The big banks aren’t the only ones that will feel the effects of a banking Royal Commission, says founder of CrowdfundUP and director of FinTech Australia Jack Quigley.
After a long period of sustained political pressure, the Turnbull government last week reversed its policy stance and announced that a Royal Commission would be conducted to examine misconduct by financial services entities, and to make recommendations regarding the legal framework, practices and regulation of those entities as appropriate.
While the Royal Commission is aimed directly at ADIs (Authorised Deposit Taking Institutions), Insurers and Superannuation Funds, there will no doubt be implications and opportunities for Fintechs.
Reduced risk appetite and tighter credit standards
Many of the claims of misconduct by Banks stem from accusations of predatory, or at least, aggressive lending to borrowers unable to service the loans in question (eg forestry schemes, agriculture loans).
Whether through increased regulation or because of “reputation” risk, the appetite for “specialised” lending by the Banks will potentially fall, thus creating an opportunity for nimble, specialised Fintechs to enter or expand into these niches.
To an extent this trend has already started with existing Fintechs, however highly focussed new Fintechs could emerge to fill the void. Its also conceivable that new specialised Fintechs could be constituted jointly with Banks as major participants as a way of maintaining a presence but with reduced reputation risk.
Mortgages – the elephant in the room
Mortgages represent by far the largest asset for the Banks so will be an area of strong interest for the Royal Commission. A number of groups have previously accused Banks of profiteering, in particular by raising mortgage rates which are out of step with the official cash rate.
The increased regulatory risk posed by the Royal Commission, coupled with potential new regulation, has the potential to increase funding costs and therefore mortgage interest rates.
With rising mortgage rates, borrowers are incentivised to “shop around”, creating an opportunity for Fintechs providing mortgage comparison, matching and switching services.
Additionally Banks will be incentivised to squeeze efficiencies out of existing mortgage processes – for example through greater automation of credit assessment using AI or Blockchain techniques – an area where Fintechs are already very active.
If you can’t beat them…..
An increased emphasis on regulatory compliance and risk management may open opportunities for Fintechs to introduce new, highly automated and efficient processes (again incorporating AI concepts) to reduce the regulatory burden. Areas like “Know Your Customer” and “Anti Money Laundering” are clear candidates for Fintechs.
Financial advice and Robo advisers
No doubt the financial advice scandals of the past several years, where financial planner advice was found to be incompetent or unduly influenced by sales commissions, will receive considerable attention at the Royal Commission.
“Robo” advice is not influenced by commissions or individual planner competencies, so may receive greater acceptance and support going forward by both Banks and customers. Again there may be an opportunity for Fintechs to be the leaders in the provision of high quality, unbiased financial planning advice.
Another area which will no doubt receive considerable attention is Life Insurance, in particular the design of policies and subsequent assessment of claims. While Insuretech is a relatively new development in Australia, opportunities may arise in the provision of user friendly (and designed) insurance policies and automated assessment and disbursement processes.
It seems almost inevitable that regulatory and operating costs for financial services providers will increase as a result of the Royal Commission. The use of blockchain methods could defray costs across a wide range of applications – “smart contracts”, payments, security provenance etc. Fintechs are exploring blockchain across many areas, and in some cases already offer private blockchain exchanges for specialised assets.
The outcomes of the Royal Commission can’t be predicted at this early stage, however there is a strong likelihood that financial services providers will look to reduce their exposure to “risky” business activities, and will incur increased costs through regulation and compliance.
These are areas which are ripe for disruption by smart, agile Fintechs either in competition or collaboration with the established financial services community. I’m looking forward to seeing where the Royal Commission takes us.