Fintech and the perfect storm

25 March 2019

Jayson Forrest

Jayson Forrest is the managing editor of Money & Life Magazine.

Never before have financial planners had such access to, and choice of, fintech solutions as they do today. FinTech Australia’s Alan Tsen talks about the important role fintech is playing in the evolution of the financial planning profession.

Over the past few years, there’s been a lot of focus placed on financial technology – or ‘fintech’, as it’s more commonly known. Words like ‘artificial intelligence’, ‘quantum computing’ and ‘blockchain’ seem to make the media headlines on a daily basis.

Today, according to data from the peak advocacy group for the fintech sector, FinTech Australia, there are over 400 fintech businesses across Australia and the industry is growing rapidly. In fact, fintech accounts for one-fifth of the Australian start-up industry.

And with such growth, it’s not surprising that fintech impacts the entire financial services value chain; from front-office to back-office, wealth management and superannuation, to retail banking, credit and debit.

In fact, technological innovation is all pervading – not only on businesses but in the lives of all Australians. And for businesses to thrive and survive in tomorrow’s future, technology will be key. That’s why it continues to surprise Alan Tsen, the Chair of FinTech Australia, that there is still some resistance to fintech within the wider financial services market.

“Not every fintech is disrupting financial services incumbents,” he says. “In fact, the majority of fintech start-ups are enablers to the incumbents; creating tools and solutions that are helping companies to deliver a better experience to their clients at a reduced cost.”

And when it comes to talking about fintech, Alan knows a thing or two. He brings considerable depth of experience and knowledge to his role, having worked extensively in financial services and acquiring a deep understanding of blockchain and digital currencies.

So, what is blockchain? Blockchain was originally developed as the accounting method for the virtual currency, Bitcoin. Put simply, blockchain is a public ledger where transactions are recorded and confirmed anonymously. It’s a record of events that is shared between many parties, and importantly, once information is entered, it cannot be altered.

Today, blockchains are appearing in a variety of commercial applications. The technology is primarily used to verify transactions within digital currencies, although it’s possible to digitise, code and insert practically any document into the blockchain. Doing so creates a permanent record that cannot be changed. Furthermore, the record’s authenticity can be verified by the entire community using the blockchain, instead of a single centralised authority.

“As blockchains become more embedded in business as a way of verifying and sharing data, they will have a considerable impact on the financial services landscape. So, this is the type of technology that financial planners should become more aware of,” Alan says.

Policy and advocacy

As a policy advocate and official voice of the fintech sector, FinTech Australia is constantly dealing with a range of issues – with Government, regulators and industry.

One of the biggest policy issues FinTech Australia is currently working on is ‘open banking’, which comes into effect on 1 July 2019. Open banking will enable financial institutions to exchange data with each other. Essentially, open banking provides consumers with greater control of their own data that banks and other financial institutions hold on them.

“Open banking will be a big shift in the way the market will look, particularly in terms of what it’s going to mean for start-ups, and being able to access data directly from the banks and not having to scrape data from them. So, that’s one of the bigger policy pieces we are working on this year.”

Not surprisingly, the Royal Commission also features prominently on FinTech Australia’s policy agenda.

“We’re very keen to ensure that fintechs have a voice around potential changes to law as a result of the Royal Commission’s findings,” Alan says.

He adds there are also a number of other policy changes, like RG 257’s ‘regulatory sandbox provisions’ that were supposed to be amended last year and enshrined into legislation, but which have yet to occur.

“ASIC released RG 257 – a world-first class waiver to allow eligible fintech businesses to test certain specified services for up to 12 months without an Australian financial services or credit licence. This waiver would make it substantially easier for fintechs to test their offerings without the considerable expense involved with being licensed.”

According to Alan, the regulatory sandbox framework is comprised of three broad options for testing a new fintech product or service without a licence. Those options are:

–  relying on existing statutory exemptions or flexibility in the law, such as by acting on behalf of an existing licensee;relying on ASIC’s ‘fintech licensing exemption’ for the testing of certain specified products and services; and

– for other services, relying on individual relief from ASIC.

“All of these measures collectively form Australia’s ‘regulatory sandbox’ framework,” Alan says. “And while these provisions will continue to be on our advocacy radar this year, we will also continue with our general advocacy with the regulators, Treasury and policymakers about how fintech is all about improving competition within the market.”

