Ben Heap understands the ‘innovator’s dilemma’ facing big financial organisations: why invest heavily in new technology that can undermine a successful way of doing business?
But the former bank executive isn’t looking to solve the problem. In fact, he’s counting on it in his role running high-profile tech fund H2 Ventures.
“Financial organisations such as banks have been insulated because trust with customers is so important,” Heap says.
“But while the dynamic change of the internet as a delivery platform hasn’t yet impacted banks in the same way as other industries like media and retail, it absolutely will. My thesis is that it will have a greater impact over the medium-to-longer term because it's an industry that is acutely suited to electronic delivery.”
The start-up opportunity
His focus is on fintech: start-ups blending financial services and technology across areas such as peer-to-peer lending, wealth advice, payments, insurance and crypto currencies. Heap says H2 Ventures is well on its way to raising $10 million by the end of this year and has already backed nine start-ups (continuing support originally made during his time at incubator AWI Ventures).
Institutional investors such as super funds are also looking at the venture capital sector again and Heap expects some meaningful investments over the next two years.
“A few years ago there was little interest in fintech,” he says. “But I’ve seen increasing interest from institutional and high-net worth investors towards technology over the past 12 months.”
Historically, venture capital returns have been less than spectacular for many Australian investors but the success of global companies such as Facebook, Twitter, and Google (itself a significant venture capital investor) has brought a fresh perspective. The rise of local companies such as wealth management firm Bravura Solutions, foreign exchange provider OzForex, and New Zealand cloud-based accounting software firm Xero has also shown the potential of fintech.
Heap says H2 Ventures is currently sifting through applicants for its next funding round “and the quality has been terrific,” pointing to opportunities in personal wealth, payments, security and, increasingly, big data.
“Our industry is just crammed with data – the trick is converting that into useful information and there are clever models out there that we're looking at.”
H2 Ventures recently moved into Sydney-based fintech hub Stone & Chalk, where its investee companies will eventually comprise about one-quarter of 2300 square metre floor space.
The big banks: embracing disruption?
The big banks and financial institutions are intent on not being left behind – several have provided financial support to Stone & Chalk. Hard lessons have been learnt from the way companies such as PayPal and Amazon (which Westpac chief executive Brian Hartzer recently compared the bank to) have used technology to change the way customers do business.
In September, Hartzer outlined an ambitious program to heavily invest in new digital technology to bolster customer service. He has previously encouraged Westpac to think and act like a 200 year-old startup company. The other big banks are also rolling out innovative offerings to complement, rather than compete, with their traditional services such as National Australia Bank’s online UBank.
“As time has gone by the speed of change has accelerated extraordinarily,” says Heap. “Over the past 50 years you could adapt to changing business models and introduce an alternative within your business group over time – now those changes happen very dramatically and in a short space of time.”
Macquarie Research has previously estimated that digital disruption could strip almost one-third (or $27 billion) from the banking sector’s total revenue.
However, the Australian banks are not standing still and are currently rolling out the New Payments Platform (NPP), which will make real-time low-value payments a reality in 2017. BPAY will provide the NPP’s first service, which will allow customers to immediately transfer bank funds via mobile phones, tablets and the internet.
“The key idea the banks need to focus on is not to be afraid to experiment,” says Heap, who estimates that the big banks allocate just 3 per cent of their IT budgets to genuine innovation.
“Do a number of these things – it’s flawed logic to think they or anyone can predict who the winners will be in five to 10 years from now so it's imperative to have a number of bets.”
Source: Macquarie, KPMG report: Unlocking the potential: The fintech opportunity for Sydney October 2014
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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