Onerous regulation and anti-competitive behavior from the major banks have been listed among other issues for new players trying to enter the Australian market.
The statements have been made through submissions made to the select committee of financial technology and regulatory technology, chaired by senator Andrew Bragg.
The committee, established in September, has received 123 submissions for its inquiry into the Australian fintech sector.
The submissions have come from a number of financial services providers, including the big four banks, industry body FinTech Australia, individual fintechs and regulators ASIC, APRA and the RBA.
In banking, excessive regulatory measures have been pointed to as major obstacles for fintech start-ups, particularly when the established incumbents, which control more than 80 per cent of market share, are able to influence the resulting red tape.
“To succeed, the challenger banks like 86 400 will each need to take a portion of market share from the large incumbent banks,” 86 400 stated in its submission.
“A key challenge facing us is the continuing ability of the large banks to influence outcomes of regulation, even when the regulation is aimed to increase competition.”
Majors accused of anti-competitive behaviour
Representing a number of fintechs, including neobanks Volt, 86 400, along with other players such as Afterpay, Zip, Prospa and Monoova, FinTech Australia pointed to the incumbent banks engaging in “anti-competitive conduct”.
CBA has previously denied accusations from investment service Raiz of deliberately blocking its customers from engaging with the fintech, by telling them that its app increased risk of fraud on their accounts.
But in FinTech’s recent submission to the Senate committee, it noted a number of its other fintech members have long received letters from banks noting its activities using screen scraping breach the ePayments code.
Referring to Raiz, the body said: “This bank has sent notifications and emails to its customers who use the service on a continual basis.”
“Such letters have been viewed as a thinly veiled excuse of anti-competitive conduct”.
Screen scraping, a process of collecting screen display data from one application and translating it for another application to display, allows businesses to receive data from customers and to provide tailored services.
The broader fintech industry has expressed concern that the government may outlaw the practice, saying “any attempt to do so will be effectively anti-competitive”.
FinTech Australia further stated there is evidence that established banks are not opposed to it, with ANZ being reported to be the first entity to use it and NAB and Westpac backing Basiq, a fintech which uses screen scraping to collate financial data from a collection of APIs to provide financial solutions.
“Outlawing screen scraping would not only have the potential to be anti-competitive, it would also be contrary to the government’s open banking report which provides that ‘open banking should not prohibit or endorse ‘screen scraping’, but should aim to make this practice redundant by facilitating a more efficient data transfer mechanism,’” FinTech Australia wrote.
Hurdles and pleas for competition’s sake
Parent company of 86 400, payment solutions vendor Cuscal has cited a number of challenges facing the smaller banks, including difficulties in achieving economies of scale to effectively reduce costs of production; not being able to afford widespread promotion; generally copping lower credit ratings from ratings agencies, making funding more expensive to acquire; and APRA prudential standards requiring smaller banks to hold higher capital ratios – reducing their ability to compete on price.
FinTech Australia stated the key components of national competitiveness are capital and funding, tax, skills and talent, culture and regulatory measures – particularly related to open banking.
Notably, it has pushed for the superannuation to be subject to the CDR, saying it not only has the potential to “drive competition between funds, but also to allow members to present their financial data and invite them to present a personalised ‘best offer’ to the member”.
The industry body has also urged ASIC to follow Singapore and the UK in adopting a “pro-competitive approach to implementing the mandate for competition” and for programs to be established to raise awareness of alternative providers.
UK player Revolut has recommended that to boost the competitiveness of the local scene, the government should provide additional guidance around the licensing process, particularly with indicative timelines.
It has also urged for increased awareness and normalisation of fintechs in the financial services landscape, to increase levels of trust and thus adoption of productions by the Australian public.
Revolut stated it views Australia as an internationally competitive place to do business, pledging to create 30 high-skilled jobs locally in the next year.
New networks could help
86 400 has urged the government to not allow the incumbents to delay the introduction of new platforms or ecosystems such as the New Payments Platform and open banking (but consumer data sharing among the majors has been delayed from its original February launch date to July).
It has a positive outlook on the new schemes, but has cautioned they will only be effective if all members support the network and are committed to change.
“This is unlikely to be the case where the change is seen by incumbents to have a downside,” 86 400 noted.
It has also urged for organisations “with the most experience in payments” be included in governing the open banking model, listing the Australian Payments Council, the NPP Australia and AusPayNet.
Looking back on its establishment, 86 400 stated: “Despite there being many ‘competitors within the industry (including over 100 ADIs and numerous non-bank lenders), there was little real competition to the big banks who dominated the market with over 80 per cent market share in most banking services.
“This lack of competition had enabled our dominant banks to make vast profits while underinvesting in changes to their legacy systems that would enable them to meet customer demands of the future,” 86 400 commented.
The new banks face regulatory hurdles and in funding, with banking being a capital-intensive business.
According to neobank 86 400, capital pools for start-up ADIs are limited, despite capital requirements being vastly higher than for other fintechs at an earlier stage of business.
“Capital requirements to cover operating expenses (which is the key capital requirement for a non-ADI) are 25 per cent of the capital required by an ADI, the 75 per cent being regulatory capital requirements,” 86 400 wrote in its submission.
“Early investors in ADIs also have to contend with expectations of two years or more until profitability is reached.”
It added regulatory treatment of capital for ADIs disadvantages newcomers and discourages investment in technology, noting the government should consider direct investment in early stage start-ups through the Future Fund.
The Senate committee will present its final report on or before the first sitting day in October.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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