Musings of a Fintech: Start-up Inversion

We write this blog as we embark on a new business chapter for Huffle. As an Australian based FinTech, we are in the process of opening a UK office!

The UK is a natural step for Huffle. Two of our founders, Conor Svensson and Damian Horton, are British. The bulk of their professional lives have been spent in the UK and this brings both a huge amount of international skill and experience to Australia but also offers a natural next stepping stone.

However, the rationale is beyond just a new market and really comes down to business risk and regulation. Should the UK just be a new office or should it be our Headquarters?

The story of this begins with the UK. A huge financial crisis in 2008 that impacted the UK banking system was a huge motivation and realisation that diversity of lending sources is beneficial in a crisis. If one channel becomes strangled with credit losses, funding constraints or another inability to service the economy, another channel as either an overflow or with the ability to grow offers a major diversification of risk. The UK realised 4 banks are not enough.

In addition to this, financial technology brings global reach. The UK dropped the ball in creating technology start-ups but wasn’t going to miss the FinTech opportunity. This creates jobs, companies and brings in revenue that is now £20bn of the UK economy. It is exportable, with companies like Funding Circle operating in the US and Europe. This supports what the City of London has always been: an exporting powerhouse of financial services.

The FCA, the UK regulator responsible for oversight of FinTechs, is active in providing help and assistance to get businesses started. Communication is timely, transparent and informative. The goal is to get businesses operational in a safe and reliable format.

Comparing this to Australia is stark and clearly provides motivation to relocate Headquarters to the UK. Firstly, Australia has a Four Pillar Policy in the banking system. Originally aimed to prevent an oligopoly shrinking to 3, it now acts as an informal barrier to greater competition and was left off the table for the Financial System Inquiry. Really, it should be an Eight Pillar policy or actively have alternative lending channels to provide financing for a substantial portion of the economy.

Whilst Australia has a strong domestic financial services industry, the banks are mostly local and focused on local lending. This presents a second problem: Australia isn’t a huge exporter of financial services, albeit outside of ANZ’s recent progress. A few examples aside, Australian financial services companies have not been successful in overseas expansion and reliance on current incumbents to take up this challenge on their own today is naïve.

The battle of FinTech’s isn’t a local issue. It is about creating an environment to create a new and local powerhouse before overseas FinTechs own financial services in a similar way to Google and Apple’s domination of technology. At stake: it may be Google that dominates FinTech and Australia becomes even more bound to importing services.

So the battleground is set. If we cannot innovate here due to a regulatory regime that cannot quickly adapt, as a start-up the business risk is too great to keep our intellectual property here. We need to be in a place where we can innovate, launch new products and services and recognise and hire global skills.

If local regulatory barriers stop initial traction, we will have global start-up inversion to locations that can accommodate innovation.

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It’s All About Deposits and Payments

Inspiration to write this comes from Pascal Bouvier, albeit our view has formed separately and with a different take.

Bank lending is a complex game but can be reduced to it’s key component: a bank is a lending and investing platform.

Banks borrow money from the public, either through deposits or other debt instruments (such as bonds). This money is then given out to people and businesses as loans. The bank makes a net interest margin, which is the difference from what it can borrow for and what it can lend out.

If a bank wants to make money, it is generally incentivised to lend at high interest rates and borrow cheaply. The lending question is slightly more complicated as risk and competition need to be considered. The borrowing side is easier: deposits are the cheapest form of borrowing.

Deposits are called such as they have government guarantees if the bank were to fail. It makes them secure – a key requirement for many people. Liquidity is the second key ingredient – people might and do want instant access to checking accounts. Banks usually pay no interest on these sources of borrowing but do need to manage the flow of borrowing, usually by adjusting term deposit rates to balance amount borrowed and amount lent.

This is where the key battleground begins.

The Major Australian Banks have huge control over deposits, particularly checking accounts. This helps them fund residential mortgages and business loans at lower rates and provides them with strong profits.

Payment systems and speed play an important part in how much is kept in a checking account. The time spent waiting for a home loan to settle, say 6 weeks, allows a bank to fund itself more cheaply as cash sits in a checking account. The 3 days for a debit transaction allows a bank to hold higher checking account balances rather than the money flowing around the economy. Payments are huge. Payments are also getting interesting as Google Wallet, Apple Pay, Square and Tyro Payments enter and expand in the market.

As new entrants enter the payment space, it becomes more competitive and, in the long term, this means faster. This allows new entrants to also hold checking deposits, reducing the advantage the Major Banks hold on cheap funding. Bitcoin can make transactions instantaneous, so we may not need checking accounts at all. PEXA, a technology company in property settlements and land registry, will speed up settlement times. No doubt that Apple sees value in borrowing cheaply in Australia – it issued a bond here in August. Deposits are on the radar.


The future is awesome. More competition, faster movement of money and most importantly, a change in the way we borrow and lend. This is the FinTech battleground and the opportunity is navigating the upcoming change.

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Musings of a Fintech

Welcome to our blog and we hope you find the information here exciting, relevant and informative. Please send us a message if you want to continue the conversation (, @aussiehuffle or in the comments below).

On Thursday 15th October , ASIC’s John Price and Mark Adams spoke at a Fintech Melbourne event hosted by KPMG. Whilst each start-up has their own regulatory questions, we’ve decided to add our thoughts on the key aspects from the night.

  1. If you’re trying to create something new, licensing will be complicated

If you’re the only one who can understand your product or service, how do you expect regulators or customers to understand the risks? You will need to take your customers on a journey, so start simple and add complexity where it is warranted and understood.

  1. You can borrow another entities license for an interim period

Licensed entities with similar products or services to you can lend you their license under certain circumstances. This is a quicker way to meet regulations. One concern of this approach is the potential impact on margin if you need to share revenue, particularly if you rely razor thin margins.

  1. Think modular as not everything needs to be in one go

ASIC has a modular approach: pick where you are operating and ask for regulation on those aspects. This makes licensing easier than a one-size fits all license. You can also start small and specific and grow over time.

  1. Community, co-working and industry groups

A wider Fintech community, centred in one location in Melbourne, will drive better collaboration.

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