No magic bullet

With the diverse range of fintech offerings popping up in the market, sorting the wheat from the chaff can be a daunting prospect. So, how can planners identify the right type of solutions for their businesses?

“It’s a good question,” Alan says. “I agree it can be confusing trying to sort through all the fintech products to find the right solution for your needs. But it all boils down to three things.

“Firstly, you need to ask yourself: What technology will add value to my clients and business? This means understanding what the needs of your clients are and then finding the software that meets those needs.

“Secondly, it’s about thinking about your own workflows and streamlining your own processes by determining what manual parts of your business can be cut out and replaced with cutting edge software.”

And thirdly, Alan says it’s essential that planners first “try” before they “buy”.

“When it comes to fintech, there isn’t a magic bullet. The best way to figure out what software solution is right for your business is to simply try it. I think in many industries and professions, like financial planning, there is a reluctance to try different software. But when you find the right technology solution, you have to try it,” he says.

“You need to be curious about what each provider is doing with their product and then map this against the needs of your clients and business. You need to be inquisitive because not all offerings will be right for your clients or business.”

Alan applauds the FPA’s initiative of releasing two fintech reports – Mapping fintech to the financial planning process and the FPA Fintech Buyers Guide and Checklist – which are aimed at assisting licensees and planners to successfully navigate the complexity of fintech offerings and help them match their technology needs with the right solution.

“These are really good tools that go to the heart of helping financial planners with their fintech needs. Thinking through, in a systematic way, the needs of your clients and business is incredibly important,” he says. “These types of tools really make you think about your technology needs and the processes involved in selecting the right technology solution for your individual circumstances.

“The FPA’s fintech reports are a great starting point for licensees and planners who are new to the software space, and they are also invaluable in helping to demystify fintech.”

The perfect storm

In fact, when it comes to the future of Australian fintech, Alan is supremely bullish, saying the Royal Commission’s findings, as well as developments in open banking and the regulatory sandbox provisions, are providing a “perfect storm with the perfect conditions” for the fintech sector.

“We’re already seeing outcomes from the Royal Commission, with some financial institutions pulling away from wealth management as a result of issues raised during the proceedings.

“The Royal Commission has been a gift to fintechs,” he says. “It has highlighted the failures in some of the larger organisations; failures in terms of operating systems and processes, which have created the level of distrust we are now seeing in them.”

However, Alan believes this has also created a significant opportunity for fintechs in the business-to-business space, by enabling them to take their services to these organisations to help them better streamline their offerings.

“We’ve also got open banking coming, the implementation of the New Payments Platform (an open access infrastructure for fast, real-time payments in Australia), the regulatory sandbox provisions, and we’re seeing amazing advancements in artificial intelligence. And you can add to this, all the new innovations that are popping up to service blockchain and digital currencies.

“With Australia ranked fifth in the world in terms of adopting fintech solutions, from both a consumer and business adoption perspective, now is probably one of the best times ever to be running a fintech start-up,” he says.

“So, I believe we’re at an interesting point in the fintech sector’s life stage, where all these key developments are coming together, creating a perfect storm for the exponential growth and adoption of fintech.”

Beware of Threats

And what of any threats to the burgeoning fintech sector that may derail this growth?

“As with most trends, there’s an offence and defence,” Alan says. “For example, many people see artificial intelligence as a potential threat, as it will result in people losing their jobs. But I think there is an offensive piece here, where there is a great amount of opportunity to innovate and to use these emerging technologies to do really interesting things with them. It’s the same thing with quantum computing.”

Quantum computing takes a new approach to processing information. Built on the principles of quantum mechanics, it harnesses complex laws of nature to run new types of algorithms that processes information more holistically.

“By breaking all the encryption that exists, quantum computing will provide a whole lot of new opportunities for companies. Quantum computing is going to be a game-changer. But we really still don’t know just how significant quantum computing will be, particularly as we’ve only recently moved from analogue to digital to automation.

“So, as much as there are threats in the fintech space, there are also amazing opportunities, and planners are perfectly positioned to benefit from these innovations. Remember, where there’s a threat, there’s an opportunity, so allow fintech to enable that opportunity within your own business.”

Alan Tsen is the Chair of Fintech Australia.