Resisting Fintech disruption amounts to a loss of $13 billion in
aggregated revenues, according to Frost & Sullivan
The Australian Banking sector is heavily regulated to prevent monopolies and collapses, and is guided by the Four Pillars Policy of the Australian Government which maintains the viability and separation of the “Big Four” banks: Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ).
Following the global financial crisis, in 2008, for reasons motivated by
stability rather than customer satisfaction, consumers flocked to the ‘Big
Four’ who benefited by recovering market share previously lost to the
smaller financial institutions, according to the release. While the Big Four are more dominant than ever, future bank profitability is more dependent than ever on innovation.
Frost & Sullivan’s latest study, Fintech in Australia – Trends, Forecasts and Analysis 2015 – 2020 forecasts that the Australian Fintech market will reach over AUD4 billion in revenues by 2020 including AUD1 billion in
completely new added value to the Australian economy. What is more
arresting is that the report highlights the fact that Australian banks are
set to lose out on AUD13 billion in aggregated revenues as the Australian
Fintech sector is set to take AUD10 billion in aggregated revenues away
from the big Australian banks and contribute AUD3 billion of new revenue to
the Australian Financial Services Sector from 2015 to 2020.
“This disruption should be of serious concern to the Australian financial services sector. While Fintech will not end traditional financial services, Australian Fintech is in the development stage of the business cycle and already the Fintech start-up space has grown rapidly in Australia,” commented Audrey William, Head of Research, ICT Practice, Frost & Sullivan Australia & New Zealand, “Frost & Sullivan believes that the Big Four banks must react or face a large dent in future profit growth. The decline in return on equity will continue with the disruption from the Fintech
Fintech has decentralised financial power and provided new dynamic new
solutions to old problems. The Fintech disruption is changing historical
trends and offering products that offer stability in a new and innovative
way and at a lower cost than the Big Four banks.
“Frost & Sullivan believes that the inertia and stability of the Big Four banks is more a weakness than strength, and will be increasingly exposed as such without a clear strategy to decentralise the existing suite of banking products,” added William.
The Commonwealth Bank of Australia (CBA) comes in second after WBC in its likelihood to succeed with its engagement with the Fintech Sector. As the
bank with the highest market capitalisation, CBA has the most to lose from the disruption of the Fintech Sector.
Saranga Sudarshan, Research Analyst, ICT Practice, Frost & Sullivan Australia & New Zealand says that out of the Big Four banks, Westpac Banking Corporation (WBC) is the most engaged with new technologies to combat Fintech disruption.
“WBC opened an innovation lab in September 2014 and has already invested AUD50 million in companies throughout the Fintech sector, with blockchain trials and mobile payments through its partnership with Android Pay to begin in 2016,” added Saranga. “CBA already started trialling blockchain technology with its subsidiaries at the end of 2015; a revolutionary step in the transformation of the banking sector, and has set up two “Innovation Labs” designed to research Artificial Intelligence (AI) and Machine Learning Systems with a third lab planned in London in 2016. The internationalisation of technological research is a key element of CBA’s strategy into the future.”
Although WBC and CBA compete with two different innovation models; they have both committed early resources to engaging with Fintech. Whilst NAB and ANZ have developed strong engagement strategies, they have been late in committing resources compared to WBC and CBA. The future growth of the Australian Fintech sector will depend on how much the government chooses to favor the Big Four banks and keep the financial sector regulated against market volatility.