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20210330 The big lie: Noo Finance and the confidence trick by FinTechs and regulators.
20210330 The big lie: Noo Finance and the confidence trick by FinTechs and regulators.
“Innovative fintechs play an increasingly critical role in the market, challenging the established banks, leading to more innovative and cheaper banking for consumers. We therefore examined the proposed acquisition particularly closely, including extensive consultation with industry participants, given the important role of that innovation,” said ACCC Chairman Rod Sims, announcing that the Australian Consumer and Competition Commission "will not oppose" the "acquisition" of 86 400 Holdings Limited by National Australia Bank or NAB. But there is enough in the statement to make it clear that Noo Finance is really just the same old same old, it's sama-sama, it's sitting on the bus while it's at a stop that isn't yours. The ACCC has just, inadvertently, let slip that the Fintech industry is a trick.
86 400 is a so-called digital only bank which means that it offers services only online, in this case only through an application hosted on users' smartphones.
According to the ACCC's statement "The ACCC’s consultation included banks, non-bank lenders, fintechs, mortgage brokers, industry and consumer bodies among others. Most interested parties raised no or limited concerns with the transaction."
And therein lies the true situation.
Those developing and financing fintech companies do not expect, in many cases, to reach profitability: they expect to build a user base and to sell out. There are so many that there is no reason for banks to be competitive as to which they buy: it's a very well-stocked pond they are fishing in. The banks don't need more than one or two fintechs in their group and, in most countries, there are more than enough to go around.
The ACCC's statement suggests that the regulator has only nominal control over Noo Finance. "Supporting our decision is that we have seen several banks and non-bank lenders outside the big four invest heavily in their technology and service offering to improve user[s'] experience.”
After all, there's that big pond: "Whilst in this instance we found that the removal of 86 400 is unlikely to substantially lessen competition in the market, we will continue to closely scrutinise proposed acquisitions of emerging competitors, particularly by major banks,” Mr Sims said. "Market feedback suggested that while 86 400 is innovative, particularly in reducing the time and effort in completing home loan applications, there are a number of other businesses with similar offerings or the ability to replicate them. These other competitors continue to bring a similar disruptive influence to the market”
That translates to "there are lots of fish in the sea and banks and others are developing their own software. There is no good reason not to let them buy in a functioning product that is proven in both a technological and marketing sense." To be clear, there can be absolutely no criticism of that approach.
Where the criticism arises is here: most Noo Finance companies are not designed with a view to trading profit. They are designed with a view to making a profit for their shareholders on disposal. Their price depends on two things - first their customer base (think "eyeballs" in the dot com boom era) and on their so-called assets which means the debt that others owe to them which, as housing crises repeatedly reveal, are often not truly to be considered assets any more than the trinkets in a pawnbroker's window on a wet Wednesday when no one wants to leave home or wherever else they are hiding.
Here's the thing: across the world Noo Finance, using the generic term "fintech," became the darling of regulators in or about 2017. By 2018, regulators were competing to host more and more. But no one wanted to face the reality that these companies were doing nothing new: they weren't even using new technology.
To be fair to Australia, it did recognise early that if a fintech company is providing banking services it must be considered a bank. But so that Noo Finance gained a leg up, participants in that market would be granted a period of light regulation: that was necessary because markets such as Singapore had grown its fintech market rapidly with its so-called "Regulatory Sandbox" which did not define those delivering banking services as banks and allowed them to develop with close to zero regulation beyond that applicable to any company incorporated and trading in Singapore. Again, I should be fair: that means that start-ups can focus on developing their tech and their business. That's good. It also means that when they start operations and must comply with, at least, a light version of financial services regulation, they have built a finance company with no, or very little, culture of financial services regulation. That's not just bad, it's idiotic and downright dangerous for consumers.
"86 400 is a digital bank headquartered in Sydney. 86 400 does not operate a physical branch network, or online browser-based banking facilities, with the key customer interface being the 86 400 smartphone application", says ACCC, going on to say that the company has less than 0.1% of the home loans and household deposits in Australia and "86 400 has offered online transaction and savings accounts since September 2019, and launched a home loan product sold through a network of selected brokers in November 2019." So, it doesn't have branches but it's outsourced a major part of its operations to businesses that do have some kind of physical presence somewhere and which, incidentally, are regulated with an Australian Financial Services Licence.
Hang on... back up... run that by me again, This paragon of Noo Finance has one tenth of one percent of the market and it's considered an important "disruptor" by the regulator for the whole Financial Services Industry including the protection of the other 99.9% of the industry's customer base? Seriously? It's so important that its "disappearance from the market" (to use ACCC's own language) had to be investigated? It's like Hungry Jacks having to seek permission to buy out a tiny village baker.
"86 400 is majority owned by Cuscal Ltd, one of Australia’s largest independent payments providers," says ACCC.
Cuscal is an example of a business that has successfully placed itself at the centre of a so-called disrupted financial sector; a sector that should be called "fragmented." It has become a company that creates order out of the chaos that has been caused by the nail-bomb effect of rampant Noo Finance growth.
ACCC is trying, at least on the face of it, to restore its authority. It says that its research shows that "competition between the big four banks has been muted at best. They tend to accommodate each other rather than competing strongly to win market share. Therefore any acquisition of a rival or potential rival by any of the big four needs to be very closely considered."
That implies that ACCC sees Noo Finance as a tool to break up an implied cartel - without regard to the basic truth that banks trade in money and that the price of money is set by the market (even if it is a corrupt market as happened, for a time, with LIBOR) or by central banks. It is also without regard to the fact that banks have been at the forefront of technological development for decades. And it is without regard to the fact that banks are not allowed to invest their customer's money in their own business development.
When ACCC says that the banks have been developing their own tech, it is with their hands tied behind their backs. It's not as if online or telephone banking is anything new, nor as if the launch of a bank relying on the internet or telephone banking is new. And history shows that, even when those are services developed by banks, they have a relatively short and troubled life. History bodes badly for the FinTech sector and those who are still in it when no one wants them any more.
And so, more and more businesses are started, without the systems and controls that would be needed if they were honest about their business activities. Banking is banking and regulators should not shy away from that, even if hashtag warriors disagree.
FinTech is not a trend, it isn't anything when one gets down to it. It's just a delivery channel for services that replicate those that already exist. Consolidation by acquisition and failure is an inevitable consequence of the current state of the industry.
And that's the con: all those people who thought they were being smart by banking on their phones really aren't. They are just buying a MARB bar because they didn't look carefully enough at the label, or because they thought that buying a MARB bar sticks it to a big corporation, not knowing that, if MARB Corp gets a big enough market share, it will be absorbed by a big corporation and if it doesn't it will die and its assets will be bought by, yes, you've got it, a big corporation.