One of the key benefits of this new connected way of working is it removes the inefficiencies of commerce friction.
From manual processes reliant on paper, human intervention with its propensity for error, to limitations inherent in geographical boundaries and logistical networks.
The digitisation of both financial services and those being serviced all but eliminates the wastage caused by these very physical restraints.
It reduces days for business loan approval to several minutes online. It allows an Australian consumer to access credit from their mobile while waiting for a bus – whether that bus happens to be in Sydney, or in Shanghai.
For fintech founders, a critical implication of this two-way street of digitisation is the extension of the potential customer pool across national borders.
No longer are growth trajectories limited by the confines of geography and jurisdictional boundaries.
For the majority of fintechs that require hyper-scalability to approach profitability, the opportunity thus presented is substantial.
But with this significant opportunity also comes a significant risk for Australian fintech.
The reduction of national barriers means Australian fintech is free to cross over into international markets.
But, likewise, these international markets – with their greater experience, scope and funding – are free to cross over into our markets also.
So how big exactly is this threat, and what might be done to neutralise it?
The current state of play
According to research by Frost & Sullivan, the Australian fintech sector could grow to $4.2 billion by 2020, up from its $247.2 million valuation in 2015.
This predicted compound annual growth rate of 76.36 per cent could see Australian fintech on a trajectory towards becoming a significant industry – and we’re already seeing some evidence of this growth.
Adoption rates in Australia have already increased from 13 per cent in 2015 to 37 per cent in 2017, according to an Ernst & Young report, making us the fifth biggest global adopters.
Investments into Australian fintech (including M&A, private equity and venture capital) have also risen from US$53 million in 2012 to over US$675 million in 2016, according to research by KPMG.
In fact, some of the largest Australian players alone are now single-handedly more valuable than the sector as a whole was in 2015, with Afterpay’s market capitalisation now over $300 million, and ZipMoney’s over $250 million.
But, despite these positive signs, Australia still remains little more than a rounding error in the global fintech market.
And because international markets are much larger and in some cases more mature, we risk having this growth trajectory hijacked by experienced and well-funded foreign entities in search of untapped growth markets.
Ecosystemic impediments
So, what is Australian fintech doing differently to some of our competitors in international markets?
Failure can be a good thing
One issue Australian fintechs are facing is a lack of appetite for failures by the banks.
Not every fintech innovation or partnership experiment will succeed. Australian banks need to get comfortable with ‘fast failure’, by experimenting with different tech-driven models, and partnering with fintechs more comprehensively to learn about the new future, and shuttering the initiatives that don’t suit.
This is a huge cultural shift necessary to see break through results and an increased urgency to innovate.
On the business model side, too many fintechs are merely replicating a bank’s value proposition, and trying to disintermediate.
This is despite paling significantly in terms of economies of scale and access to capital.
It’s also an approach that places a fintech’s greatest competitive advantage – its technology – almost as an afterthought, as opposed to positioning it centre stage in its strategy.
A great example of resulting stagnation is in the business lending segment, where technological innovation has barely budged in the last 10 years.
This has caused the business working capital funding gap to continue to grow, to its current $60 billion shortfall per year according to research by Macquarie.
More ‘fin’ than ‘tech’
Despite tech being the real hero of this story, Australian fintech has also so far maintained a greater focus on finance.
This is unsurprising given there are some great yields to be had in traditional financial services here, that aren’t always to be found overseas.
However, because we haven’t been forced by circumstance to innovate and invest more heavily in tech, the result has been a sort of sluggishness that has resulted in the creation of products that are a minor improvement rather than a re-imagination of existing products.
The issue here – in an increasingly digitised world – is that such products aren’t as readily scalable or global in nature.
In a hyper scale and global financial market, we don’t have to own the whole value chain, maybe thinking about how we use technology to own market access has more merit and should be where we focus on adding value.
Friends not enemies
This is not a David and Goliath story where the little (but heroic) fintechs take on the big (so obviously tyrannical) banks using the magical weapon of superior tech.
Instead, for Australian fintech and banks to survive international competition, a situation of partnership and 'co-opetition' with banks is the answer.
A more apt analogy might be found in Game of Thrones instead: the Night's Watch (the banks) realises the White Walkers (foreign financial institutes) will wipe out all life unless an alliance can be formed with the Wildlings (domestic fintechs).
A global growth focus
Much of the above stems from a failure to move fast enough to embrace the changing dynamic of our position within an increasingly globalised financial marketplace.
Investment into tech that allows for hyper-scalability, through aggressive expansion into overseas markets, while leveraging our significant financial expertise through partnerships within our local markets, might all assist in creating an Australian fintech model that could capture significant new markets internationally.
The future looks bright
Fortunately for Australia, being late to the international fintech export party may actually have its advantages: we have a plethora of success and failure stories from which to learn, without having to fail fast ourselves.
So, if we can learn from the mistakes of others, think beyond our own local shores, and unlock the international export potential offered by partnerships – Australian fintech may just have a fighting chance of exceeding growth expectations.
Martin McCann is the chief executive and co-founder of Trade Ledger.
