Disruptive forces continue to shake up the financial services sector

Australia’s financial sector has always benefited from a love of property, with the lending sector making up the majority of income, particularly for the Big Four banks. However, as the findings of BDO Growth Index’s top five mid-sized financial services businesses highlight; disruptive forces have presented a unique backdrop for other players and sectors to compete. These disruptive forces being The Royal Commission and the Pandemic - a true ‘Black Swan’ event that accelerated the demand for fintech and insurance products.

Key Findings from the BDO Growth Index

The Financial Services sector is the third largest industry by business count (9%) and the largest profit generator.

During the most recent reporting period, Australia’s mid-sized Financial Services businesses recorded a total Profit before Tax of $3.7b. This was a result of a total revenue across the industry equal to $27 billion.

Businesses within the Financial Services sector are most likely to be publicly listed companies (64%), rather than privately owned (27%) or otherwise structured (9%).

The industry has been experiencing growth over the past three years with average revenue CAGR and PBT CAGR increasing at rates of 6.65% and 0.54% respectively.

Top five Financial Services Businesses in terms of annual revenue percentage growth (3 year CAGR):

  1. Zip
  2. Afterpay Touch
  3. Columbus Capital
  4. Gen Re
  5. Gen Re Life Australia

 Since the findings of the Royal Commission and the resulting tightening of credit, there have been dramatic changes to the lending space resulting in non-bank lenders meeting various financing needs for consumers. This is reflected in the findings of the Growth Index, where the top three Financial Services businesses included Columbus Capital – who specialises in home loan products for wholesale and retail - as well as market darlings, the newer Buy Now Pay Later (BNPL) models, Zip pay and Afterpay Touch.     

The distinct difference in these types of lenders compared to the larger banks is that they currently aren’t APRA-regulated entities and therefore do not have the same scrutiny as licensed Banking institutions. These conditions have allowed the BNPL and non-bank players to improve their position over the past few years, particularly regarding innovation. Furthermore, as BDO’s global research – Rethink Fintech - found, the adoption of Fintech has been accelerated by COVID-19 as consumers demand seamless digital products. 

Looking ahead, cybersecurity will be at the forefront of Board conversations within Financial Services, as they grapple with how to best serve consumers in a digital environment while ensuring their cyber risks are mitigated. The Senate will also likely move their focus onto those financial services providers outside the scope of regulatory impacts, and we will see changes in the landscape to level the playing field. However, for now, self-regulation is enabling growth and innovation and is proving to be enough in the regulator's eyes. As new BNPLs enter the market - like Beforepay - and it becomes more saturated, we expect there to be a market consolidation or smaller players to fall away.     

The top five also reflect the impact of Fintech on the Financial Services sector - who differentiate themselves through technology and customer experience. COVID-19 saw the acceleration of the demand for Fintech products, with consumer behaviours through digital means now expected and being met by smaller, more nimble fintechs.

Overall, Fintech IPOs are expected to grow - in 2020 there were seven Fintech IPOs in Australia valued at $353 million and accounting for 7% of all primary capital raised across all sectors. For the larger players Fintech will be a way to grow without having to reinvent the wheel, by opening their war chests to acquire those who fill their customer experience gaps. Regtech will also present the banks with a way to ensure they are compliant and prevent the need for further, costly remediation work.    

Lastly, the disruption of the Pandemic highlighted that a ‘Black Swan’ event can occur, increasing the need for insurance coverage. Likewise, climate change is having an impact - as Australia battles with ongoing drought, floods and the Pandemic, the need for general insurance will grow, with IBIS World projecting the General Insurance industry's revenue to rise over the next five years to 2026.   

Overall, while Financial Services generates more profit than any other sector by far, the sector as a whole will need to look at their cost pressures, customer-centricity and continuous innovation now and into the future.

To read more insights into the Financial Services sector, read the BDO Growth Index 2021, in collaboration with Commonwealth Bank.

If you would like to know more about our services, or more information on how BDO can assist your Financial Services organisation, contact our specialised Financial Services team.