At a glance
By Nigel Bowen
With crypto crashing, neobanks collapsing, Buy Now Pay Later (BNPL) services going from being the disruptors to being disrupted and tech industry rationalisation looming, what is a regulator to do?
Ross Buckley is KPMG Law – King & Wood Mallesons Professor in disruptive innovation and law at the University of New South Wales. He’s also the co-author of BigTech and Platform Finance: Governing FinTech 4.0 for Sustainable Development, a recently published how-to manual for fintech regulators across the globe.
Alan Tsen has been a tax lawyer, the founding general manager of Stone & Chalk, a chairperson of Fintech Australia and a member of the Federal Government’s Fintech Advisory Group and the Australian Securities and Investment Commission’s Digital Finance Advisory Panel.
Buckley and Tsen believe Australia’s politicians and regulators have done a reasonably good job of fostering and regulating fintechs, but warn they are in no position to rest on their laurels given the challenges barrelling towards them.
A proportional approach to regulating financial services
Financial services businesses now fall into three broad categories: fintech start-ups of varying size and scope, well-resourced industry incumbents (the Big Four banks, in the Australian context) and globe-spanning tech behemoths.
It would arguably be neither wise nor fair for regulators to treat differently sized players exactly the same, yet the playing field still needs to remain more or less level.
“There’s always going to be tension between regulators and the regulated, between entrepreneurs and public servants,” Tsen observes.
“Yet the Federal Government has done well in encouraging fintechs to emerge and compete with the banks. ASIC has taken a thoughtful approach to crafting regulations for new financial products, such as Buy Now Pay Later, that previous generations of regulators could never have imagined existing.
“ASIC has also looked at what has worked overseas, such as open banking and regulatory sandboxes, and introduced those things here in a localised form.”
Buckley agrees. “Yes, Australian regulators learnt some lessons from their foreign counterparts, but things are moving so fast that it’s a huge challenge for regulators everywhere to keep up,” he says.
“ASIC has taken the graduated and proportional approach to regulation I believe works best.”
While a proportional regulatory approach might seem like a no-brainer, it’s harder to achieve in practice than in theory.
“Thanks to the GDPR [General Data Protection Regulation], in Europe the field is tilted in favour of incumbents and big tech companies with the resources to comply with lots of regulation,” Buckley notes.
Australia now has fewer neobanks than it used to. Presumably, it will soon have fewer BNPLs.
Both Tsen and Buckley believe the Australian Competition and Consumer Commission (ACCC) should take a hands-off approach to the merger and acquisition activity that is likely imminent.
“The ACCC doesn’t have much experience with the fintech sector but I’m sure it will recognise that, most of the time, mergers and acquisitions are a good thing,” Tsen says.
“I don’t see how preventing start-up founders either cashing out or joining forces results in a more vibrant fintech scene.”
“Given shareholder expectations, banks can’t be innovators that take big risks while that is precisely what fintechs are meant to do,” Buckley says.
“Part of the reason Australia’s banks are so technologically sophisticated and that Australian entrepreneurs have been so eager to launch fintechs is because industry incumbents acquire successful start-ups.”
The looming Big Tech challenge
Since Apple announced it was launching a BNPL service, Apple Pay Later, there has been speculation about whether Australia’s BNPLs are long for this world.
Tsen argues tech leviathans don’t pose as much of a threat to domestic businesses as is often claimed.
“Have Google, Apple or Facebook put the likes of PayPal or Square out of business?” he asks.
“Apple Pay Later will presumably need to operate under the same rules as pure-play BNPLs, as well as banks and credit card companies offering BNPL products, do in Australia. That’s as it should be; I don’t see the need for special rules for the FAANGs [Facebook, Amazon, Apple, Netflix and Google].”
Buckley is less sanguine. He notes that finance is all about pricing risk, which is all about data analysis.
That means companies with an intense focus on collecting and then analysing vast amounts of data have an enormous competitive advantage.
“The tech companies have access to far more personal data than banks can ever imagine having, without the banks’ overheads or obligations,” he notes.
“The tech companies don’t want to take out banking licenses or deal with burdensome regulation. But if they control the consumer interface, they don’t have to.
“Coles isn’t an insurance company. Nonetheless, it sells insurance ultimately provided, on a white-label basis, by IAG.
“What’s to stop the Apples and Googles of the world cherry picking the most lucrative financial products and then, where necessary, getting Australian banks to compete among themselves to provide these products on a white-label basis?”
The good news is that such a scenario is (probably) 5-10 years away. The bad news is that even Buckley isn’t sure what regulators should do if giant international Chinese, tech companies start gunning for the Australian banks that employ so many people and contribute so much tax revenue to government coffers.
Australian Banking Association CEO Anna Bligh has warned, “Australia’s five largest banks between them pay more company tax than the rest of the ASX 200 combined, and if a significant amount of their revenue ends up in the pockets of companies like Apple, that is revenue that is not going to come back to the Australian taxpayer.”
“It’s the eternal dilemma of regulators,” Buckley says. “How do you encourage innovative new market entrants and ensure industry incumbents face serious competition while preserving the stability needed in the financial sector?”