What is fintech?

The fintech space and the players in it have been around for a while now, but "fintech" is becoming increasingly difficult to define. What once started as a term to define the tech startups coming to disrupt the big banks after the Global Financial Crisis (GFC) has now changed to include the banks it came to disrupt. So what is fintech, what are the benefits and risks, and what fintech products are there? This guide will take you through what you should know.

What is fintech?

Fintech is any use of technology in financial services to develop or improve products and services. While this definition can be applied all the way back to the introduction of the first ATM in the late 1960s, fintech really became a term applied to the rapid redesign of financial services following the GFC in 2007/08. From this point, we have seen new technology being used to introduce a raft of new banking and lending products that are increasingly becoming faster, cheaper and more accessible.

What are some examples of fintech in Australia?

There are a number of different types of "fintech" products, which include new products as well as improvements of existing products. Fintech products can include, but are not limited to, any of the following:

• Peer-to-peer lending. This is a type of lending where a third-party company brings together people that want to borrow money with individuals or companies that want to invest. The borrowers receive a rate that matches their determined risk and the investors receive an attractive interest rate based on how long they invest for and their risk appetite. Some examples of peer-to-peer lending in Australia include RateSetter, Harmoney and SocietyOne.
• Unsecured small business finance. Fintech has made small business finance more accessible by providing more ways to borrow without the need for residential or commercial property as security. Typically, business loans provided by banks require a property to be attached as security in Australia, but fintech has brought in new small business finance products that leverage technology for better approval rates or more flexible terms for increased accessibility. Fintech business lenders include those provided by Prospa, Moula and Spotcap.
• Robo advice. These are essentially automated investment platforms that leverage Artificial Intelligence (AI) and machine learning. Robo advisors typically help you manage an investment profile of exchange traded funds (ETFs) that are based on your chosen investment amount, risk appetite and investment goals. Robo advisors available in Australia include Six Park and Raiz.
• Digital banks. Also called challenger banks and neobanks, these are new banks that are typically only accessed from your smartphone. They are built using new technology and offer smart features such as spending insights and analysis, multi-currency support, smart saving features, cashback and security features. There are a number of digital banks launching accounts and products in Australia including Up Bank, Xinja and Revolut.
• Cryptocurrency. Cryptocurrencies are currencies that only exist digitally and can be transferred securely. Unlike traditional currencies, they aren't government regulated and are instead produced by a public network. As of November 2018, there were over 2,500 cryptocurrencies in the world.
• Digital wallets. Apple and Google are not small tech startups and they are not large financial institutions, but they do offer fintech products. Contactless payments are popular in Australia and digital wallets such as Apple Pay and Google Pay provide a way for these payments to be made. By enabling devices such as smartphones and wearables with near field communication (NFC) technology and then partnering with banks, people are able to make contactless payments.

What is a fintech company?

Fintech companies are usually thought of as being tech startups, but a fintech company is any organisation that is using technology to develop or improve financial products and services. This can include banks and startups.

In Australia, banks have experimented with new technologies, brought out innovative products and partnered with fintechs to progress fintech innovation. While not every bank is a fintech, banks have developed fintech products and adopted agile approaches used by tech organisations in order to keep up with the pace of change and bring out new products quickly.

It is also becoming increasingly common for banks, tech companies and fintech companies to work together to bring out fintech products and services. So, whereas in the early days of fintech, only disruptive players were considered fintechs, now startups as well as banks can be considered to be fintechs if they are changing financial services.

How is fintech regulated in Australia?

There are varying levels of regulation for fintech products and services. The Australian corporate regulator, the Australian Securities and Investments Commission (ASIC), has taken various actions with fintech products and services in order to encourage innovation and competition as well as protect consumers.

For example, to encourage innovation, ASIC established a regulatory sandbox to allow fintech companies to develop and test products and services in a limited environment before getting a licence. Also, in 2016, ASIC released guidelines for robo advisors to follow to ensure customers are protected when using their products and services. Australia's seven largest fintech business lenders also established their own code of conduct in order to self-regulate.

What are the benefits of fintech?

The following are a number of advantages to fintech:

• Price. Fintech products can come with lower prices that are better for consumers and businesses. These lower prices can be because of the use of algorithms to better judge the risk of lending to someone or simply through the lack of legacy systems.
• Access to financial products. A benefit of fintech globally is the increased access to banking and lending products. In Australia, small businesses may benefit from better access to finance through fintech products. Consumers may benefit from better insight into their spending and better interest rates through risk-based pricing. Simpler, automated investing also gives people options outside of savings accounts, and people living in regional areas will benefit by not having to visit a branch to conduct their banking.
• Improve your finances. Many fintech products aim to improve your financial position and aim to give you a better view of your finances. For example, neobanks and other banks offer spending analysis and insights as well as notifications to help you understand exactly where your money is going.

Are there any risks to fintech?

• New companies. Many companies entering the fintech space have less experience in financial services compared to banks. This makes it important to check that the company is appropriately licenced and contactable before applying for any products. You would also benefit from reading financial documents, such as product disclosure statements as well as reviews, to ensure you're well informed about what you're buying into.
• Less regulation. Some fintech products and companies tend to operate outside of the traditional financial landscape and therefore may be pending regulation or be operating in a less regulated space. For example, small business finance providers do not require a credit licence to offer business loans. There are still consumer laws to protect you, but it's best to check how a company is regulated and licenced if you have any concerns, or you can even contact ASIC directly.

Questions we've been asked about fintech in Australia

What is an incumbent?

An incumbent is any large institution that is established in the financial market, usually a bank.

Can a bank be a fintech?

Yes. Banks offer many innovative fintech products and services as well as partner with fintech companies to help move innovation forward.

Are large tech companies such as Amazon and Google fintech companies?

While still referred to as tech companies, Amazon, Google and other large tech companies can and have offered financial products.