In Conversation with Alan Tsen, General Manager, Stone & Chalk – Part One
"It’s a big move to be a bank. There’s often an underestimation of the rigours of the process; your posture as a business must change. The Royal Commission has highlighted the very strong duty to one’s customer, and tech companies won’t necessarily want to go that far in such a direction."
FST Media: In the wake of the Royal Commission, the explosion of tech-savvy challengers, and with the imminent launch of Open Banking, our financial services industry is undergoing a groundswell of change and transition. Walk us through your view on the current state of play in Australia's banking industry. Are we in a good place?
Tsen: If we think about what's been happening most recently within the banking industry, the first thing that most people think about in terms of a ‘marker’ is the Hayne Royal Commission. It has certainly highlighted some systemic and cultural issues above all else in the current banking system and why it’s important to have a robust and competitive banking landscape. Obviously, coming from a fintech perspective, we think that competition in the market is probably one of the best ways to ensure a strong system and one that is really going to have the biggest impact on customers.
At the end of the day, what the Royal Commission highlighted above all else is that customers in some segments are currently not being taken care of as well as they could be. And again, there are probably some systemic failures in the industry that need to be looked at. But there are probably broader forces at play. If we think about technology, for a long time it has been a big force in the industry: it’s cheaper, it’s easier, and it’s faster than ever to build a company today. In fintech, obviously, one of the challenges is the regulatory framework that sits around it. And we’ve seen great strides in changes around the regulatory regime for financial services. We’ve seen the introduction of the what’s called the ‘RADI’, or the Restricted ADI licence, allowing more competition in banking; we’ve seen the introduction of the financial services sandbox; we’ve seen smaller changes to tax treatment of digital currency; and we’ve seen amendments to KYP (know your patron), AML (anti-money laundering), and digital currencies.
FST Media: Of these, what force would you say is having the greatest transformative impact on financial services today?
Tsen: What’s different today is the regulatory regime. We talk about cultural change, and that’s very recent – there’s still a lot more to come from that in terms of the Royal Commission and what that means to banking, and I think it will change for the better. But the regulatory regime is the one that stands out the most to me. We’re seeing, quite clearly, that it allows more and encourages competition in the market. While, of course, there’s more to be done, I’ve referred to it previously as the ‘perfect storm’ for start-ups to get into the fintech space.
FST Media: Do you feel the regulatory regime is changing fast enough in Australia? We, of course, no longer compete on a local scale but globally, so how are we positioned compared to other countries?
Tsen: My answer, generally, is there could always be more done and it could be done faster. But if we take an overall view, as compared to other jurisdictions, we’re not doing badly. In many regards, the changes have been really positive, which has seen the rise of neobanks, and that’s in part thanks to the introduction of the restricted ADI – despite some criticism of it – which has encouraged a wave of new entrants into the market. Overall, I’d say we’re somewhere in the middle. Obviously, any time I get a chance to speak about it, 'more' and 'faster' is usually my message, but if we’re to take a holistic view of it, I think we’re doing pretty well.
FST Media: You mentioned some criticism of the RADI. Is any of that coming from the incumbents?
Tsen: It’s mostly from start-ups that have tried to access the RADI – it’s still a challenge. Any time you have a restricted ‘something’, it gives you scope, and the question is how much scope is one that will have a material impact and allows you to do what you want to do. I always talk about regulation as a guard rail; so we must ask, how high do you place the guardrail? And the question with regard to the RADI – is it fit for purpose?
The general proposition of the RADI is that it's a good starting point, but there’s probably a little bit of work to be done around it – as we’ve seen with the sandbox, which is where some of the criticisms have been levelled at it from people who’ve really gone deep on understanding how they can use it.
FST Media: The emergence of the RADI portends to a rapid growth of neobank offerings, which appear to have already found their place in Australia's financial services market. How will this evolving financial services market shape up and what role will this mix of incumbents, fintechs, and neobanks play in the lives of tomorrow's consumers?
Tsen: The emergence of neobanks has really started to make incumbents think about their approach to customers. One of the things that we’ve seen in the UK, where there are a number of neobanks, is that these start-ups are more focused on creating an experience for their customers that aligns with their needs. If we think about some of the core failings of banks – that, again, were highlighted by the Royal Commission in a pretty stark way – sometimes incumbents lose sight of what’s really important to them, and that is what their customers need and want: to be treated as the ‘north star’ of their business. Neobanks tend to be pretty good at it. Their focus has to be razor sharp on their customers because they’re in that position. They’re trying to get customers to switch from what a lot of people think is a really sticky product step. In Australia, it’s more common that we see people open new accounts than close them down, so getting someone to come across to you in a meaningful way is quite challenging.
