Who could be the ASX fintech winners as Aussies chase a better banking deal in 2023?

Research shows more Aussies will switch from traditional banks to non-bank fintech services in 2023
Judo Capital Holdings reports an increased profit of 300% in H1 FY23 to $53.2 million
An era of higher interest rates may mean fintechs have ability to increase their margins

In the month of Valentine’s Day it seems the big banks are not feeling the love. Last week the Commonwealth Bank of Australia (ASX:CBA) reported record half-year profit of $5.15 billion as along with other big banks it faces scrutiny over passing on interest rates to customers with savings accounts.

This week Money Transfer Comparison, a money transfer service review website, reported more Aussies will switch from traditional banks to non-bank fintech services offering more value as they take steps to reduce financial stress.

Founder Alon Rajic said before the RBA began raising rates, banks were increasing fixed-rate loans in anticipation. As a result, loan rates are now sitting 4-5% higher than the RBA cash rate.

He said more rate rises this year are likely to drive Aussies to seek out smaller non-bank fintech services that offer better deals, including lower exchange rates and fees, than traditional banks.

“These may include lenders, specialist international money transfer platforms, virtual credit cards, and insurers,” he said.

Money Transfer Comparison’s research found that nearly three quarters (71%) of Australians say they have lost at least some trust in banks due to their high loan rates and fees, and 74% would consider switching their accounts, loans or transactions to more affordable online services.

So with the potential for Aussies to switch up their banking and lending, what does it mean for the ASX finance sector? Who could be the winners?

Cyan Investment Management director Dean Fergie told Stockhead in an era of rising interest rates there will be a propensity for people with a loan which is an increasing expense to look for a more competitive rate

“It’s not as easy and cheap as changing over a phone plan but if you’re saving 200 or 300 in basis point interest every year it’s well worth it,” he said.

Judo Capital profit rises more than 300%

Challanger bank Judo Capital Holdings (ASX:JDO) saw its share price rise 6% on Tuesday after announcing a strong uplift in profitability for its H1 FY23 results.

Among key results for the specialist bank for SME businesses for H1 FY23 from H2 FY22:

Profit before tax (PBT) of $53.2 million, an increase of more than 300%
Gross loans and advances (GLA) of $7.5 billion, up 23%
Net Interest Income (NII) of $163 million, up 69%
Underlying Net Interest Margin (NIM) of 3.56%, up 72 basis points

At a time when major banks are coming under criticism for closing branches Judo has opened four new ones during the half-year at Orange, Albury, Bunbury and Rockhampton and now has 18 locations nationally.

JDO CEO and founder Joseph Healy said the H1 FY23 result is “another black belt result” as the company remains on track to achieve its FY23 guidance.

“The results again demonstrates the strength of our unique, pure-play, specialist business model,” he said.

Fergie said Judo’s result may be a thematic that repeated across the sector.

“Judo saw a pretty good uplift in their profitability,” he said.

“Broadly for the thematic that is likely to be the case.”

The JDO share price is up more than 15% year to date.

The JDO share price today:

Breaking down the ASX fintech & banking sectors

Fergie said anything that doesn’t have a branch you can attend is likely to be categorised as a fintech.

“But that can be everything from a simple buy now pay later (BNPL) service like an Afterpay (ASX:APT) or a ZIP (ASX:ZIP) to a more full service offering like a Latitude (ASX:LFS),” he said.

“The difference between the banks and fintechs is the banks are able to take customer deposits and have the capital adequacy rules behind them.

“Banks need a lot more capital to operate but they are able to reduce costs of lending as they’re able to use customer deposits as collateral for loans.”

Fergie said banks also have their deposits guaranteed by the government which means they have more regulatory hurdles to jump than fintechs.

The APT, ZIP & LFS share price today:

Stocks to watch in personal lending sector

Fergie said there are a lot of different options in terms of personal loans, finance for cars etc including MoneyMe (ASX:MME), Plenti Group (ASX:PLT), Wisr (ASX:WZR), Harmoney (ASX:HMY), Money3 (ASX:MNY) and Latitude.

“There the ones people might look at to move their personal loans,” he said.

The MME, PLT, WZR, HMY & MNY share price today:

Liberty Financial also one to watch

JDO has home loans only available to customers with associated new or existing SME lending with the bank.

Fergie said Liberty Financial Group (ASX:LFG), Latitude and Judo are probably the bigger players. According to its website LFG offers home, car and business loans.

“Some of the others like Plenti, Wisr and Harmony are more personal and car finance,” he said.

The LFG share price today:

Higher interest rates may increase margins

Fergie said it has been tough for the fintechs and smaller lenders but with higher interest rates this may change.

“When you have this interest rate volatility it does give any of these financial businesses the ability to increase their margins,” he said.

“It allows a bit of flexibility to take a bit of the cut, where what we’ve had has been the worse backdrop for most financial services.

“When you have sustained very low interest rates there’s just not margin there and people aren’t going to deposit their money for a zero interest rates, so I think it’s a good time for these businesses to operate.”

In the last quarter, MME’s shift in focus from high growth to cash returns has resulted in a return to statutory profit, beating analyst expectations.

PLT and HMY also delivered positive results recently in what could be an encouraging sign.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.