Unravelled: The fintech phenomenon – risks and opportunities
1 April 2015
Other articles in this edition of Unravelled:
- Section 68A – undue attention to an inadequate remedy
- Nudge, nudge, think, think – ASIC and behavioural economics
- Bank capital – where to from here?
Written by Simun Soljo Senior Associate
If you work in financial services and you haven't yet come across the word 'fintech', you must be living in a filing cabinet. Everyone seems to be talking about it. Even lawyers like me, who wouldn't know their 'cache' from their 'cloud'.
'Fintech' refers generally to the use of technology in financial services. So far, this is not particularly revolutionary. Financial services providers have been adopting and innovating with technology for a long time. What has changed more recently is the pace of development and customer preferences.
The whole industry is adapting to the change. The regulators are trying to keep up or stay ahead. Lawyers should too.
First, the opportunity
Technology is changing rapidly and customers are increasingly willing to transact electronically and online. While longstanding customer relationships are important, so is being able to deliver what customers want. And in financial services, this increasingly means having the right technology to give the customer a more convenient way of accessing their money, making payments, investing and getting advice, all potentially at lower cost.
The potential is there for new entrants with the right technology to steal significant market share. Providers with more innovative products or solutions will have an advantage. In the Australian financial services industry, worth billions, this represents a massive opportunity.
The opportunity is attracting investors. Money is flowing into new technological development both within established financial services providers and within emerging companies and start-ups. Investors see a potential windfall if they can pick the next big thing. We are seeing a new tech boom. It has led to the development of investment funds and incubators focused on fintech start-ups. It has the potential to increase employment in this high income sector, which will have benefits for the economy as a whole.
It's smart to adapt
But with the opportunity comes risk.
Clearly, it represents a threat to existing players. The smarter ones are adapting by investing in their own technological development, as well as taking an interest in the emerging companies and start-ups that are leading the innovation. It's wise to stay close to new developments. Those who carry on doing the same old thing and ignore the market may be left behind.
For investors in the sector, there is clearly the risk of huge losses. The number of new entrants is proliferating. They will not all have great ideas or have the ability to bring them to fruition. Money will be lost. As with the last tech boom, irrational exuberance and the herd mentality will result in some bad investments. But for those who are able to pick the winners, the rewards could be substantial.
With the increasing penetration of technology, there are also risks from those with ill intentions. ASIC, in a recent report, highlighted the increasing threat posed by cyber attacks on financial services providers. The threat will only grow as financial services becomes increasingly dependent on technology.
Regulators in the spotlight
The regulators are trying to keep up with where the industry is going. There was a lot of talk about fintech and innovation at the recent ASIC Forum. Clearly it is on the mind of regulators, and not without reason.
The development of the sector poses some obvious risks for them too. It is growing quickly, with many new entrants every year. The business models are sometimes difficult to understand. Start-ups seem to have a tendency to leap first and think later. Many can't afford good advice when they are in early stages of development. Yet, the financial services area operates within perhaps the most complex regulatory regime of any industry in the country, with multiple layers of regulatory obligations. Good advice early on is important. It may be too late when a fledgling company can finally afford it after their second or third round of capital raising, when they usually already have thousands of customers.
This presents a challenge for regulators. ASIC has made it clear that it wants to encourage innovation in fintech but is looking for ways to also encourage compliance. It recently announced the proposal for an 'innovation hub' with streamlined application processes, better access to ASIC staff and better online information for innovative businesses. It's a great idea and cannot come soon enough.
Let's hub – Stone and Chalk
The private sector is also doing its bit. Late last year, KPMG prepared a research report for the Committee for Sydney, which considered the conditions needed to allow Sydney to become a major centre for the fintech industry, which will have to compete with cities like London, Singapore, Hong Kong and New York. A key recommendation was the 'establishment of a not-for-profit Fintech hub in the heart of the city that co-locates venture capital, technology start-up and established financial services firms'. It is pleasing that this recommendation is about to become a reality. The hub will be called 'Stone & Chalk'.
Allens is a foundation member together with other major companies including ANZ, Westpac, Amazon, American Express, KPMG, Macquarie Group and Woolworths. The NSW Government has also provided support. The hub will provide subsidised working space, industry networks, expertise and mentoring, and access to capital for emerging companies in the sector. Allens has led the legal and governance workstream in the establishment of the hub.
We are on board
We are seeing increasing interest in the sector, from established financial services companies developing new technologies, investors who want to understand the regulatory landscape affecting fintech emerging companies and start-ups, as well as start-up companies themselves. There is a broad range of issues to consider, from more familiar issues of corporate structuring, governance, and finance, to ensuring innovation and intellectual property is protected, and navigating the regulatory minefield.
One practical way we are assisting the development of the sector is by offering an easy to use, low-cost suite of critical contracts that every start-up company needs when establishing its business. It's been developed by my colleagues and is called the 'A-Suite'.
You can find out more about what we are doing in this area and how we can help by visiting our website dedicated to start-ups and emerging companies - Allens Accelerate
What does the future hold?
Where the fintech phenomenon will end up is hard to predict. Customers will certainly be better off. But it is more difficult to discern how the competitive landscape will look. It seems likely that those who are prepared to invest will be rewarded, but as always, this is not without risk.
Other articles in this edition of Unravelled
- Simun SoljoManaging Associate,
Ph: +61 2 9230 4635
You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.