Neobanks are starting to really force the hand of banks in how they think about their service offering, and I think they’ve got a great chance to establish their presence. Usually, when I speak about neobanks, I say in the next five years the number five bank in Australia will be a neobank, and it wouldn’t surprise me in the next 10 years if our number four is a neobank just because they’re so focused on delivering what their customers want.
FST Media: At the other end of the scale are the so-called 'bigtech' players. What role do you see for companies like Apple, Google, and Facebook in banking? Are they playing in a completely different space compared to the incumbent institutions, or do you feel every banking industry player will ultimately move in the same direction over the next five to 10 years?
Tsen: I think they play in different spaces. If you consider the banking stack, or the things that a bank does, and then very specifically, if you think about your Googles or your Apples and where they’re placed – though, as we've seen, Apple is starting to alter their position somewhat with their recent Goldman Sachs credit card deal – their posture has generally been at the pointy end of the transaction, which in their case has been the phone. That’s how it’s tended to play out, and they haven’t moved down the stack. Whereas we’ve seen in other instances, for example in Asia, it’s quite common for companies to move up the stack into the pointier end of payments, as with the Singapore's ride-sharing service Grab.
Google and Apple have started with the interface, or the end-point of a transaction, with the consumer and they're slowly working their way down the stack. And the question becomes, how far down do they go? Do they get to the point where they start to take deposits, to act like a bank and do loans? I personally don’t think they will. Doing that is a completely different business; the Googles and Apples of the world tend to not go into that space; they tend to be more focused on their core business: devices. If you look at their history, they haven’t done exceptionally well in the services and software part of their businesses, so my gut says that they won’t go down that path – but never say never. The tech firms are getting aggressive, they’re starting to get more involved. And there’s an argument to say that they’re probably involved at the most important part of the payment process, which is the consumer interface.
FST Media: Considering Apple is trying to expand its service offering, including the very recent relaunch of the Apple TV service, it will be interesting to see whether they will deliver a financial services offering down the line.
Tsen: I agree. And it wouldn’t surprise me, but it’s a big move to be a bank. There’s often an underestimation of the rigours of the process; your posture as a business must change. The Royal Commission has highlighted the very strong duty to one’s customer, and tech companies won’t necessarily want to go that far in such a direction. I just don’t feel that they want to be in that position where they’ll maintain the capital reserves to meet ASIC’s requirements. They’ll likely stop at a point; but I can't be certain – it's just an educated guess because they’ve been pretty aggressive.
FST Media: The industry must also ask itself whether, in five to 10 years’ time, consumers in a fully open banking environment will notice a discernible difference between bigtechs, neobanks and incumbents if they all start moving into the same space? It may be that the only difference between them will to be the customer interface.
Tsen: I totally agree. If you pay with your phone or watch, you don’t even know who you’re paying with, all you know is the interface that you’re using – your watch or your phone; I forget all the time what card I'm using. The relationship changes, and perhaps it won’t really matter who provides the service.
FST Media: Taking a step back into the realm of start-ups, what do you feel is their biggest hurdle in the current banking environment? In what ways does Stone & Chalk assist these companies in overcoming these challenges?
Tsen: In fintech land, it’s that universal problem of a company starting at zero and trying to get to one. Customer acquisition, capital raising, finding talent: these are universal problems that all start-ups and early-stage companies face. That’s just one bucket of challenges, no matter what industry they’re in.
Very specifically in fintech, the challenge is around a complex and, for the most part, cumbersome regulatory environment. You’ve always got this double layer of complexity; you are trying to do all the stuff that any other start-up is trying to do: hire talent and great engineers that you need to build your product; to acquire customers in a cost-effective way; to raise from VCs high net wealth. And then on top of that, you’ve got to deal with regulators. You are probably going be, in some form, required to have a licence, an AFSL (Australian Financial Services Licence), and to be designated as an ADI. So, you’ve got this double challenge.
At Stone & Chalk, we’re focused on fintech: we eat, breathe, live fintech. That’s all we think about. That specialisation really is our key differentiator versus other co-working spaces. It’s that specialist knowledge, insight, and the network that we have that we can start to – in a meaningful way – help our start-ups.
When a start-up comes to me and starts talking about an AFSL, I can go deep on that and refer them to the right person, the right lawyer, the right third party who they can speak to. And it’s just the way we’re structured. We are a not-for-profit; our ‘north star’ is helping our start-ups grow, so we’re not driven by profits – we’re about our companies and making sure they’re successful, so our mission is a greater one than just bringing in dollars. ◄
Stay tuned for Part Two of FST's In Conversation interview with Alan Tsen.
Alan Tsen will be a featured panellist at the 2019 Future of Financial Services, Melbourne. Register now to secure your place!
– With contributions from Patrick Buncsi, Editor