Digitally disruptive startups have upended everything from communications and the taxi industry, to books, music and property rental.
But arguably the biggest prize in business is in the financial services sector.
Australia’s big four banks had a collective profit of $28.6 billion last year alone.
All four are making big technology plays especially at NAB with its NextGen project which is complete overhaul of its legacy systems, and at CommBank which is working with a number of startups and last year announced it would open up APIs to developers.
Banks are well appraised of the significant and rising threat from digital disruption.
Financial services startups, known under the catchall term fintech, that have the potential to challenge banks in a multitude of service areas, are everywhere. PayPal is now a globally famous brand. Apple launched a payments platform last year. Accounting software companies that didn’t exist 15 years ago are now processing billions of dollars a month in payments and have the ability to track cash flows across the economy in real time. Crowdfunding and peer-to-peer lending have suddenly emerged as new ways to raise capital.
And with the explosion of the fintech sector, the opportunity is being recognised and supported by bright entrepreneurs.
In 11 years, payments company Tyro has raised a total of $33 million. It has grown to over 160 staff, secured more than 12,000 customers and processed more than $6.5 billion in transactions. Atlassian founder Mike Cannon-Brookes is on the board.
Tyro is now launching a specialised fintech co-working space which currently has 125 seats and spans an entire floor at its new Clarence Street office in the Sydney CBD.
Company CEO Jost Stollmann told Business Insider disrupting the big banks takes “lots of little Tyros” working in an “ecosystem”.
“Lots of Tyros that can challenge the establishment and the veterans, not only in exactly what we are doing but any of the other things that banking competes on,” he said.
Applications for the space opened this week. The first company to secure a spot was Lend2Fund which is establishing a marketplace for sophisticated investors.
Stollmann said if demand exceeded the current space the company would be expanding into other floors of the building.
“If there are 250 we’ll rent another floor,” he said. “That would be a good problem to have.”
Banking is a highly regulated market that spans every business and consumer in the country. It’s a deeply established sector which is notoriously difficult to crack.
But knocking over that establishment is something payments company Tyro is attempting to do.
It’s not the only fintech co-working space flagged for Sydney this year with the state government also announcing it is looking at setting up a specialised hub that should be functioning by April.
Stollmann said the momentum had just started and an ecosystem of fintech startups was required to propel the sector forward.
“If they opened up they would unleash so much creativity and it would be simple and low cost and go fast,” he said.
“It takes an ecosystem to breakup the oligopoly and change the game.”
Tyro’s fintech space won’t be providing investment to startups but it will be providing access to the banking system – something that took the company almost five years to secure.
“We are not going to resolve the capital problem, that’s up to the incubators, accelerators, venture capitalists,” Stollmann said. “We will not invest.”
“If there is a rock-and-roll solution using our APIs we are happy to solve the market access problem.
“We give people a chance here to start engaging with us, to start engaging with the community and then the plan for Tyro is once a quarter to select one of the teams with who we intensively work to develop an open API.”
It sounds similar to the Xero platform. Tyro is a cloud-based service, it’s an open platform and now by opening up APIs and working directly with other fintech startups it’s able to distribute add on services seamlessly to its customers.
The hope is establishing a space like this will draw out bankers who are currently working in the big institutions and have ideas but don’t have the access, or the space, to execute on them.
Stollmann’s concern was if fintech startups could not secure access to the banking system they would slink away into the shadows which would create a whole new level of risk for the system – especially if these companies started to scale up.
Stollmann doesn’t sit in the camp of minimal regulation. He thinks there needs to be a strong regulator and a balanced system which enables newcomers to thrive and innovate. Stollmann said self-regulation didn’t work in a market with four dominant players, and he would prefer a “graduated regulatory regime”.
“It’s hard to imagine business models that are really disruptive where you need a bank, you need your competitor in control of your destiny, it doesn’t work,” he said.
“The access problem is not resolved and it is the protection of the bank oligopoly, they are highly profitable, they pay a lot of lip service to innovation but they block entry.”
But he was realistic about how the big banks might be challenged: “A new model would always focus on something it cannot compete on the whole product line of a major bank.”
David Murray’s Financial System Inquiry report which was released late last year recognised innovation and increased competition in financial services was a good thing for consumers.
Stollmann said one way to boost innovation was by opening up APIs which would move the sector away from “controlled central infrastructure”.
“If Australian banks would do this, or if they were encouraged to do this, you would see an unbelievable surge of entrepreneurship in Australia,” he said.
In 2004 the former governor of the Reserve Bank, Ian Macfarlane noted that one of the main impediments to reforming Australia’s payments system was the lack of competition in the space.
At the time Macfarlane said the solution may not be regulation but rather trying to open up the area to more competition. Stollmann said he gave a presentation to Macfarlane during this period and managed to secure his support.
“That’s very unusual for the Australian Prudential regulator to support a drip-fed startup where the runway is eight months and it goes through the Global Financial Crisis,” he said.
The UK government has been a big supporter of fintech and has established its own strong ecosystem.
UK Trade and Investment entrepreneur-in-residence for Sydney Andrew Corbett-Jones told Business Insider the UK regulator was heavily engaged in trying to promote innovation in the finance sector.
“Treasury is pouring money into this whole field, putting out specialists to spread the word about innovation in financial services in the UK, you’ve got the world’s leading co-working space in Level 39 [in London], it’s not an accident,” he said.
“The UK is showing leadership, everyone is keen to follow that, but unless we can actually get the [Australian] regulator on board to help companies you either don’t innovate or you innovate under the radar so the regulator doesn’t know you’re there or you go through a terrible process of trying to engage the regulator and succeed and only one has done that. If they’re you’re options you’re not going to see a lot of innovation.”
Stollmann is convinced it’s possible to flip the banking industry on its head.
“If you really want to write a significant growth story, you have to address a significant problem with an awesome, better solution,” he said.
You can register interest in the Tyro fintech hub here.