s Faster Payments—and learn what works well and where improvements were needed. “It’s been designed to both provide the rails as critical infrastructure, and allow for banks, nonbanks, corporates and fintechs to work together to create new services or overlays,” he says.

So far, BPAY, a bill-payments scheme owned by Australia’s four major banks, is running the first of these overlays, known as Osko. This is a simple peer-to-peer payment (and request-to-pay) system based on known identifiers, such as a payee’s mobile number, email address or Australian Business Number. It also allows messages of up to 280 characters, including emojis, to accompany the payment.

Pollari, however, expects the next set of overlay services to deliver much more than simple low-value payments. “It’s not just [faster] payments. The rich data that can be sent with each transaction is an opportunity to remove inefficiencies, enhance transparency and allow for new value-added services to be created for corporate clients.”

The ASX shift to distributed ledger technology (DLT), also called blockchain, is the other piece of hard infrastructure that Pollari rates highly. A deal with Digital Asset Holdings will replace the ASX’s 1994-vintage CHESS (Clearing House Electronic Subregister System) platform, making it the first major exchange to adopt DLT.

“We believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets,” Dominic Stevens, ASX managing director and CEO, said in a December 2017 statement. This has set the pace and direction of blockchain in Australia—it may be back or middle office driven rather than a crypocurrency-led payments revival. This is an example of so-called regtech performing tasks such as customer onboarding, market surveillance and monitoring, regulatory reporting, and KYC and AML measures.

Australian regulators are well-regarded around the world, Pollari says, and so its “regtech will get a significant amount of attention and interest from banks in the corporate and wholesale area in particular.”

One early-stage example is identitii, an Australian distributed-ledger KYC-monitoring solution for cross-border payments that is being tested around the world. This is an Australian company that uses blockchain technology skewed very much toward corporate payments. The firm uses patented tokenization technology that allows both parties of a payment transaction to be verified in real time.

“Identitii has created a platform for banks to exchange rich information about payments over legacy payment networks like SWIFT, RTGS and ACH,” says co-founder Nick Armstrong. “The problem we are solving is a lack of information in payment messages, which results in slow manual investigations, poor customer experience and risk of noncompliance.”

Already more than 600 fintechs dot the Australian landscape; and although most are clustered in retail payments and P2P lending, the relationship between payments innovation and Australia’s fintechs is set to expand further.