The Quiet Revolution: How AI And Embedded Finance Are Rewiring Australian Money

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Australia's Big Four banks face their biggest existential threat since deregulation; fintech companies systematically stealing customer relationships and turning banks into commoditized "dumb pipes".

-Big Four banks spending -$3.5bn annually on R&D to fight fintech threat
-Embedded finance market exploding from US$4.2bn to US$17.7bn by 2029
-PayTo system threatens lucrative card payment revenue streams
-Private credit filling $50bn-plus gap left by risk-averse bank lending
-Banks' AI arms race: CBA cuts fraud by -50%, NAB retains $92m in deposits

By Valery Prihartono

The scenario keeping bank executives awake at night isn’t a recession or regulatory crackdown – it’s becoming irrelevant.

The “dumb pipes” thesis describes banks being reduced to back-end utilities, providing the regulated infrastructure while nimble fintechs own the customer relationship, the brand experience, and, most importantly, the valuable transaction data.

This threat isn’t theoretical anymore. Australia’s Consumer Data Right legislation has handed third-party platforms the keys to initiate actions on customers’ behalf; payments, account updates, even loan applications.

The customer’s primary interaction shifts from their bank’s app to retail sites, rideshare platforms, or property apps that seamlessly integrate financial services.

When someone books an Uber and pays through the app, or buys electronics with embedded Buy Now Pay Later, they’re not thinking about their bank. The platform owns that moment, the data, and increasingly, that relationship.

The Numbers Tell the Story

The embedded finance market validates this shift. According to international estimates, Australia’s sector is projected to surge from US$4.2bn in 2023 to US$17.7bn by 2029; a compound annual growth rate of 35.1% that dwarfs traditional banking growth.

This represents a systematic unbundling of banking services. Each embedded payment, instant lending decision, or integrated insurance offer is revenue and customer interaction that banks are losing to platforms they’ve never heard of.

Research shows embedding payments into a SaaS platform can increase revenue by 2-5x. That multiplier effect isn’t just good for software companies; it’s coming directly out of traditional banking margins.

Where Banks Are Losing Ground

Payments Under Attack

The New Payments Platform’s PayTo system poses a direct threat to the banks’ lucrative card payment business. PayTo enables secure, one-click Account-to-Account payments that bypass traditional card networks entirely.

For merchants, PayTo offers lower fees than card payments, which typically carry processing charges and surcharges. For banks, it threatens a core revenue stream that has underpinned fee income for decades.

Commonwealth Bank ((CBA)) has been forced to respond defensively, launching its own Buy Now Pay Later product, StepPay, to counter competitors like Block’s ((XYZ)) Afterpay and Zip Co ((ZIP)).

The fact that Australia’s largest bank felt compelled to enter BNPL shows how seriously the threat is being taken.

The Mid-Market Lending Exodus

Perhaps nowhere is the disruption clearer than in business lending. Risk-averse banks, still scarred by post-GFC regulations, have strategically deprioritised mid-market business lending. This has created a massive vacuum that private credit funds have eagerly filled.

Businesses are willingly paying 2-4% premiums over bank rates for the speed, certainty, and flexibility that traditional banks can’t match. The global private credit market is projected to grow from US$1.5trn to US$2.6trn by 2029.

This isn’t just lost revenue – it’s lost relationships. When a growing business can’t get timely funding from their bank but receives it quickly from a non-bank lender, the primary relationship shifts.

Future expansions, cash management, and other services follow the credit relationship.

Embedded Finance: Death by a Thousand Cuts

The most insidious threat comes from embedded finance; financial services integrated directly into non-financial platforms. PropTech platforms now offer mortgage pre-approvals within property searches. Travel sites provide embedded insurance at checkout. E-commerce platforms integrate instant credit decisions.

Each integration represents a moment where the bank becomes invisible. The customer interacts with the travel or property brand, building loyalty and trust, while the bank provides anonymous back-end services.

