AUSTRALIA: An Introduction

Developments in financial technology (fintech) have increasingly become a defining feature of the Asia-Pacific’s economic and legal standing in the global context. Australia has been a notable driving force behind this, with a recent EY FinTech Australia Census report stating that Australia’s fintech adoption rate more than doubled between 2015 and 2018. This trend has been facilitated by a broadening of product offerings by the Australian fintech community. While previous fintech offerings were limited to operating on the periphery of traditional financial services (including lending, personal finance and asset management), more recently the sector has moved to disrupt the core product offering of many Australian institutional financial service providers, including payments, wallets, supply chain, wealth and investment and data and analytics.

Throughout 2019 and into 2020, a growth in demand from both customers and investors has seen fintechs move into the spotlight with several successful listings on the Australian Securities Exchange (ASX). This trend is notable given the uncertain regulatory environment fintechs are subject to following the completion of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019 (Royal Commission). While the Royal Commission focused primarily on the misconduct of large financial institutions (particularly at the senior management and board levels), this has had a flow on effect of resetting the regulatory dial for many financial service providers in Australia. As a result, fintechs have a unique opportunity to redefine Australia as a global leader in fintech offerings due to the heightened regulatory focus, increased enforcement activity and significant technological developments.

Neobanks 

In 2018, the Australian Prudential Regulation Authority (APRA) introduced a ‘restricted’ authorised deposit-taking institution (ADI) (ie, restricted bank) (RADI) licensing framework. The framework is designed to assist new entrants to break into the banking industry. The new regime enables RADIs to conduct a limited range of banking activities for two years while building capabilities and resources. The framework is designed to balance the promotion of competition and development of innovative new business models with the maintenance of safety and stability in the financial system. The introduction of the RADI framework has kickstarted the launch of numerous digital banks (also known as neobanks) with a corresponding uptake in consumers accessing these services. Neobanks in Australia have been characterised by targeting more digitally oriented customers with a focus on delivering more convenient and cost efficient products.

There are currently four neobanks in Australia that have moved through the RADI framework to full ADI status with traditional banks over the past two years. While the product rollout of these neobanks has been staggered, the uptake has been significantly higher than broader sector expectations demonstrating a trending market sentiment towards accepting fintech offerings as markedly competitive with traditional offerings. It is expected that more neobanks will launch in Australia (either domestic startups or offshore entries) over the coming years.

Open Banking 

Another significant opportunity for fintechs in Australia is the advent of Open Banking. Open Banking is the first iteration of a broader Consumer Data Right initiative to provide customers with control of their data and enable them to share it with third parties. In the Open Banking context, this will give consumers the right to access their banking data and share it with other industry players. It is expected that giving customers greater control and giving other businesses greater access will increase transparency and competition in the financial sector and provide product offerings that better meet customers’ needs. Open Banking is still in its development phase; however it is intended that the accessibility and portability of consumer data will reduce the information advantage that established institutions have traditionally had over fintechs, representing a significant opportunity for continued disruption by fintechs in the future.

Comprehensive credit reporting (CCR) and buy now pay later (BNPL)

There has been a proliferation of deferred payment solutions, with increased uptake from consumers opting to use such services instead of traditional short-term credit (e.g. credit cards). Most significantly, there has been mass consumer adoption of BNPL as a payment model, with research from Roy Morgan in September 2019 indicating that 1.95 million Australians had used at least one BNPL provider in the last year. There has been resulting regulatory scrutiny on BNPL service providers and the Reserve Bank of Australia has proposed reviewing the regulatory framework for payments in 2020, specifically referencing BNPL as a potential space for policy action in relation to merchants passing along surcharges to consumers.

There has also been a renewed focus on credit reporting in Australia in connection with the development of Australia’s responsible lending regime, which requires lenders to inquire about and verify a consumer’s financial situation for the purposes of assessing the suitability of a credit contract or lease. The amount of data considered in credit reporting has increased in recent years following the introduction of the voluntary comprehensive credit reporting (CCR) regime in 2014 but it is generally acknowledged that voluntary information sharing has been suboptimal. CCR gives credit providers and credit reporting bodies access to the ‘comprehensive credit information’ of credit applicants for the broader purposes of alleviating information asymmetries between borrowers and lenders and promoting financial inclusion. The Australian Government (Government) has proposed a mandatory CCR regime for certain ‘large’ authorised deposit-taking institutions (ie, banks) holding an Australian credit licence. While this does not yet capture fintechs, the Government expects that the critical mass of information supplied by such banks and their subsidiaries will encourage other credit providers to also share comprehensive credit information, thereby seeking to address the broader information asymmetry concerns for consumers.

