Australia's big banks are well placed to defend their position against fintechs hoping to disrupt the industry, according to a new report from Moody's.
While fintechs may be seen to pose a growing threat, large banks have the financial resources to invest in their own or joint technology, Moody's said. However, smaller banks may still be vulnerable to disruption from fintechs.
Moody's vice president and senior analyst Daniel Yu said: "Fintechs have grown substantially in recent years, leveraging technology to penetrate segments of consumer and small business unsecured credit that are underserved by incumbent banks, and areas that do not require the liquidity and scale of a bank's balance sheet, such as payment services."
He went on to explain the major incumbents have already responded to the threat posed by fintechs by pursuing technology development.
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"The smaller banks with limited financial resources are more vulnerable to fintech disruption," Yu added.
The focus on residential mortgages has created opportunities for fintechs to specialise in products outside of this sector, however residential mortgages account for 75% of total system loans, the report shows.
Regulators have supported the creation of digital banks, with APRA recently granting full banking licences to Judo Bank and Volt Bank.
But, fintechs face significant funding constraints with limited access to capital markets and other sources of debt funding. The incumbents do not have this issue.
Moody's predicts the large incumbent banks in Australia will defend their market positions with their own technological innovation, observing that the big banks have been actively investing in improving digital services while collaborating with fintechs.
However, fintechs are gaining traction in unsecured credit, especially with the success of buy-now-pay-later services including Afterpay. These offer an alternative form of consumer finance to bank credit cards.
Their success may come down to the fact that although these services are similar to traditional personal finance in concept, they are not subject to ASIC's National Consumer Credit Protection Act. This has helped these businesses grow rapidly, Moody's said.
Loans to small businesses have also become a key focus for fintechs, while it is not for the big banks. Judo Bank, which was granted an ADI just last month, is focussed on lending to the small and medium sized business market.
Small business lending can be risky; with just under half of small businesses that made less than $200,000 annually closing with in four years (based on 2014 ABS data).