The platform captures the valuable contextual data –what the customer is buying, when, why– while banks are left with basic transaction records.

This commoditisation is the “dumb pipes” scenario in action. Banks provide the regulated infrastructure and balance sheet capacity, but lose the brand relationship and cross-selling opportunities that drive profitability.

The Counter-Offensive: Banks Fight Back

Recognising the existential nature of this threat, Australia’s Big Four have launched unprecedented defensive strategies.

The AI Arms Race

Financial services’ R&D spending hit -$3.5bn in 2023-24, with AI investment growing 142% between 2021-2024. Each major bank has deployed AI as a weapon in the battle for customer retention.

Commonwealth Bank partnered with OpenAI and Anthropic, cutting customer fraud reports by a third and financial losses by half. More importantly, CBA’s AI-driven fraud detection creates a superior customer experience that fintechs struggle to replicate.

National Australia Bank’s ((NAB))  “Customer Brain” uses over 2,000 data points to guide more than 50 million monthly interactions, successfully retaining $92m in term deposits through proactive, personalised engagement.

ANZ Bank ((ANZ)) calls AI its “single-biggest change program”, using generative AI for compound efficiency gains while augmenting customer service capabilities.

Westpac ((WBC)) appointed a dedicated Chief Data, Digital and AI Officer, leveraging AI for real-time payment monitoring that blocked over 94,000 suspicious phone numbers in 2024.

These aren’t cost-cutting exercises; they’re desperate attempts to create customer experiences so superior that fintechs can’t disintermediate the relationship.

Strategic Acquisitions and Partnerships

With subdued IPO markets, banks are turning to M&A to acquire capabilities they can’t build fast enough internally. ANZ Bank’s acquisition of Suncorp Bank, completed in July 2024, exemplifies this strategy; buying market share and capabilities rather than developing them organically.

The acquisition spree reflects a harsh reality: banks are massive, heavily regulated institutions with legacy systems and risk-averse cultures. They can’t innovate at fintech speed, so they’re buying innovation instead.

Investment Implications: Picking Winners in the War

For investors, this battle creates clear opportunities and risks across the ASX financial sector.

The Big Four banks –CommBank, Westpac, ANZ Bank, and National Australia Bank– remain defensive plays. Their massive balance sheets, regulatory moats, and AI investments provide stability, but growth will be constrained by the disintermediation threat.

The real opportunities lay in identifying the enablers and winners of embedded finance. Companies providing the infrastructure for this transformation –payment processors, data analytics providers, and platforms successfully embedding financial services– represent the growth side of this equation.

Technology companies with strong customer relationships and the ability to embed financial services are positioned to capture disproportionate value.

The key is identifying platforms with sufficient scale and stickiness to make embedded finance accretive rather than just another feature.

The Future Battleground

Two scenarios will likely emerge from this conflict:

Successful Defense: Banks successfully integrate AI and strategic acquisitions to create digital experiences so compelling that customers remain loyal. This results in a consolidated landscape where modernised banks coexist with specialised fintechs serving niche markets.

The Dumb Pipes Reality: Banks fail to innovate quickly enough and are relegated to providing back-end infrastructure while tech giants and platforms own customer relationships and capture the most profitable revenue streams.

The outcome depends on execution speed and cultural transformation. Banks have the balance sheets and regulatory advantages, but fintechs have the agility and customer-centric focus.

For Australia’s financial sector, which represents roughly 30% of the ASX200 by market capitalisation, the stakes couldn’t be higher. The quiet revolution in embedded finance and fintech disruption will determine whether banks remain masters of their domain or become commoditised utilities in someone else’s ecosystem.

The battle for the customer relationship is the defining investment theme for Australia’s financial services.

Banks are spending billions to avoid irrelevance, while fintechs are systematically capturing the most valuable part of the value chain.

For discerning investors, understanding this dynamic is crucial to positioning portfolios for the sector’s transformation.

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