The diversity of Asia is seen across many different aspects in the region, including the Financial Services space. Countries in the region vary from well-developed mature and relatively open markets (e.g. Australia) to markets with high barriers to entry (e.g. China) and developing countries with huge growth opportunities (e.g. India).
I recently travelled to Australia and wanted to share some of my observations on this fascinating country. Not only is it a vast and beautiful country, it is also one where the payments and lending landscapes are likely to change significantly over the next few years due to a range of events currently happening in the market. These include events such as the RBA’s imminent interchange regulation and the rise of Australia’s FinTech sector (a trend that is also happening across the wider Asia-Pacific region).
Interchange regulation is changing the competitive landscape in Australia
The RBA is going to communicate its decision about the interchange cap on consumer and commercial cards later this month (May 2016). Unlike Europe, where commercial cards (with corporate liability) are excluded from the regulation, the RBA’s proposed hard cap will apply to both consumer and commercial cards. The regulation will have a significant impact on the landscape, especially on rewards programmes as well as rebates and sign-on bonuses.
Australia is a rewards driven market, both in the consumer and commercial spaces, and Australian issuers are already preparing for the decrease in revenues by changing earn and burn rates, i.e. by lowering the value proposition of their rewards programmes.
On the consumer cards front, we expect to see a trend towards more basic rewards programmes, cuts in air miles exchange as well as issuers starting to charge higher fees for cards.
On the commercial cards front, the interchange cap is likely to force issuers to lower rebates, increase rebate tiers as well as cut sign-on bonuses. When looking specifically at the SME segment, we expect that some issuers will start to offer value added benefits instead of rewards, e.g. basic data or simple expense management solutions.
One upside of the regulation is that the practice of surcharging card payments is likely to be forbidden, stopping a practice that has been witnessed across merchants in some sectors and one that has hampered the wider use of cards by consumer and corporate cardholders alike.
In light of these challenges, some Australian issuers may look to develop new propositions and enter other markets within the region. Nevertheless, interchange caps are already in place in some other Asian markets and many others may face similar regulations in the future.
The impact of the new cap is unlikely to be immediate and we will be watching very closely to see what developments take place.
Banks partnering with FinTechs to develop their knowledge and enhance their offerings
Besides the interchange regulation, Australian banks are also faced with disruptive FinTechs entering the market. The emerging product offerings from FinTechs is a hot topic across the globe. In Asia and especially in Australia, traditional players are increasingly turning towards FinTechs to learn from and partner with, rather than viewing them as direct competition.
There are a number of successful referral partnerships between alternative lenders and banks for SMEs and customers who are not yet credit worthy, e.g. CBA’s partnership with OnDeck in the consumer lending space.
There has also been direct investment by some of the banks into alternative lenders, e.g. Westpac buying shares in SocietyOne, Australia’s first P2P lender. This is clearly a mutually beneficial partnership as SocietyOne benefits on a capital level and also from a trust boost through association with Westpac (as an established lender), whilst Westpac benefits from access to SocietyOne’s credit approval algorithms and knowledge on how to perform faster credit checks. This should ultimately help WestPac enhance its product offering and increase speed of approval for customers.
Another hot topic for Australian and Asian banks is that of cross-border payments. Unlike in Europe where companies benefit from one uniform currency (with some exceptions), Asia is much more diverse in terms of currencies and accepted payments methods.
For example, companies doing business with China face specific challenges in cross-border payments. Many banks see these challenges as an opportunity to facilitate and enhance cross-border payments, especially those in the B2B space.
This changing landscape is definitely one to keep an eye on and we look forward to seeing all our friends in Australia and across the region very soon!