The Rise of Non-Bank Lending (Part Three)

November 25th, 2019

Conditions have never been more favourable for FinTech businesses to challenge the incumbent financial service providers. Further to Part One and Part Two of this series, here are a few of the tailwinds supporting the rapid growth of FinTechs in Australia and around the world.

Light business models and low barriers to entry

Barriers to entry are lower than they have ever been for new entrants wanting to compete against the banks. In the past, for example, banks had branches wherever they had customers, but with the power of instant messaging, video-conferencing  and modern digital marketing, it's now possible for businesses to connect with their customers with a very light physical presence. 

High quality and cheap ‘Software as a Service’ products allow FinTechs to rent the software to run their businesses. This avoids the expense of having to build software in-house and the SaaS products are always up to date. Cloud computing also means that FinTechs don’t need to invest heavily in servers and can outsource this to AWS very cheaply with no capital outlay.

The downside of running your business on SaaS products is that it creates external dependencies. This is probably a sacrifice founders are willing to make while they are validating their business model but at some stage they might want to take back control by building their own customised software. 

Enter open source community sharing of software. Rather than your in-house software development team struggling to solve every problem themselves, developer communities like GitHub promote the sharing of open source code which has contributed massively to faster and better quality software development.

Regulatory barriers to entry are also relatively low for a lot of niche financial service providers. The government naturally regulates Australian Deposit-taking Institutions heavily to safeguard the deposits of Australian consumers but Fintech’s that do not take deposits generally have a much lower regulatory burden.

The bar for good service is low

Banks often make their customers feel like they're the lucky ones in the relationship. The cosy oligopoly of Australia's Big 4 banks and little other competition meant their customer base was largely captive. And for every one of the extreme cases raised in the Royal Commission, there are thousands of examples where bank customers have been frustrated by poor service. This continues today with head-count cuts resulting in poor customer service for all but the most premium customers.

This has created a massive opportunity for challengers to attract new and loyal customers simply by treating them with respect and with a genuine intent to help.

Rapid Tech Advancement

Technology has improved by leaps and bounds in recent years. A good example is online video streaming. Most of us now take Netflix for granted but it's only been in Australia since 2015 and, although it was a little slow to reach our shores, its introduction was only made possible by faster internet connectivity and increased computing power. 

Significant developments in financial services like mobile payments, bank account scraping, online accounting and machine learning have helped FinTech businesses provide more value to their customers while also being more operationally efficient. 

The key here is that it has generally been the FinTechs that have benefited from these developments as they are agile enough to fully embrace these technologies. While the banks are carrying out feasibility studies and presenting PowerPoint pitches to the various committees for approval, a few stallion developers at the start-up are getting it into the hands of their customers ASAP!


Our parents might have had their bank accounts, credit card, mortgage, life and general insurance, financial advice and superannuation all with the same bank. A fundamental change is that Millennials are very happy to unbundle their consumption of goods and services and choose the specific supplier that best serves their needs. 

This is critical as it allows FinTechs in Australia and around the world to specialise in very specific niches and provide a better service, often with less cost than full-service organisations can. This leaves full-service banks competing with new challengers in all aspects of their business and compounding the problem is that the FinTechs often target only the banks’ best customers. For large and complex financial institutions like the Big 4 Australian banks, it is a case of death by a thousand cuts. 

This is not lost on management of the big banks and it’s part of the reason they are divesting ‘non-core’ businesses like foreign operations, insurance and wealth businesses as well as retreating from small business lending. This lets them focus on what they are best at which is lending money against houses.

These are just a few reasons why FinTechs in Australia and around the world are growing so fast. And with no sign of these tailwinds abating, they seem set to keep taking business from the banks and other traditional financial service providers.

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