It’s a new era – many Australians will soon be able to bank with a fintech rather than take out an account at one of the banks.
A new partnership means Afterpay’s 3 million-plus customers will be able to apply for a Westpac savings and transaction account directly through the ‘buy now, pay later’ provider mid next year.
In the deal, the accounts would be held on Westpac’s books, with the money safely secured by a government guarantee under a deposit licence, but the customer side would effectively be managed by Afterpay.
Canstar finance expert Steve Mickenbecker said this was the era of big data, with the move providing Afterpay with an even greater picture of its customers and the ability to determine who could actually afford credit.
“It’s like a window into the soul of the banking customer,” Mr Mickenbecker said.
“If you can access peoples’ transactional behaviour, you can see almost everything there is about them.
“You don’t need to find out from any other source whether they have a home loan, because you can see the transactions of their monthly outgoings.
“You can get a good picture for whether that person’s creditworthy, and whether there are other services you can sell into them.”
And with open banking, Mr Mickenbecker said transaction data would become a lot more accessible. So, who do you trust with your data?
“You need a transaction account and somebody is going to have all that transaction data, but you control the data by choosing the institution you bank with,” he said.
Afterpay finds a lower barrier to entry in banking than neobanks
The other side of the coin of this development, other than Afterpay’s entry into banking, is that Westpac is providing services to new players by wholesaling out its existing products.
By having the deposits held by Westpac, Afterpay avoids having to acquire any licence from the Australian Prudential Regulation Authority (APRA) to offer accounts to its customers, lowering the barrier to entry for the fintech to provide banking services a lot earlier and more easily than other players have done in the past.
This is made possible by Westpac’s new 10x bank-as-a-service platform, launched in November 2019, that essentially opens a back door for fintechs to provide full banking services, but with the added security of a major bank brand, its banking licence and its systems.
Mr Mickenbecker said Afterpay had managed to take the easier route to avoid APRA’s regulatory requirements by using Westpac’s licence.
It has also so far successfully argued to the regulator of credit providers, the Australian Securities and Investments Commission (ASIC), that Afterpay doesn’t provide credit and should therefore not be subject to the regulation that applies to other financial services providers in Australia.
Neobanks, on the other hand, had to jump through hoops to get licensing from APRA and then still convince potential customers that they were a good place to put their money.
Mr Mickenbecker said the challenge now for neobanks was that their cost base has been much higher than Afterpay’s to provide bank services.
“The problem that it presents for them, relative to Afterpay and anyone else who signs up to the Westpac-style deal, is that their costs in delivery are higher because they’ve got all that infrastructure of the bank and all the compliance they’ve had to build. They’ve got to work pretty hard to make up for that,” he said.
“You can see that neobanks seem to be under some pressure, because they have gone from a position of leadership in savings interest rates and they’re no longer the leaders in interest rates.
“Some of them don’t have lending yet and appear to be struggling to bring lending into their product offerings.”
While Afterpay is the only fintech on Westpac’s new banking platform at this stage, the Australian Financial Review reports that Zip – the main competitor to Afterpay and a company which Westpac was a shareholder of until shortly after the Afterpay news broke – may be getting close to an “integration”.
Commonwealth Bank was the first big four bank to announce an integration with a buy now, pay later provider in January when it partnered with Klarna, giving CBA customers access to the pay later provider via the bank’s mobile app.
Afterpay’s share price reached $100 on the ASX for the first time on Tuesday, after the company announced its plans to offer banking services with Westpac. In 2016, the company was listed at just $1 per share.
Australian Competition and Consumer Commission (ACCC) Chairman Rod Sims warned this week at the National Press Club that big banks should be prevented from buying emerging fintechs because it could further increase their market power.