There’s no denying that Square's purchase of Afterpay was a watershed moment for Australia’s fintech sector. That part is more or less obvious. But quietly, it also doubled as a wake-up call for all banks, globally, about the importance of fintech partnerships and will place an emphasis on them going forward.
The combined Afterpay and Square business is poised to make inroads into financial services in both consumer and business banking, across payments, transaction banking, and lending.
Further, the combined entity will become a powerful ecosystem driving everyday engagement and commerce between consumers and businesses. This model has been successfully implemented in countries like China (Alipay, WeChat Pay) and India (Paytm), however, it wasn’t something the Australian banking industry saw coming for this market.
So what does this all mean for our major banks? It eventually means that if they don’t act, the oligopoly that they work to protect could be threatened by larger, tech-savvy overseas entities. They can’t buy away the competition either. Square’s market cap is on par with CBA, our largest bank.
The solution to maintaining the status quo lies in fintech partnerships, which is why our local ecosystem has now become so important to the banks.
Years ago, fintechs threw themselves at banks to land partnerships that would help grow their business and build their brand in the market. While it was all good news on the surface, this in fact created a lot of friction between the fintechs and the banks.
What the sector learned is that banks needed bank-grade scalability, reliability and compliance from their fintech partners. Unless the fintechs focus on this from day one it is almost impossible to attain. This is why many fintech and bank partnerships failed to produce a tangible result. The idea was there, as was the technology, but the required level of scalability, reliability and compliance was not.
Now -- while compliance still remains a key concern -- this new competitive dynamic provides our banks with an added incentive to work towards a successful partnership. Our major banks simply can’t keep up with the advances of these payment companies, they need these partnerships to remain competitive and relevant.
Banks also now understand that if fintechs aren’t bank-grade from inception, the partnership won’t work, and now, more than ever, they need it to work.
That’s the reasoning behind the big four banks' various VC funds and accelerator programs -- to incubate bank-grade fintechs from day one. As a result of the Square Afterpay deal, I think we can expect this approach to be further expanded across our banking landscape.
Partnerships with other bank ready fintechs outside of these accelerators will still be key for the banks. However, given their earlier experiences, there will be a higher level of scrutiny from the bank before they agree to partner with the startup. The key takeaway for any fintech looking to partner with a bank: Ensure you are designed to be bank-grade from the start of your business. In my experience, this isn’t something you can successfully retroactively apply to your company.
All of this is good news for the fintech ecosystem. Not only will the Square Afterpay deal put a global focus on our ecosystem and encourage further investment, but it is also set to promote more successful bank fintech partnerships too.