Digital lenders challenging the banks: Prospa

Mr Moshal noted that he had seen an “unbundling” of the banking system – with fintechs taking key components or businesses and finessing them.

Looking at his own company as an example, he noted that Prospa had used alternative data and automation to target a traditionally underserved business lending market.

“We saw different fintechs attacking a certain part of the banking system and doing that better,” he said.

“As they’re actually starting to grow and getting loyal customers and you know, very high [NPS] and because they’re loving the products, they’re often asking, what else can you give me – and we’ve seen an element of fintechs rebundling.”

He pointed to Square’s $39 billion acquisition of buy now, pay later giant Afterpay as an example of two fintechs attempting to rebundle businesses that have traditionally been offered by banks.

Open banking is also expected to make various lending and banking options more accessible to customers, according to a new report on the future of fintechs from CreditorWatch.

As noted by Rebecca Schott-Guppy, CEO of fintech industry body FinTech Australia, fintechs will be able to gain access to banking data through intermediaries, and then directly offer services to businesses and consumers.

The change could help customers make larger payments at higher volumes and higher rates, such as mortgage repayments, without having to prove their identity in a physical banking branch.

Mr Moshal has observed that over time, customers have become more open towards alternative providers.

“People are far more willing to try newer brands than they would have been in the past. We used to hear at Prospa, first question was are you a bank, if you’re not a bank, what are you?” Mr Moshal said.

“That was a complex question. That’s certainly not the case today. Just the knowledge, ask your average consumer if they have heard of many fintechs and they have.”

Recently, APRA rolled out new restrictions for banking entrants, mandating that they must have an income-generating product as well as a deposit product before they can secure a full licence.

The standards unveiled in August followed a review into the restricted licensing pathway that was launched in 2018.

The review had happened after the closure and licence rollback of former neobank Xinja.

Ms Schot-Guppy has forecast that the regulatory changes will see new entrants “reverse engineer” the pathway to becoming a fully fledged bank, starting with loans.

“We’ve just gone through a bit of a consolidation phase and we’ll see companies reverse engineer it, actually go from lending products and then to become a neobank, so that they have the revenue generating stream before they go to offering transaction and deposit accounts, which we saw Xinja and Volt start off with,” she said.

“So I think we’re seeing it change the landscape, but I think we will see some growth in the sector.”

‘Friends or foes’: Incumbent banks versus challengers

Mr Moshal noted that each of the banks has had their varying responding strategies to the emergence of fintechs.

More and more fintechs will move into the banking space, he believes – whether they provide services in the backend for institutions’ operations, partner across a customer-facing business or offer themselves up for acquisition.

For banks, the challenge could lie in deciding whom to buy and whom to team up with.

“I think acquisition was something where it was a bit of a wait and see, so I think the view of the banks was rather, let’s see who the winners are and then hopefully we can acquire them,” Mr Moshal said.

“I think the banks have to decide, can they partner or will they be both partnering and competing? And I think they’ve had an identity question that they have to answer, are these our friends or foes.”

Fintechs could face further challenges when operating alongside the banks, having to move alongside organisations of a comparatively mammoth size and capital base, with “different operating rhythms or different attitudes or different style”.

But Mr Moshal also believes the banks may be most challenged on their potential loss of data, as customers migrate to smaller players.

The lending market has seen a “lot of innovation” over the last nine years, since the specialist business lender was first established, he said.

“What has been universal across all fintech lending solutions, and this can go towards an Afterpay, which is a quasi… payment, lending product, is reducing the friction and making it simpler for the customer than their previous experiences,” Mr Moshal said.

“It’s been done and it’s highly, highly valued to customers who are certainly finding that if you can make it easier, quicker, simpler, faster.”

Reducing friction bumps commerce speeds and produces a better financial system, he added.

“I think the thing that excites me is, financial services is just an such an enormous space, there’s so many problems to tackle. And it’s a vital thing to keep improving on,” Mr Moshal said.

[Related: SME lending likely to be regulated, suggest lenders]