I have heard across the debt market that APRA has made two small but significant changes to how banks manage securitisations via APS 120. This may just kill Australian Lending FinTech.
Two adjustments to the regulatory guidance have created new issues for those looking for warehouse financing or securitisation capability:
- APRA will limit any tranche retention in a securitisation to 20% notional of a senior tranche. In other words, a 20% senior exposure cap on what a bank can retain in a securitisation. There is a particular focus here because APRA doesn’t believe retained senior AAA and selling junior mezzanine tranches is a suitable risk transfer (ie. capital relief securitisation is not suitable).
- There is a loan warehouse growth cap of the lower of a bank’s investment home loan growth and the 10% APRA cap applied to investment home loans.
This will significantly impact all Lending FinTech at a later stage. I can’t see anyone scaling without either a banking licence or securitisation or probably both.
Lending FinTechs don’t have direct access to deposits, so if they want to scale and be cost effective, their only options are to tap into capital markets or other lenders’ balance sheets. And the most cost-effective way to do this is through bank warehousing facilities or loan securitisation. Further:
No “Unicorn” Lending or P2P FinTech exists (with the exception of RateSetter) without a publicly announced securitisation program.
See our table if you need further evidence:
|Latest Valuation (USD)||Securitisation Name|
Given lack of local Australian senior tranche or AAA buyers via capital markets (just 8% of super fund assets goes into non-bank fixed income, source: OECD), FinTechs would be forced towards the 4 Aussie majors. Overseas wholesale is just too much for a young local FinTech with a local product, plus currency swaps are an extra cost and complexity.
But now a growing FinTech cannot obtain funding from a major bank, as the capital relief type securitisation is now blocked. And don’t think you can try to run a book with 10 different senior tranche investors: new deals need to be especially “clubby”.
What about warehousing?
Warehousing is another option that will be constrained, although if there is not going to be a longer term securitisation market, the demand for warehousing might also fall. Warehousing is a stop-gap: helping non-banks get to scale before a securitisation. If this is now capped, then FinTech growth is now capped. I would also expect Australian banks to service existing clients with scale over high growth yet still small FinTech who might have longer-term payoff.
What Else? No deposits. No Collaboration.
Looping back, APRA has not showed any a desire to open up access to banking licences to FinTech (ie. direct deposit access) and the Federal Government has not got the appetite to provide support in the same way as the UK government did via buying loans or credit guarantees.
This, coupled with a low appetite for banks to engage with FinTech, has made life significantly harder.
In my opinion, not much. Small FinTechs with small warehousing facilities may exist but the ability to scale has now gone. Overseas FinTechs, who have already scaled, can come and then distribute securitisations given the bigger brand name and their local markets, notably the US, China and Europe.
Now APRA will have other reasons for its actions, so this isn’t a criticism of them. They need to manage Australia’s banking system. But this current approach appears to be pushing against where other global regulators and governments are going.
As it stands, the point of Lending FinTech was to bring technology and data into finance, which includes risk management and credit scoring processes for better borrower outcomes. This would push major banks harder, increase competition and, ultimately for Australians, create a financial services industry that we can export globally in the same way we consume a huge amount tech from Silicon Valley technology companies.
But it looks like APRA has now taken the Tech out of FinTech.
*We all know about Lending Club’s struggles over the last 2 years.