The tech pioneer believes Australia’s corporate sector has never been more threatened by the tsunami of disruption.
For pioneering tech investor Paul Bassat, the scandal at Westpac stands as unfortunate confirmation of a core investment thesis.
About four years ago, Bassat’s venture capital firm Square Peg Capital began investing in fintech start-ups and now has stakes in companies including payments provider Airwallex, mortgage firm Athena, US group Stripe and small business lender Prospa.
Bassat and his team were attracted by the financial service sector’s annual profit pool of about $50 billion, the high returns on equity and the potential for even the strongest local incumbents to face disruption.
He’s only become more confident since then.
“The rate of change, the rate of disruption, the vulnerability of our largest institutions I think is far, far greater than anyone understood, and certainly we understood three or four years ago,” Bassat said at the Future Generation investor forum in Melbourne.
“And we were very, very bullish on disruption.”
While stressing that the facts of the Westpac case are complicated, he says the scandal is another example of corporate Australia’s broader struggle to deal with the rising power of global disrupters.
“We’re seeing a lot of examples of companies making really, really bad mistakes. How much of that is incompetence, negligence, underinvestment in people, systems and process?
“Our largest companies are really, really threatened by these globally driven software business models that in industry after industry are solving big problems on a global, not a local basis.
“And our companies are responding by paying 80 or 90 per cent dividend payout ratios, seemingly responding by under-investing in systems and processes.”
That’s certainly a charge that can be laid at the feet of Westpac and its peers, which have pushed harder and harder on capital returns, only to see systemic compliance problems emerge as legacy technology systems fail to keep up with new regulations.
This AUSTRAC mess is one example, but so too is the fee-for-no-service scandal exposed by the royal commission. Complaints from the banks about rising compliance, risk and technology spending should be read for what they are – catch up for money that wasn’t spent when it should have been.
But Bassat’s bigger worry here – arguably echoing the concerns of Treasurer Josh Frydenberg’s calls for investment over dividends – is the way Australian business is balancing the short term with the long term, and the global with the local.
“We’re in a real vicious cycle in this country. This is a tsunami. I think Australian companies have never been more threatened by disruption than they are,” Bassat says.
“There is such a focus on short-term profitability in this country, we are going to see so many companies disrupted by those companies globally that are saying you know what, we are actually trying to build a 50 or 100-year business that becomes insanely profitable over time, but ultimately the metrics that matter are around building strong competitive position, investing in product, building a competitive moat, acquiring customers.”
Bassat and fellow panellist Peter Cooper of Cooper Investors express concerns about the mounting expectations on public company directors, and particularly bank directors.
Cooper recounts the experience of a top-flight executive who, upon being sounded out for a bank directorship, requested recent board papers, only to be dismayed when a truck with tens of thousands of pages of documents turned up a bit later.
“It took this person a few hours to realise this is just a joke, and you can’t actually fulfil the responsibilities.”
For Bassat, it’s part of the same broad question. Where are Australian companies and boards focused? He says it’s a fair bet that after this week, every director will be looking for their version of the AUSTRAC disaster.
“How much time are boards spending on actually value-creating, rather than managing risk?”
by James Thomson