Wednesday, February 27 2019
– Open Banking to have important implications for the Australian financial services landscape-
Leading Australian equities investment manager, DNR Capital, believes an important area of focus in the Australian small cap sector is the investment opportunity arising from the increased use of technology across the financial services sector, with the emergence of a new breed of fast growing FinTech businesses.
Sam Twidale, Portfolio Manager of the DNR Capital Australian Emerging Companies Fund notes: “Traditional financial services companies in Australia have long benefited from favourable regulation, limited competition and captive customers, with a large pool of profits making them ripe for disruption.
“We are witnessing this change now as new business models emerge adopting the latest technologies, with today’s tech-savvy customers receptive to change. In the Australian small cap sector investors can gain exposure to these niche opportunities, which is not the case in the ASX 100, which comprises the larger incumbents being disrupted.
“We also expect that the mandated introduction of Open Banking on 1 July 2019 will have important implications for the Australian financial services landscape, accelerating the level of disruption. Open Banking refers to internal bank data being made accessible to external parties via digital channels.
“The idea behind Open Banking is that the customer owns the data, not the banks. Therefore, the customer should be able to use this data to their own benefit by having access to competitively priced products and services.
“The banking ecosystem is changing with the banking oligopoly being progressively disrupted as a new breed of innovative companies aims to take a share of the combined profit pool of the four major banks of $30billion. The incumbent banks have had a significant competitive advantage from the use of data and have made it difficult for competing providers and new entrants to attract customers away. Open Banking will reduce those barriers and create a more level playing field for competitors.
“We expect a range of new innovative products and services to arise to take advantage of Open Banking, with greater availability of data providing opportunities for Australian FinTechs to thrive. We expect one company in particular, Afterpay Touch Group (ASX:APT), to be a beneficiary from the transition to Open Banking by allowing the company to more effectively assess its customers,” says Mr Twidale.
“APT is a great example of an emerging Australian company disrupting the consumer credit market domestically and internationally, with its ‘buy now pay later” offering allowing customers to split purchases into four fortnightly installments. The product is resonating with consumers at an exceptional rate, providing an alternative to traditional credit cards where usage is declining. Given the sectors rapid growth it has rightly attracted greater regulatory scrutiny, with the recent Senate Committee Inquiry reviewing the risks to consumers. We attended the inquiry as observers to understand the potential regulatory risks for APT. We came away with greater conviction in the quality of APT’s business model, and its ability to take share from traditional forms of credit. We were also pleased to see a sensible approach was taken in the Committee’s recently published recommendations. Although regulation clearly needs to keep pace with technological advancements, we believe it is unlikely to stifle the significant growth opportunities for highly disruptive companies like APT.
The DNR Capital Australian Emerging Companies Fund is invested in a number of companies benefiting from disruption taking place in the financial services sector. Along with APT, the fund holds the specialist platform provider HUB24 (ASX:HUB), as well as companies providing software to the financial services industry such as Bravura Solutions (ASX:BVS).
For more information about the Fund please visit: https://dnrcapital.com.au/individual-investors/ec-investor-managed-fund/
About DNR Capital
Founded in 2001, DNR Capital is an independent Australian investment management company that delivers client-focused, quality, investment solutions to institutions, advisers and individual investors. DNR Capital is a signatory to the Principles for Responsible Investment (PRI).
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