Can a fintech lending firm disrupt the big four?

As CVs for Australian bankers go, Jason Yetton’s background doesn’t quite scream ‘disruptor’. High-flyer perhaps, certainly ambitious and across trends. But helming a startup?

Yetton started out in 1992 as a graduate trainee in Sydney at Bankers Trust under its then boss, the dynamic Rob Ferguson. There was the obligatory stretch in Asia – in Kuala Lumpur with CIMB – and the polishing stint at Harvard Business School too. By 2008, Yetton had joined Gail Kelly at Westpac in Sydney in a variety of senior posts, rising to be her head of retail and business banking and emerging as her possible successor.

So far so, well, normal. But the trajectory didn’t go to plan, and it was Brian Hartzer, not Yetton, who was installed at Westpac when Kelly left in early 2015. By June that year, Yetton had followed Kelly out the door.

Times change, and the technological trajectory of the banking industry hasn’t quite panned out as imagined either. 

Today, the likes of US academic Clayton Christensen, who coined the term disruptive innovation, are in vogue and disruption is becoming de rigueur in the world of finance.

Two years on from Westpac and now running SocietyOne, the Sydney-based loans fintech that is one of Australia’s more prominent financial startups, the mid-career Yetton seems to bite with near evangelistic fervour the very hand of establishment banking that once nourished him.

Long before Australia’s prime minister, Malcolm Turnbull, announced a royal commission into the banks and financial sector at the end of 2017, Yetton was among those agitating for what he calls a long-overdue shake-up.

Australian banking is backward in many critical areas, Yetton tells Asiamoney. He wants to see a tech-led democratization that would revolutionize payments and settlement, as well as lending, data and information infrastructure, while allowing customers to switch banks without penalty.

The crucial issue, he says, is the protected supertanker that is the Australian financial system with its dominant big four banks: Westpac, Commonwealth Bank of Australia, NAB and ANZ. 

The current system preserves the status quo, Yetton says, in which the formidable foursome control 80% to 85% of Australia’s banking market and from which they earned a collective A$32 billion ($24 billion) in the 2017 financial year.

While such talk is self-serving for an upstart like SocietyOne, Yetton isn’t alone in his thinking. No less an authority than Greg Medcraft, the outgoing chairman of Australia’s top business regulator, the Australian Securities and Investments Commission (Asic), described Australian banking to parliamentarians as “frankly, an oligopoly”. 

And if the political momentum that led to a royal commission into the Australian banking system is any guide, millions of Australians agree.

“While we are seeing the traditional players taking steps in the right direction,” Yetton says, “there is still a sense that the industry is being dragged kicking and screaming to do what is best for all Australians.”

He adds: “The issue for incumbents is not that they don’t know innovation, and not that they don’t want to do something about it. It’s that all their processes tend to lead them toward sustaining innovation in exactly the form that they’ve always been. The big four generally treat everyone the same.” 

By targeting Australia’s A$100 billion personal credit market, which is dominated by the big four, SocietyOne aims to exploit that one-cap-fits-all approach.

Launched in 2012, and with some of corporate Australia’s biggest names behind it, unlisted SocietyOne offers loans to customers at interest rates that undercut the incumbent banks’ boilerplate products. 

It made its first loan in August 2012 and now boasts a 15,000-strong loan book totalling A$350 million. Yetton claims that loan book has grown sevenfold over the last seven quarters, a period that broadly equates to Yetton’s time at the helm since his arrival in the middle of 2016. 

His ambitious target is to capture between 2% and 3% of that personal credit market by 2021, an anticipated loan portfolio of between A$2 billion and A$3 billion, or an ambitious 10 times SocietyOne’s current book.

Like other fintechs in the emerging peer-to-peer lending market, SocietyOne has been dubbed an Uber for borrowers. It electronically assesses a borrowing application and matches it to a pool of available funds provided by backers. Customers receive a response to their initial inquiry within 10 minutes, to see if they are “in the zone” after they have been credit-scored by Equifax. On receiving an indicative rate, prospective borrowers are then matched to SocietyOne’s pool of investor-funders to see who will accept the loan. 

SocietyOne takes a margin as the deal transacts electronically.

SocietyOne’s lending funds derive from a pool of around 24 providers, some of them traditional financiers such as banks and deposit-takers, others fund managers, wealthy individuals and family offices who see SocietyOne as an alternative investment option offering returns of between 7% and 8%.

“It’s a more-pure investment,” Yetton says. “You can directly see if the consumer credit market is going well or not.”

While a personal loan at a big bank could cost as much as 16% once fees are included, “because they have a lot of them,” Yetton notes, SocietyOne could offer the same loan at around 9% to 9.5%. Its online ads trade on Australians’ distaste for banks and banking fees.

While SocietyOne operates entirely online, its borrowers must be resident in Australia and aged between 21 and 60. SocietyOne doesn’t have the overheads of a branch network, apart from a head office in downtown Sydney. Yetton says 65% of its loan applications are done via a mobile device.

The key for borrowers, Yetton says, is their credit profile, something that the established banks are reluctant to share with customers and other lenders.

“You tend to know your profile on the downside, if you’ve defaulted or had a charge against you,” notes Yetton. “But if you are a good risk, you should be rewarded with a good rate. And if they are really good, they should be able to get an even better deal.”

Yetton says risk-based pricing is not really known in Australia outside startup lenders like SocietyOne, because the big four dominate the lending market.

“They’d have to explain to their customers where they stand credit-wise, and most customers don’t know. The banks see that as their data, not your data. We see it as the customer’s data. It takes the power away from the banks, and addresses this major power imbalance.”

Yetton describes SocietyOne’s borrower demographic as “prime, the type of customers who would get a loan at a normal bank.” 

