Intersekt Festival 2018

This year’s Intersekt Festival, held in Melbourne last month, was put together in quite challenging circumstances, given some of the recent events within key industry body FinTech Australia, the primary event host. It was a credit to all involved.

Not surprisingly, given some of the regulatory and industry changes underway in Australia, the key themes included: Open Banking and access to data: Trust in the banking and financial services sector (thanks to the Royal Commission, and the APRA report on the CBA); Data Privacy; Payments and the NPP; Comprehensive Credit Reporting and predatory lending practices; and Equity Crowdfunding. And of course, a little bit about Blockchain, Cryptocurrencies and Security Tokens.

There was a lot of discussion on “Trust”, especially in the age of Uber and Airbnb – how have these marketplaces managed to earn so much public and consumer trust in such a relatively short time? Yet as consumers, we obsess about Open Banking vs Data Privacy,  while banks themselves appear to be more infatuated with their Net Promoter Score…. whereas “Trust” is clearly a huge issue. In the case of the banks and the fall out from the Royal Commission, there was a discussion about whether our key financial institutions have come close to losing their social license to operate.

Meanwhile, with the prospect of self-sovereign digital identity becoming a practical reality (fuelled by blockchain, decentralisation and trust-less protocols and standards), there is a demand for cross-functional  (and cross-border) solutions for KYC/AML processing and identity management. But a lack of mutual regulatory recognition or harmonization (as opposed to “mere” industry standards) plus a diversity of business models confounds regulatory harmony, often within a single jurisdiction, let alone across multiple markets.

When it comes to payments and the NPP, it’s clear that regulation lags technology. For example, despite the existence of a (complex and somewhat uncertain) licensing regime for purchased payment facilities, APRA has only licensed one such PPF – PayPal. As former ASIC Chairman, Greg Medcraft once observed, by the time the NPP is fully operational, Blockchain will have gotten there long beforehand. And given the preponderance of stored value cards, digital wallets, peer-to-peer crypto exchanges, and multiple overseas and cross-border mobile payment apps, the respective regulatory roles of RBA, APRA, AUSTRAC, ATO and ASIC need to be clearly defined and set out.

On the topic of data protection and “big data”, there was a lot of discussion about getting the balance right between privacy and innovation. One the one hand, industry incumbents should not be allowed to use their market dominance to resist open banking and stifle the emergence of neo-banks; but on the other, there is a need to shelter the forthcoming consumer data right (CDR) from potential abuse like predatory lending (e.g., not simply define the CDR standards by reference to existing banking products and services) – mainly because the CDR is designed to empower consumers (not embolden the industry), and it is designed to be sector neutral (i.e., equally applicable to utilities, ISPs, telcos, insurance firms).

Other topics included SME lending, where new, tech-driven providers are not only originating new loans, but also refinancing existing businesses as the big 4 banks are seen to withdraw from this market; home loans (where technology is driving new loan origination, funding and distribution models); social impact (“FinTech for good”); equity crowdfunding (and the role of STOs); insurance (creating a decentralised market place) and Superannuation (which prompted perhaps the most contentious panel discussion – more on that to come!).

If there were any criticisms of the conference, based on local and overseas delegates I spoke to, they related to the length (was there enough content to sustain nearly 3 days?); the need for clearer roles and participation by the major and regional banks; the absence of investors (despite a speed-dating matching event….); and a desire to see a broader range of speakers and panelists (too many of the “usual suspects”?).

Next week: The Future of Super

 

 

 

Startup Vic’s FinTech Pitch Night

This month’s Startup VIC pitch night on FinTech was a curtain raiser for the annual Intersekt conference. Sponsored by Square and FinTech Australia, it was hosted at the Victorian Innovation Hub, and MC’d by Finch’s Shahirah Gardner and Melissa Mack, Head of Community at MoneyPlace and a Director of FinTech Australia.

As usual, the startups are mentioned here in the order they pitched:

i=Change

i=Change allows retailers and brands to “give back” to the causes their customers care about. Offering a “plug’n’play” solution for their clients, i=Change claims to have 60 brands on board already. It’s fair to say the target audience is fashion-conscience women, with an emphasis on charities, campaigns and causes that are primarily supporting the lives of women and children. Which is all good. But would it be churlish to suggest that many of the brands and products (and their associated imagery) might not be accessible to women in many of the countries where these projects operate? So, there is a potential disconnect between products and causes….