Digital wallet and payment providers 

As digital platform offers have grown significantly in Australia, so too has the use and offering of digital wallets and payment providers. Given the global rise of digital payment systems (notably through WeChat Pay and AliPay) Australian startups and institutions are looking to enter this space via specific products, ecosystem strategies and broader peer to peer payment models. While digital wallets and payments often form part of an integrated product, there are nuances resulting in a significant range of regulatory treatment under Australian law. Significant regulatory requirements can arise for businesses and recent rhetoric in the fintech community is associated with the challenge presented by these regulations. Australia is an active player in facilitating innovative business models and it is likely that this space will develop significantly over the coming years, presenting opportunities for fintechs to disrupt traditional payment models and markets.

The Council of Financial Regulators (comprising Australia’s major financial regulators) made recommendations to the Government for a new graduated framework for stored value facilities (ie, digital wallets that are widely used as a means of payment and store significant value for a reasonable amount of time) to be overseen by APRA. The new framework is intended not only to be fit for purpose for the current financial system but to accommodate future developments and technological advancement, such as proposals for stablecoin ecosystems.

Blockchain and distributed ledger technology 

There has been sustained attention on blockchain technology, and a growth in interest in the technology by established businesses. Fintech businesses have begun moving beyond the proof of concept stage to formalising actual use cases for distributed ledger technology such as managing supply chains, making cross border payments, trading derivatives, managing assets and offering digital currency exchanges. The ASX is progressing with its plans to adopt a blockchain-based technology for its clearing and settlement process to replace its current ‘CHESS’ system. The ASX is currently conducting internal analysis and testing of the technology which is set to conclude at the end of August 2020 with the implementation of the new system scheduled for March 2021.

From a regulatory perspective, the Government has shared a broader commitment to facilitate growth and innovation within the blockchain sector and has taken a relatively non-interventionist approach. Australian regulators have generally been of the view that Australian legislative obligations and regulatory requirements are technology neutral and apply irrespective of the mode of technology that is being used to provide a regulated service.

Regulatory fintech initiatives 

ASIC has championed various fintech initiatives to propel the development of the sector in Australia. Following the conclusion of the Royal Commission, there has been increased investment in ‘regtech’ (regulatory technology) and ‘suptech’ (supervisory technology) by financial services businesses. ASIC undertook four regtech initiatives in 2019 using government funding intended to promote Australia as a world leader in developing and adopting regtech solutions to risk management and compliance problems relating to financial services. One such initiative included a proof of concept chatbox, which was developed to help businesses navigate the credit and financial services licensing regulatory framework.

ASIC has entered into a number of cooperation agreements with overseas regulators that aim to further understand the approach of fintech businesses in other jurisdictions in an attempt to better align the regulatory treatment of these businesses across jurisdictions. These cross border agreements facilitate the referral and sharing of information on fintech market trends, encourage referrals of fintech companies and share insights from proofs of concepts and innovation competitions. ASIC has committed to supporting financial innovation in the interests of consumers by joining the Global Financial Innovation Network, which launched in January 2019 and currently has 50 member organisations.

ASIC has also provided regulatory assistance in various forms. In December 2016, ASIC made certain class orders establishing a fintech licensing exemption and released regulatory guidance detailing its regulatory sandbox for fintech businesses to test certain financial services, financial products and credit activities without being licensed. There are strict eligibility requirements for both the type of businesses that can enter the regulatory sandbox and the products and services that qualify for the licensing exemption. Once a fintech business accesses the regulatory sandbox, there are restrictions on how many persons can be provided with a financial product or service and caps on the value of the financial products or services which can be provided. ASIC has also established an Innovation Hub that has assisted both fintechs and regtechs in navigating the Australian regulatory framework, engaging with around 500 entities since inception. ASIC has noted that these businesses have covered models including digital advice, marketplace lending, payments and remittance, regtech, and credit. Other Australian regulators have also made sandboxes and innovation hubs available.

Outlook 

There has been a variety of regulatory and legislative developments in the fintech industry, and 2020 will see further changes impacting consumers and businesses. With the outcomes of the Royal Commission and the commencement of Open Banking, fintech is likely to see continued opportunities for growth as the sector moves from speculation to development to implementation. In particular, the Select Committee on Financial Technology and Regulatory Technology will in October 2020 report on the opportunities for Australian consumers and businesses in relation to fintech and regtech, barriers to uptake, current regtech practices and opportunities to strengthen compliance and the effectiveness of current initiatives in promoting a positive environment for fintech and regtech businesses.

While the government has a broad commitment to encouraging growth and productivity within the technology and financial services industry, in recent times market regulators have become more focused on consumer protection and fintechs should note the general expectation that regulator engagement is likely to be far more rigorous, and the regulatory approach to enforcement far more proactive. As well as this, market uncertainty guided by external forces such as the current coronavirus pandemic is likely to have an impact on funding avenues for fintechs.

However, it is clear that Australia presents fintechs with opportunities to shape new business models to meet increasing demand for bespoke offerings and tailored services, and established institutions will continue to face the challenge of redesigning their existing technology platform, strategies and capabilities.