The Citi Australian & New Zealand Investment Conference fintech panel: (left to right) Citi managing director - marketing, digital & customer experience Linda Duncombe; Reinventure Group managing director Danny Gilligan; SocietyOne chief financial officer Jerry Yohananov.
Australia’s taxi industry saw Uber coming – and yet failed to act. The reason lies at the heart of disruptive innovation: any genuine fightback would have simultaneously destroyed its own highly-profitable business in the process.
“They went and produced an app but that's an incremental innovation, it's not a disruptive innovation – so the DNA of the organisation says you're going to lose,” Tyro Fintech Hub boss Andrew Corbett-Jones said during a fintech debate at the Citi Australian & New Zealand Investment Conference in October.

The combination of faster internet and powerful smartphones has levelled the playing field across industries as diverse as journalism, music, travel, and accommodation. Financial services is now the target.

“I don't think there's going to be this one big disruption to banking in the same way we had in lots of other industries… I think it's going to be a lot of death by a thousand cuts.”

Banks, Amazon and eBay

About $US12.2 billion poured into the fintech sector in 2014 threatening traditional bank strongholds such as payments, wealth management, insurance and lending. Nonetheless, Australian banks remain well placed to meet the challenge given they continued to launch new services in the wake of the global financial crisis, just when many of their overseas counterparts were struggling to stay afloat.

Still, Citi managing director - marketing, digital & customer experience, Linda Duncombe, said customers are thinking about their own banking experiences in a new way, which is forcing change.

“Consumers aren't benchmarking us against other banks, they're benchmarking us against other digital or self-serve experiences,” she said, citing companies such as Amazon and eBay. “We may think we're technologically advanced, whether it's perception or not, consumers are saying: ‘this is slow in comparison to what Uber is doing for me right now’.”

Citi recently launched a fintech unit in its global consumer bank, which will focus on mobile banking, while its Citi Mobile Challenge project is an attempt to bring innovative solutions into the bank.

Capital constraints

Danny Gilligan, the managing director of Australia’s largest fintech investor, Reinventure Group, says banks face a particular challenge – they are constrained by the nature of their capital. Shareholders are incentivized through the tax system to demand high yields, which bars the banks from investing in new, disruptive business models with a high failure rate.

“The core problem with disruption is it starts with the nature of capital and the incentives that flow from that. For an organisation to defend itself against disruption it has to act counter-intuitively.”

Westpac has attempted to tackle the issue by investing $50 million in Reinventure, effectively hiving off a small portion of growth capital from its dominant yield capital. Reinventure has invested in several start-ups, including Australia’s first peer-to-peer lender, SocietyOne.

That business has already attracted more than $40 million in mainly unsecured loans from consumers, however, Gilligan says the truly disruptive innovation is how SocietyOne funds its loans by paying investors.

“By offering 9 per cent returns on something that is not government-backed but has every other characteristic of a bank in terms of the credit process, that's a fundamentally different proposition than a 2.5 per cent term deposit and one that is almost impossible for a bank to respond to – and they have no desire to respond to.”
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
Published by BPAY Pty Ltd.  BPAY is offered by over 150 Financial Institutions. Contact your Financial Institution to see if it offers BPAY and to get the terms and conditions. This is general advice – before using BPAY please review the terms and conditions and consider whether BPAY is appropriate for your personal circumstances.