The lender offers the usual array of car, holiday and home improvement products but not mortgages – yet. Yetton might describe his book as prime, but around two thirds of SocietyOne’s loans are for debt consolidation, notably to liberate households from crippling credit card debt and big-bank interest rates of up to 20%.

“This gets our customers out of a problem,” says Yetton. “They can repay their debts, do it at a much lower cost and then feel in control. It’s good for the economy, good for society and we can make some money.”

A student of banking history, Yetton calls all this the democratization of finance. He notes how many products that are now commonplace in the market started out as the privilege of a few. 

Take superannuation, Australia’s retirement pension scheme; these products, he says began as perks for corporate bosses until social reform followed by legislation broadened the scheme and it became the world’s fourth-biggest pension pool after the US, UK and Japan, with assets of more than A$2 trillion. Likewise share ownership, once the domain of a privileged few in the corporate elite, is now available to anyone with a few clicks.

Yetton believes lending will go much the same way. Banks, he says, are forums of intermediation, matching providers of capital (savers and depositors) with users of capital (other savers and depositors). New networking technology allows that matching to take place outside these established theatres “in a much more efficient, transparent, technology-enabled world,” he adds.

“It’s the opening of products or asset classes to more and more people at smaller and smaller transaction sizes and much cheaper and cheaper rates that are processed in a faster and faster way.”

With support from a federal government aiming to expand competition in retail and business banking, Yetton has led an industry challenge to Australia’s big four banks to reform and modernize.

Indeed, Yetton has become a campaigner for a more transparent, industry-wide sharing of customers’ credit history, via a secure comprehensive credit reporting regime (CCR). His stump speech for CCR has the fervour of a politician running for elected office.

“Despite Australia having a very sound regulatory environment and a very strong financial service sector and, generally, world-class, it is backward in CCR. Australia is probably the only developed market where we don’t operate with CCR and positive credit-scoring information,” he says.

“There’s a whole regulatory shift underway in Australia…and since CCR is coming in its full glory, we should all get on board and do that now rather than have to wait for the government to force everyone to act in their customers’ interest through legislation.”

Federal treasurer Scott Morrison has made fintech development a hallmark of his time in office, proposing legislation that he has said will be a game-changer for Australian banking. He’s also pushed for an experimental regulatory sandbox for startups, suggesting a softer supervisory touch as fintechs mature.

“This will empower Australian consumers in a way they haven’t been previously,” says Yetton.

“I applaud the federal government’s initiatives on CCR and open banking, which have finally seen some of the big players in the banking industry pledge their support for a proper and positive credit reporting regime,” he adds. “It also means that when CCR comes into full force (in 2018), Australia will have finally caught up with the vast majority of developed and developing countries, including the UK and the US, where positive comprehensive credit reporting has been the norm for decades and has been shown to benefit consumers, providers and their economies as a whole.”

To that end, in 2014 SocietyOne set up the website GetCreditScore.com.au, which was part-marketing channel, part-guide to help potential customers assess their creditworthiness.

“Until then, Australians had few if any ways of finding out their credit scores through their credit histories,” Yetton says. “This also provided us with an opportunity to offer consumers the option of taking out a personal loan based on their individual credit scores as we offer loans through risk-based pricing.”

Participation in comprehensive credit reporting has been voluntary in Australia, Yetton says. SocietyOne is just one of three consumer credit lenders in Australia to make such data available. 

Another 15 or so are understood to be participating in CCR deal by deal, behind the scenes, but to be fully effective it requires all the big banks and lenders to contribute and level the playing field for the customer, he says.

Australia is also backward in real-time payment settlement, Yetton says.

“The system is robust and reliable, but two days to settle everything?” This is a hangover from the days of settlement by cheques “which aren’t much used for payments anymore,” he says.

“It works, but the banks put in their delays because that’s how banking was done. Their desire to upgrade is low. But if you open up real-time payments, you can also open it up to other participants who can leverage the payment infrastructure because then it would be integrated and not a bank’s infrastructure,” he proposes. “There’s a real fear amongst the banks that others will be able to piggyback on the infrastructure and come up with new payment solutions, which is real if you fear competition. Or you could embrace it and do better.”

For all Yetton’s fighting talk of disrupting the big four, some observers see SocietyOne as something of a technological insurance policy for Westpac against future technological upheaval to its core franchise.

In 2012, while still at Westpac, Yetton led that bank’s digital strategy where, he says, he could see disruptive technologies coming fast.

Westpac set up the Reinventure venture capital fund in 2014 with an initial A$50 million stake. Yetton and Hartzer, the two Westpac executives then competing for Kelly’s chief executive slot, became Westpac’s internal champions for the fund. 

Reinventure’s first investment was SocietyOne; today it owns a 15% stake in the startup. Reinventure’s managing director Simon Cant is a SocietyOne director, and an influential member of the Australian government’s fintech advisory group.

There are four other Australian banks alongside Westpac on the SocietyOne register; the second- and third-tier lenders Unity Bank, Beyond Bank, G&C Bank and Regional Australia Bank. Rupert Murdoch’s News Corp is also a backer, as are the family investment companies of the Packer family and of Kerry Stokes, who owns one of Australia’s largest media companies.

So, is SocietyOne destined to be owned one day by Westpac and to have its disruptive methods embraced and coopted by the dominant big four?

“Things that are really successful have often been bought by major banks in Australia,” admits Yetton. “But I don’t think that’s how you can set up or run a company. It’s got to be successful, have its own brand, have challenger status and the ambition to change the game, and that’s what we have. We could stay private, we could list, it could be M&A, it could become a new bank in its own right by aggregating other services.”

He does not rule any of these out though. 

“I don’t spend a lot of time on those options because we are trying to build a successful business, but if we do, then those types of things come into fruition.”