Australia must respond quickly to the growing fintech sector if it wants to be recognised as an international leader in the space.
Australia has a strong demand for financial technology – or FinTech – services and is internationally recognised as a leader – but we cannot afford to stand still. That’s the message from a six year investigation into how the growth of FinTech will impact the financial services sector and Australia’s economic prospects more broadly.
Monash Business School’s Australian Centre for Financial Studies’ (ACFS) Funding Australia’s Future research project has just released four new research papers on the growth of FinTech, also assessing its value to the Australian community through increased competition in the financial services sector. The papers are the fourth stage of the Funding Australia’s Future project, in which the ACFS partnered with the financial industry to assess how to derive more value from FinTech.
ACFS Research Director, Professor Kevin Davis explains that while Australia is seen as a leader, policy internationally is moving fast. “There is a risk of being left behind if we don’t keep a focus on what changes will benefit Australia,” he says.
Keeping pace with global developments
FinTech involves using new technology in financial services such as crowdfunding, cryptocurrency and open banking to disrupt traditional financial markets.
The research illustrates that FinTech growth has been promoted through:
- high venture capital investment, which has occurred in the United States;
- the exploitation of regulatory gaps, in China;
- the adoption of FinTech-specific policy and regulation, which has happened in the United Kingdom.
It also shows that as was the case in the United Kingdom, the growth of FinTech in Australia is most likely to arise from specific policy and regulatory changes.
Murray Inquiry recommendations
In 2014, the Australian Financial System Inquiry (FSI) conducted by David Murray made nine recommendations in its final report on the sector’s need for technological change and innovation.
The Murray recommendations recognised the need for government and business to work together to ensure the maximum social benefit from FinTech, but also the need to remove regulatory barriers to the development of socially valuable FinTech new products and services.
It was also vital to recognise the potential social benefits of the massive increase in data accumulation, as well as who owned the rights to the customer information that is accumulated by financial firms; and there was a need for regulators to be flexible.
While the recommendations were accepted by the Federal Government, progress since has been mixed.
Although the Federal Government formed the Government FinTech Advisory Group in 2016, there has still been no public release of meeting minutes or any further updates.
Also in 2016, the Australian Securities and Investments Commission (ASIC) introduced a ‘regulatory sandbox’ that allows FinTech companies to trial a new financial product or service on a limited scale without requiring them to apply for an Australian Financial Services Licence or an Australian Credit Licence.
“However, regulatory sandboxes are akin to a controlled experiment or trial, where private benefits will accrue to the successful participants,” says Professor Davis.
“There should be both explicit criteria for assessing whether the provision of the trial facility has generated social benefits and some requirement for those whose trials are successful and provide them with private benefits to contribute to the overall cost of providing the trial environment.”
Open banking – sharing data
Open banking is the idea that banks should allow third-party companies to build services and applications using the bank’s data.
“We have a lot of entrepreneurs in Australia doing various things in this area and the regulators and federal government are trying to assist by establishing open banking,” says Professor Davis.
The Open Banking Review was released by Treasurer Scott Morrison in February this year and made 50 recommendations.
Increased access to the information that Australia’s financial institutions hold about their customers is critical to help new products develop.
A separate element of that is mandatory comprehensive credit reporting, which is set to come into effect by July this year to ensure there is credit data sharing.
While the government has permitted equity crowdfunding for non-listed public companies, it is now looking at extending this to proprietary companies.
However, this raises the issue of how investors can value their investments and then subsequently sell them on.
“This suggests a need for the development of secondary markets which the current markets licence regulation would impede,” says Professor Davis.
“ASIC has also consulted on developing a tiered markets licence regime which could facilitate secondary markets for crowdsourced equity.”
But there has been no action on crowdfunding of debt – although small businesses can effectively achieve such an outcome via peer-to-peer or market-place lenders.
There is also no action on crowdfunding insurance, despite the growth of a range of innovative models appearing overseas.
“FinTech is just one part of the solution for improving the current services,” says Professor Davis.
“There are clear benefits from increased competition. FinTech has the potential to disrupt business models, introduce lower prices and new products.”
Getting the right balance
But the regulatory system needs to balance the benefits of increased competition in the sector with consumer protection.
“Australia needs to think about whether its regulatory arrangements are suited to FinTech,” says Professor Davis.
“Currently peer-to-peer lenders (P2P) don’t fit naturally in the categories Australia has for regulation – P2P lending is not pure funds management nor traditional lending. Australia needs to rethink its regulatory arrangements for FinTech businesses instead of just slotting them within the current framework.”
The four papers commissioned by the ACFS include:
- A framework to contextualise FinTech and its value for Australia by David Link (Verrency) and Professor Rodney Maddock (ACFS);
- The impact of international policy and regulation on growth in FinTech by Deborah Cope (PIRAC Economics);
- Innovation and FinTech policy: Post-Murray developments by Professor Kevin Davis (ACFS); and
- Cryptocurrencies, Institutions and Trust by Dr John Vaz and Dr Kym Brown (Monash Business School).
The research project is supported by industry stakeholders: K&L Gates, Suncorp, Australian Treasury, Westpac, the Australian Securities and Investments Commission (ASIC), FinTech Australia, The Reserve Bank of Australia, Stone & Chalk and the Australian Government’s FinTech Advisory Group.