Growing fintech sector points to further change

NAB’s planned takeover of digital bank 86 400 has come at a time of growth in the fintech sector - a recent report by KPMG showing that 26 new groups entered its roster of active fintechs in the lending category last year. According to Dan Teper, partner, Mergers and Acquisitions and head of Fintech (Australia), KPMG, this growth trend is set to continue throughout 2021 as more and more consumers accept digital lending.

“In terms of new developments in the market, we expect to see further innovation in the onboarding and credit processes, along with greater diversification of the distribution models towards partnership and referral structures,” he said. “We are also expecting new entrants to continue to target niche segments to compete with the more traditional lenders who often lead with a ‘one-size-fits-all’ solution. This segmentation can either be in the form of a very specific type of product or solution or tailoring an existing product to a very focused industry segment or customer audience.”

This level of competition not only provides an alternative for borrowers who don’t fit in with the credit policies of more traditional lenders, it also drives the growing trend towards digitalization of the industry more broadly, he said.

Read more: How to digitise the loan application process

“We are seeing the Australian lending industry becoming more customer centric,” said Teper. “Simpler application processes and quicker turnaround times will continue to drive better customer acceptance and overall greater access to credit, for both retail and commercial customers.

“More broadly, digital lending will continue to become more widely accepted as an alternative to traditional models, and in response we expect that those providers, banks, credit unions and traditional lenders, will progressively develop similar offerings either via internal developments or partnerships with existing fintechs.”

Finance professionals across the country were no doubt intrigued by NAB’s announcement last Friday that it intends to take over 86 400 as part of its growth plan. If the deal is passed by the ACCC, APRA, the Federal Court and Treasurer Josh Frydenberg, the major will own 100% of the neobank as opposed to the 18.6% stake it currently holds.

Read more: NAB moves to snap up neobank for $220m

While some may be concerned about what this means for competition within the Australian banking industry, all opinions aside, the deal adds gravity to the value that fintechs bring to the space – a value that 86 400 lending product lead Melissa Christy outlined in an interview with MPA conducted one week before the announcement of NAB’s takeover.

“The lending industry is still very paper based and manual, and I think the fintechs will move it to a completely different norm,” she said. “If the bigger banks don’t start to catch up, they will be left behind.”

She said that 86 400 stood out from other fintechs in the lending industry because it was the only neobank to have launched transactions, savings and home loans facilities within two months of receiving a banking license.

“We’ve got the fullest suite of products at the moment and features in our app,” she said.

In the world of SME lending, the “paperwork-heavy approach of mainstream banks is highly outdated,” said OnDeck CEO Cameron Poolman.

“Fintechs are demonstrating that there is an easier, faster and more streamlined way to deliver the funds SMEs need to seize business opportunities or access much-needed capital,” he said. “As a dedicated SME lender, we regularly survey the small business community, and we know that one in four small businesses have been rejected for bank finance. Even among those that do get the green light for a business loan, the drawn out process the banks use means that one-quarter of these SMEs will experience negative impacts from a protracted funding process. So, growth in the fintech sector is definitely a positive for the small business community.”

He added that since fintechs make intelligent use of data to assess credit risk, rather than taking a rear-view approach like most banks do, lenders such as OnDeck are especially valuable given the current economy.

“Our approach makes good sense in today’s environment where the future is expected to be a lot brighter than the preceding 12 months,” said Poolman.

Despite these benefits, Poolman said the impact of the growing fintech sector on the broader SME lending industry was yet to be seen.

“It’s hard to see how the growth of fintechs won’t force a rethink among the banks about their own lending processes – particularly given the advent of open banking,” he said. “However, the small business community have historically been an underserved arm of bank activities – especially for those businesses unwilling or unable to offer residential property as security on commercial finance, and we believe this is unlikely to change.”

Teper said brokers would continue to play a crucial role within the mortgage and finance markets despite the growing popularity of fintechs in the lending industry.

“As demand remains for a human facing element in the lending industry, digital or otherwise, brokers will always play the role of the human intermediary and advisor, focusing on delivering a more personalised and trusted customer experience,” he said. “We are also anticipating brokers to play a larger and more strategic role in the distribution models of digital lenders, whereby businesses can partner and drive significant operational efficiencies and better customer experiences.

“The merger between Aussie Home Loans and Lendi is a recent example of such a ‘win-win’ partnership - with one bringing a broad network with a long history of brand recognition and experience in the market, while the other brings a scalable and efficient platform and associated back-end technology.”