Can fintech companies disrupt the big-four banks?

Can fintech companies disrupt the big-four banks?

Accessing fast-growth, finance-technology companies.

My previous article in ASX Investor Update discussed the super profits a successful disruptive business model can generate. If you were lucky enough to get stock in the float of the web-based jobs advertiser, Seek, back in April 2005, you would have made more than eight times your initial investment.


Just to remind you, a disruptive business is taking existing demand and introducing a new business model that undercuts the established competitors and effectively takes their profits from them.


Another example is owner REA, which also has a lower-cost business model. Neither it nor Seek have to fund lots of journalists and newspaper printing and distribution plant and equipment, like traditional media companies.


Disruptive technology in financial markets (FinTech)


In the world of winners and losers, when it comes to FinTech it is hard to find a corporate gorilla that has had its world turned upside down. By many measures, Australia’s banks have never been more dominant.


The ultimate disruptors are two people in a garage who come up with the new idea that comes in a digital form and happens to be cost effective at the right scale.


One that comes to mind is Nimble, a micro-lending platform that uses credit scoring in real time. It was started by Greg Ellis and Sean Teahan in 2005, using $100,000 from friends and family. Nine years later, according to one report, it has financed about 700,000 short-term loans of up to $1,200 each and become a serious force in micro-lending.


The same report says Nimble’s lending system uses “machine-learning algorithms and behavioural data… [which] assesses each loan application against 4,500 points of data to help pinpoint borrowers who represent the least risk.” Furthermore, three-quarters of its lending is through its mobile app.


In theory, the banks could do this type of business but they have an enormous overhead and a huge existing business that does not lend itself to the sort of cost structure that a start-up can operate under. This hasn’t stopped them trying to replicate the conditions, though. Former AMP chief executive Craig Dunn will join Westpac Bank’s board and is also the chairman of Stone & Chalk, the new “FinTech hub” being built in Sydney, which is preparing to open in the next month.


Westpac puts a toe in


Westpac and other finance organisations have contributed towards the hub’s construction, which is being undertaken by Westpac’s venture capital arm, Reinventure Group. It has already invested in FinTech companies, including peer-to-peer lender SocietyOne.


The peer-to-peer platform acts as a conduit for people who have capital (lenders) and people who want capital (borrowers). The platform clips the ticket on the way through. It is popular in India and developing markets where lending institutions are not well developed.


The other micro-lending model is payday lending by another name, and the one we assume is used by Nimble. It is mainly for people who do not have access to a bank and want to borrow less than twice their weekly wage, and needed the money yesterday. In this case the company provides its own capital for the loan.


We doubt that the Westpac involvement in the FinTech hub will be even a rounding error for the group’s profits any time soon (in fiscal 2014 WBC made just under $11 billion in pre-tax profit). And Nimble, like many other FinTech initiatives, is privately owned. So where does that leave everyone else keen to jump on the FinTech bandwagon?


Plenty of FinTech on ASX


(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).


The good news is that ASX is a great source for accessing FinTech.


One of Under the Radar’s favourites is eServGlobal. It has a core business in mobile wallet services, providing customers with things like top-ups. Its business is generated largely from the Middle East and Africa, which management hopes will give its disruptive international remittance business, HomeSend, a competitive edge.


HomeSend is a joint venture with three partners, one of which is the credit card giant MasterCard. The business is still 35 per cent owned by eServ and has a great deal of potential, because the technology allows the diaspora of the world to send money back to their families in places such as India and Asia.


HomeSend’s technology allows these transfers to take place at a fraction of the cost of using the industry gorilla, Western Union. Assisting in its endeavours is MasterCard’s marketing muscle, with its 1.9 billion card holders and 27,000 banking relationships. But as eServGlobal shareholders have found, transforming this disruptive potential into super profits is no easy task, even when you have an industry giant in your corner.


One company that has been successful from the original vendors’ perspective is the money transfer company OzForex Group. The group was originally funded by Macquarie and the private equity group Carlyle Group, which floated on ASX in October 2013, having raised $440 million. Its stock was issued at $2 and traded as high as $3.50 in early 2014, but has gone down ever since.


The thing is, its business has successfully carved out a niche in financial markets that was previously the preserve of banks, simply because it offers the same services but at much lower prices. If you have money in an international property and want to pay off a mortgage, or have a business offshore, using OzForex to transfer money is much cheaper than using a bank.


It never actually holds any money but facilitates the transfer using its technology and its extensive banking relationships. Like other new kids on the block, it does not have the cost structure of legacy participants like the banks.


The company generates reasonable cash flow but looks expensive trading on a PE of 22 times, based on next year’s earnings estimates, and it is not clear to us where the growth will come from.


Wealth management is a FinTech hub


One area where there is a concentration of FinTech is wealth management, which can loosely be described as systems relating to trading and financial planning.


Australia is rich in these financial platform-type companies and all have the opportunity to pivot into a FinTech revolution. Conversely, there is also the possibility to be overtaken by something else that comes along that is more revolutionary and provides a more efficient outcome for financial intermediation.


Also, it is worth noting that the wealth management sector is incredibly fragmented. There are at least 19 different platforms operated by all levels of the portfolio and wealth management industry, from the banks to the planners to the clients. Australia is over-endowed with listed platform providers. You have to expect there will be consolidation in this sector, because having too many platforms is not good for anybody.


Australia was one of the leaders when it came to the provision of software for wealth management, because of the rapid introduction of superannuation in the 1990s and the changing regulations associated with that and financial planning. When the rules are always changing, you need software that can keep up.


One company we tipped was Bravura Solutions, which remains a leading supplier of software to the big wealth managers. This company was finally taken over by its private equity suitor, Ironbridge Capital, after a long battle.


Another company still listed in the wealth management software space is GBST. Like Bravura, it is successfully transferring its know-how into the UK market, which is undergoing a financial services review similar to Australia’s Future of Financial Advice.


Then there are companies such as Praemium, Hub24 and OneVue that provide financial services administration platforms and clip the ticket, so to speak, on funds under administration for financial services providers like planners. These are essentially providing outsourcing services for planners, fund managers and brokers.


Last, there is a small listed company called Australian Wealth Investments (AWI), whose cause has been taken up by an Australian financial services luminary, Paul Clitheroe, its executive chairman. This company is emulating Westpac’s FinTech hub and has investments in businesses such as Stockspot and


The former allows investors to avoid financial planner costs of between $1000 and $2000, which would damage the returns of the majority of savers, whose net worth apart from their house is less than $100,000. An app leads you through multi-choice questions, which deliver you an investment decision involving cost-effective products such as exchange-traded funds (ETFs). There is no investment expertise involved because it utilises simple asset allocation algorithms that create portfolios.


Such is the world of Fintech.

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