Editor’s note: The ‘neobanks’ are coming, according to our mate over at Exponential Stock Investor, Ryan Dinse. These new tech challengers have much lower costs than the ‘legacy’ banks. They’re thinking smarter, don’t need branches…and are far better at tech than the Big Four, which often are still reliant on decades old systems. As you’ll see below, this is a future that smart cookies should be investing in right now… |
Dear Reader, Q: What’s the best way to position your portfolio for the ‘unbundling’ of the Australian banking sector? A: Identify the number one digital up-and-comer set to the rip the Big Four to bits. We look at one such candidate here. It’s a challenger bank with what I believe has really good odds of stealing away some of the $30 billion annual profit pot from the Big Four in the 2020s. What is a challenger bank (or neobank)? Simply, it’s an enterprise trying to steal some of the big banks’ main business — saving and lending. As LearnBonds.com puts it: ‘They are primarily app based banking setups that have for the past few years been challenging the long established banks and giving them a run for their money in customer acquisition. ‘Even without the legacy systems and limited infrastructures, they have leveraged technological innovations to achieve a national and a global outlook for a fraction of cost the and time it took the traditional banks. ‘And they are now going after what most experts consider the under-served markets that most banks long neglected as a means of curving out a niche in the lucrative finance industry.’ Now, the problem here is this trend’s so new, a lot of these companies have yet to list. (I’ve found one that IS listed. You can invest in it today, if you’re keen to take the risk. You’ll find it here.) But it’s only a matter of time before many of the challengers start to flood the Aussie stock market. Europe provides a precedent here. UK challenger bank Monzo was valued in June at…get this…$3.6 billion. It’s only four years old. It’s currently opening 55,000 new bank accounts every week. As you read this, challenger banks the world over are hoovering up venture capital cash at a frightening pace. American Banker reports: ‘In 17 deals globally, challenger banks — generally speaking, digital-first firms that provide basic financial services — raised $649 million in the second quarter; that was up about 8% from a year earlier. ‘Venture capitalists invested $1.5 billion in challenger banks in the first half of the year, a 15% increase from the same period in 2018.’ So who is the primary challenger here in Australia? I’ve made a rather left-field choice. But I think it’s an absolute cracker, which you may wish to add to your speculative portfolio immediately. And the timing on this play couldn’t be better… In July, a new law was passed in parliament around consumer data rights. It’s a law that basically paves the way for further Craigslisting of Australia’s Big Four banks. As FinTech Futures explains… ‘The consumer data right law passed by the Senate on 01 August was a critical component of the emerging Open Banking system and will ultimately be extended to the telecommunications and energy sectors. ‘Championed by Morrison when he was treasurer as a signature microeconomic reform, the new rules require banks to make customer data available to competitors on credit and debit cards, deposit and transaction accounts and mortgages if a consumer wants to switch banks, for example to a smaller lender or a fintech operator.’ The smaller fintech operator I’ve just put an urgent buy recommendation on is first in line to take advantage of this new law. It’s going to light a fire under them. The days of big bank data monopoly ended on 1 August. This law is going to make it easier for Aussies and small businesses to share data, get cheaper loans and switch to challenger banks. If I’m right, the customer floodgates are going to open for this relatively little-known fintech. Now, I’m extremely guarded about this play. Putting modesty aside for a second, I know a thing or two about lending. You see, back in the day when I started my finance career, I was a senior credit analyst at a big bank. Then later I was a lending executive to an alternate lender that was a sort of forerunner to the recommendation in Part 1. But this almost seems like a bygone era now (it was only 17 years ago or so!). In those days, credit applications were assessed by people like me using manual processes. We’d phone accountants, check payslips, we’d look at bank statements… Getting hold of the right information could take days or even weeks. Then after we’d collected all this evidence, we’d use the five Cs of credit (credit history, character, collateral, capacity to repay and capital) to assess the loan application. It was slow, prone to human judgement, and often you’d not get the complete picture due to errors, omissions and sometimes fraud. That’s still mostly the system the banks use today. But your ‘challenger bank to rule them all’ recommendation is on the cutting edge of a MASSIVE change here. You see, they use a proprietary ‘Robo-Approver’ that automatically assesses loan applications. This clever piece of technology automatically collects data from a variety of sources and uses special algorithms to assess the creditworthiness of the borrower. The result is that they could provide 10-minute loan applications, same-day loan approvals and even the possibility of a 24-hour turnaround to funding on sizeable loans. Trust me, these guys are changing the game. As a result, I believe their company’s stock is one you should learn more about before it becomes a household name. For more details, click here. Regards, | | Ryan Dinse, Editor, Exponential Investor |
|