Analysis: The financial services revolution

At a warehouse in Walsh Bay on Monday night a diverse group of start-ups, fintechs, angel investors and mortgage lenders gathered to discuss the future of financial services.

The event, held at Bond Store 3 just a stone’s throw away from the Harbour Bridge, was a collaborative effort by Pepper Money and Pollenizer, one of Australia’s first tech incubators. Pepper and Pollenizer have partnered to team up with entrepreneurs to effectively disrupt the finance industry.

One of the most hopeful and refreshing suggestions to come out of the event was that fintech may not be what is driving the revolution in finance.

The purpose of the event, at its core, was to explore why finance is still so rigid, so inflexible and so thoughtless about consumers. The use and availability of customer data was a recurring theme of the evening. Timely too, given the Productivity Commission’s (PC) release last week of a draft report on the matter.

Opening the discussion was guest speaker Matt Symons, co-founder of SocietyOne, one of the most successful start-ups to rise out of the Australian fintech space over the last decade.

After leaving a high-profile role with Accenture in the United States, Symons returned to Australia in 2011 where he founded the marketplace lender after putting himself in the borrower’s shoes. As he soon discovered, trying to find out the rate of a personal loan was an incredibly frustrating – and credit score damaging – process.

What credit file?

“You come to personal lending and try and do a price discovery and here is what happens. Google can’t tell you. Comparison sites can’t tell you. The only way you can find out the rate is to go and apply for the loan,” he explains.

“So you go to the bank and fill out a form with an enormous number of fields. Wait three or four days and the bank will say ‘congratulations, here is your rate’. I was unimpressed. I thought the rate was really high.

“So I applied to another bank and received an even higher rate. I asked the bank why their rate was more expensive. They explained that they had seen another application for credit on my credit file in the last 48 hours. They said applying for credit can often be correlated with being in a distressed state as a borrower. So I figured I better not keep applying for loans to discover the rates, because it was trashing my credit file.”

This process, Mr Symons said, is why most Australians take the first loan offer they are given.

“That is why the $100 billion personal lending market works like this: the best customers with the lowest risk effectively pay the worst rates. You can’t discover the price and when you do you trash your own credit file.”

Symons then decided to create a platform that would connect borrowers and inventors without the need for a banking license, or ADI.

“This what quite radical at the time,” he explained, adding that it took more than a few attempts to win the support of the corporate regulator.

However, what Symons discovered after setting up SocietyOne was that no one in Australia really knows what their credit profile is. This is information that the banks have, but we as consumers don’t have it.

“It is a larger issue that those of you looking to disrupt finance should pick up on,” he said.

“Most of the insight, the useful IP, the predictive models that we can build in finance come from transactional banking data. The reality is that banks think they own that data. But we all own that data.

“The revolution will be when people realise this and say ‘that’s my data and I want it back. And I’m going to use that data to arm myself with new options’.”

Government action

Last week’s draft paper from the Productivity Commission was encouraging. The PC is recommending a major overhaul of Australia's data policy framework, including the introduction of a Comprehensive Right to give people more control over their data.

“Surprising though it may be to many, individuals have no rights to ownership of the data that is collected about them. Data is increasingly an asset, and when you create an asset you should have the ability to use it, or not, at your choice,' PC chair, Peter Harris said.

The commission noted that Australia is rapidly falling behind other countries such as the UK and New Zealand in our use of data and we need to allow broader and quicker access for important research and development.

This has been an ongoing frustration for existing financial services providers for years. Particularly when it comes to innovation in lending.

Earlier this year at a Deloitte roundtable, Pepper Money CEO Patrick Tuttle explained how access to customer data in Spain was creating significant efficiencies for the group’s personal lending business in that country.

“We get access to social security information from the government in a direct feed. So we have a lot of data that makes online personal loans much easier to process with automated decisioning,” he said.

In a market where 85 per cent of all mortgages are written by four big banks, the possibilities of open data are huge. The disruptive impact on traditional lenders and positive impact on consumers is on such a scale that the banks will no doubt put up a good fight to keep customer data in their own systems, where they believe it belongs.

But the revolution is already happening. And it has some powerful supporters. Australian Competition and Consumer Commission chairman Rod Sims penned a column in yesterday’s AFR in which he describes the PC draft report on data availability as “groundbreaking”.

“Allowing consumers to use their data to compare offers can assist them to be more informed, make better choices, and drive competition and innovation in the process,” Mr Sims said.

“Empowering a consumer to ask data holders to provide their data to authorised third parties in a form that is machine readable and eventually electronic, portable and secure will allow start-ups to create and tailor products according to consumer preferences.”

[Related: Mortgage bosses say regulation is curbing innovation]

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