Mortgage fintech founder warns of housing pain

Furthermore, only 1.9 percent of its loans have a debt-to-income ratio of six times, while Baum estimates these highly leveraged mortgages have accounted for a quarter of the major banks’ new mortgages in recent years.

As interest rates rose sharply, it was these newer borrowers that Baum was most concerned about.

“We’re going to see potentially disastrous outcomes on a human level on a scale I think most Australians have forgotten about, because we haven’t had a recession for 30 years,” he said from Tic:Toc’s headquarters in Adelaide.

“We should have been more responsible five years ago. Because guess what? We will get a 10 percent increase, not a 25 percent increase in house prices. And the downside that we are now navigating will be much more manageable.”

Baum said years of gradual easing of lending rules had allowed household debt to build up, giving policymakers and central banks limited flexibility as they tried to steer the economy through a world of higher inflation and slowing growth.

“A prudent financial system is not only prudent from the perspective of losses for banks. This is actually wise for society as a whole.”

The worrying lending backdrop is compounded by a difficult environment for the fintech community, where abundant funding and rising valuations in recent years have been replaced by a bearish environment.

Baum sees the count coming for the local fintech sector, as rising interest rates, weaker economic conditions, and funding droughts take their toll.

“I think a good business model in a year’s time will start getting access to capital again, once everyone sees how the landscape is being erased. And then there’s going to be a bunch of 570 fintechs in Australia who were here at the start of all of this that wouldn’t have happened.”

Banking to be divided into three

But he was sure Tic:Toc would not be a victim. Baum’s experience in banking led him to conclude that the banking sector will increasingly split into three parts: balance sheet, brand, and technology.

Given what he knew about the power and scale of bank balance sheets and their endless technological challenges, he decided the opportunity to create a business that could pass through multiple economic cycles lay in the technology chunk.

“I think that’s a much more sustainable and hopefully successful strategy than trying to disrupt the natural capital base of the banking industry in Australia,” he said.

Most importantly, this model does not require the regulatory capital that many fintechs need to adopt the traditional financial services model.

Baum has raised $50 million over the lifetime of Tic:Toc but says it doesn’t require additional capital at this time and can quickly become profitable as needed.

The company’s funding position is underpinned by solid revenue growth; revenue is $25 million in the 2022 financial year, and Baum says it is on track to reach $40 million by 2023.

“This market is attractive to us because we are entering it with sufficient scale, momentum and model that I believe is sustainable, and has some very good growth opportunities ahead of it.”

Baum said the pressure facing the fintech sector would likely see market power shifting back to the big banks and their large balance sheets.

But he says the “component” banking model he foresaw when he founded Tic:Toc will soon pay off.

Digital bank Bendigo Bank Up, which uses Tic:Toc technology, Bendigo’s balance sheet and its own brand, focuses on younger consumers.

The most likely competitive challenge for big banks, says Baum, is that big brands of external financial services are using this component model – and using Tic:Toc technology to achieve it.

“We definitely have one and maybe two very, very large brands entering the home loan market for the first time this year, using our technology and third-party balance sheets.”

Baum also initiated initial discussions with the buy now, pay later sector about using Tic:Toc digital verification technology to meet increasing regulatory requirements to conduct creditworthiness assessments of their customers.

He argues (perhaps speaking a bit about his own book) that requiring BNPL players to use credit checks from credit bureaus would be a step too far, and a Tic:Toc assessment using customer bank statements would provide a cost effective and efficient way. meet the possible imposition of regulation of this sector.

“The bottom line is there are no technology or cost barriers to [the BNPL sector] is being set up. And I don’t think the impact of those regulations – if they take advantage of the technology – is as big as I think a lot of people think.”

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