Academic papers urge fintechs to put purpose above profit

The rise of fintech companies in Australia hasn't been examined in any rigorous way by academics – until now.

The Australian Centre for Financial Studies at Monash University has published four long and detailed academic papers on fintech, written by some of the country's leading corporate academics.

It's a timely discourse, given growing questions about the high cost of fintech business lending and whether the touted benefits of technological innovations like blockchain will be realised in financial services.

The research has been supported by Treasury, the Reserve Bank and the Australian Securities and Investments Commission; financial services heavyweights Westpac and Suncorp; law firm K&L Gates; and FinTech Australia, the government's FinTech Advisory Group and Stone & Chalk.

The papers form the final stage of a big research project known as 'Funding Australia's Future', which the Australian Centre for Financial Studies initiated in 2012. It contributed some of the initial academic firepower to the financial system inquiry.

Given the growing focus across the banking sector on how to maintain the "social licence", the Maddock and Link paper will resonate. It provides a new framework for evaluating the contribution of fintech start-ups to the economy and society.

In order to generate social value, technology should lower costs, and these lower costs should be passed on to users of the services in terms of lower prices or broader access, the authors write.

"Social value is produced when the benefits of lower costs are passed through to customers, not through simply re-allocation profits between commercial interests," they say.
"The import of the research is that increasing the value added by the financial sector is a questionable source of social benefit if the industry's natural forces keep the benefit in the form of profit."
This is relevant given the emerging debate about whether new fintech lenders like Prospa, which is set to float on the ASX on June 6, are properly disclosing high interest rates and whether the banking royal commission will push more borrowers into this shadow lending sector.
As explored in this column last week, Prospa's annual interest rate averages 41 per cent. That's more than double the rate on an equivalent unsecured SME lending product offered by National Australia Bank, known as QuickBiz.

In their paper, Maddock and Link say challenges for fintechs will include being copied by the major banks, high customer acquisition costs, difficulties accessing funds in the absence of a deposit base, and surviving a full business cycle.
Yet they could also deliver for small businesses not able to access funds at present – if pricing doesn't gouge them.
"Niche lenders, providing funds to innovative and new firms, are valuable. If lightly regulated fintech can lend more cheaply, without exposing themselves to in appropriate risk, then this is potentially an important source of social gain," it says.

Full Article: http://www.afr.com/technology/academic-papers-urge-fintechs-to-put-purpose-above-profit-20180527-h10m15