Are Disruptive Innovative FinTechs Today’s Equivalent of Video Rental Libraries?

Hipster girl band Camp Cope did a ballad entitled ‘Footscray Station’ a few years ago. Part love song, part protest anthem, it sums up what hipster types and Millennials see in Footscray, mostly from an angle different to my own, it being my childhood home town.

For most of my adult life, first as a uni student and then as an office worker, I have spent much time commuting through Footscray Station at least a few times each week for over three and a half decades.

So with hipsters like Camp Cope and their ballad in mind, it perhaps was apt that my first encounter with one of those disruptive FinTech companies was at Footscray Station in November 2019. People were handing out those perforated promotion offer cards, although rather than being for some sort of tech based food delivery service like Uber Eats or Marley Spoon, it was for Rate Setter, a peer to peer lending platform based in the UK.

The offer was for $50 credit if I were to open an account and deposit $100 in it.

Given that I was curious, and the interest rates were much higher than what was being offered by the bank, I opened an account and over the next three years gradually deposited $1000 into it. I also invested in it like a Millennial might, into green energy loans.

Along the way, during the early days of the Plague, such companies risked getting into trouble, as I learned from reading the Financial Review, and Rate Setter’s Australian branch soon spun off into its own ASX listed business named Plenti (ASX code PLT).

I added PLT to my watch list, and even genuinely pondered buying some shares in it at some stage. Starting in late 2020 at around $1.20, it topped $1.50 in mid 2021, before starting a steady downward sloping gradient to where it now stands, almost 2 years later, at $0.37.

I think that PLT’s performance on the ASX has probably matched my enthusiasm for the underpinning business model. Back in 2019 with higher interest rates on offer than the banks, and with an ability to instantaneously deposit funds in via OSCO, I got immediate gratification out of using it as a small auxiliary savings account.

Since then, the deposit function has changed to one run by BPay, where the funds do not immediately transfer over. Nor, maddening, do my attempts to lend my money to borrowers match as quickly. Interest rates also dropped, and now, with bank interest on a rapid rise, the margin in Plenti does not seem as tempting.

So for the past year or so, I have been gradually withdrawing my funds from Plenti as they get repaid, rather than reinvesting them into other loans.

And this is the rub (as Shakespeare put it in one of the alternative versions of Hamlet’s soliloquy). The banks and existing financial institutions are still able to offer investors something more reliable and appealing as an overall package than what this disruptive and innovative peer to peer lending platform can, and at the earliest sign of real trouble, it could end up no longer viable.

Buy Now Pay Later is another new trend which has been welcomed with open arms and open legs by consumers, particularly those who do not have good credit ratings, responsible spending behaviours, or ready cash in the bank. The collapse of the Australian start up in the BNPL field, Open Pay, two months ago, is a salient point for investors. It started in early 2020 at about $1 and soared above $4 by mid 2021, before gradually declining down to $0.195 at the time it suspended its operations in February.

I believe that one of the stock tipping newsletters to which I sometimes subscribe (although not the one which talks about Astrology as a way of predicting real estate prices) did mention Open Pay (ASX Code OPY) as a company to punt on a few years ago. I am glad I did not invest in it then. I have made enough dog investments in my time.

BNPL is still mostly unregulated, which carries all sorts of risks. One is that it does not run automatic credit checks and therefore both becomes a lender of first resort to many people who are not too familiar with consumer credit and who could develop irresponsible spending habits, and of last resort to those who already have reached the end of the line in terms of their financial tether. That risk is one of major defaults by customers, who, if they have no other protections left to them, can always resort to bankruptcy. The other risk is that of regulation – BNPL is currently mostly unregulated, but with consumer advocates arguing that this needs to change, and this will eliminate the competitive edge BNPL start ups have over the Banks.

At the same time, we have the major banks launching their own BNPL type products, as are the major tech companies. When these two parts of the business establishment catch up, the existing BNPLs will either go the way of Open Pay, or get bought out.

Open Pay was not the only company recommended to me by that stock tipping newsletter. Another was RAIZ (ASX code RZI). According to the Apple App Store entry for RAIZ, which is headed ‘Invest The Spare Change’:

“Raiz helps you easily save and invest your money. Get started in minutes with as little as $5, invest your spare change into a diversified portfolio with automatic round-ups, and give your money a chance to grow in the background of life.

I think RAIZ is similar to another disruptive app based investment FinTech, Spaceship. A great idea, and one which will possibly appeal to novice investors, probably the same sort of people who have been using BNPL services but hopefully have gotten that under control and now want to start building their financial health.

HOWEVER, the major banks and financial institutions are not going to stand still if they see such possible corners of the investor market slipping through their fingers to disrupters. Commsec, for example, launched a beginner’s stock investing app in late 2021, called Commsec Pocket. It allows you to start investing in a range of Exchange Traded Funds from with as little as $50, and with an initial fee of $2 (rising to 0.2% of the value if over $1000).

Commsec Pocket piqued my interest on a sleepy afternoon a year ago, so I did download it and play with it for a while, til I got bored because I am many years beyond the time when I would want to start investing with less than $1000, let alone ‘as little as $50’.

And this is the problem which RAIZ and Spaceship will face – I doubt that most of their investors are going to be putting in sufficient to give them the fees to make it worthwhile, and that after a while, they will either give up on the app or upgrade to a fuller service like Commsec Pocket. Meanwhile, new investors may simply just go with offerings like Commsec Pocket or something similar from an established financial player.

As for RZI as an investment, I still have it on one of my Commsec watch lists. Starting at around $1.20 in 2018, it struggled for a while til rising to $2 in mid 2021. Since the start of 2022, it has been on a steady slide down to under $0.40 at present.

Aren’t I glad that the only money I lose on those stock tipping newsletters is what I pay for the subscription?

I think that the problem with a lot of those FinTechs is that whilst they have a great idea, to be successful they need to grow big enough and disruptive enough that they shift the entire paradigm of the market they are entering, the way that Uber has done for the taxi industry, Amazon for retail, and Netflix for video rental. Otherwise they fail.

The Netflix quip is most salient. They once approached Blockbuster Video to buy them out, and were laughed out of the office. When did you last see a video store? I think that a lot of those disruptive and clever FinTech innovators are going to last as long as video stores – they will not be able to supplant the existing major players who will simply imitate their good ideas and implement them in a better way.

Published by Ernest Zanatta

Narrow minded Italian Catholic Conservative Peasant from Footscray.

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