Nevertheless, as well as the feel-good factor for consumers, i=Change also claims to be reducing the retailers’ problem of abandoned online shopping carts, as the prospect of being able to donate to one of the selected causes leads to greater sales conversion and completion.

i=Change applies a fixed transaction fee on top of the customer donation, with a 30% tax rebate available to participating brands. After 5 years, i=Change is generating $8k per month in transaction fees, and is currently seeking a capital raise of $1m.

The judges were keen to understand the level of transparency under which i=Change operates, and whether in-store options are available (not just on-line retail).

For me, I can’t help thinking that this is an attempt to salve the conscience of certain parts of the fashion industry. I would also be interested to understand how much screening there is of both retailers and causes, against CSR measures or other relevant criteria.

Lucidity

Under the product brands of tradeDOX and xpertDOX, Lucidity is digitizing trade finance operations, particularly for import/export commodities transactions.

Offering a pay-per-transaction model, a subscription service, or a custom solution, Lucidity is still pre-revenue, having raised $50k in seed funding. Claiming to be streamlining and automating much of the paper document and manual processes still in use in much of the trade finance industry, it was not clear what technology they are using, nor the average transaction size they are processing. I also couldn’t help thinking that Blockchain solutions for supply chain, logistics and export/import financing will likely render Lucidity redundant.

CoinBot

CoinBot is an algo trading solution for cryptocurrencies that tokenizes individual trading strategies designed by the platform users, and fuelled by native SIT coins (Strategy Instance Tokens). The coins are used to pay for “prospecting” (i.e., scanning for unique trading signals), strategy (devising trading models) and exchange fees (to cover the cost of execution).

Currently seeking to raise $3m for 14% equity (plus SIT tokens), CoinBot supports strategy back-testing written to the Blockchain, and essentially allows users to avoid things like slippage by spreading the timing of instances over a defined trading period.

Personifi

Personifi is a data-driven marketplace for personal loans. It matches consumers with the most suitable lenders (across 30 brands on their platform).

What is supposed to make Personifi different to traditional brokers, lenders and comparison sites is the level of personalised advice, and its credit decision criteria.

With accreditation for the new open banking data regime and the new comprehensive credit reporting system. Personifi can offer improved interest rate options. It has to be noted that some of the loan providers on their platform may once have been considered “lenders of last resort” – not pay-day lenders, but certainly providers who service borrowers who have been turned down by banks and other primary lenders. So, the quality of the loan origination and the standards for lending will no doubt be critical to success.

Previously known as compeer.com.au, Personifi continues to test the broker market, and is bringing more transparency on its fees and loan T&C’s. Current revenue model is based on a 2% commission for referrals. Having pivoted from P2P lending, Personifi is targeting millennials who lack either a long or a strong credit history.

On the night, i=Change took out both the Judges’ prize, and the People’s choice.

A few observations about these pitch nights. First, I miss the audience Q&A that used to be an integral part of proceedings – if part of Startup VIC’s remit (and I am a long-standing, paid-up member) is to foster better founders, there is a missed learning opportunity for prospective and current founders if there are no questions from the audience. Second, I wish they could fix the PA problems – I had thought this had been sorted by using this new(ish), state of the art venue? Finally, it seems the pitch rules have changed, as one of tonight’s teams managed to sneak in a live product demo during their pitch – I just hope that every contestant was afforded the same opportunity, and if this is going to become a regular feature, then the organisers need to be more observant of the time limits…

Next week: Intersekt Festival 2018

 

Banks under the spotlight (again)

About 6 months ago, I posted a blog on the current state of banking and financial services. It was published before the proceedings at the Royal Commission got underway, and since then we have heard a litany of complaints of malpractice and other inappropriate behaviour by some of our major financial institutions. We have also seen the publication of the Prudential Report into the CBA, commissioned by APRA. But despite the horror stories, is anyone really surprised by either of these findings?

Image: Jacob Edward; Source: Flickr; Some Rights Reserved

Some have suggested that our banking culture is largely to blame – but to me, that is somewhat simplistic, since I don’t think that the culture within our banks is so very different to that of other large companies or statutory corporations. (But I will explore this topic in a future blog.)

We have a love-hate relationship with our financial institutions, especially the 4-pillar banks. The latter have continued to be regarded as some of the most stable, profitable and prudent banks in the world – they are probably among the top 30 banks globally based on their credit ratings. Moreover, during the GFC, it was largely agreed that, despite their participation in complex financial products such as mortgage-backed securities, collateralized debt obligations and credit-default swaps, the big 4 banks helped to prevent a total meltdown in the local capital markets because they had reasonably strong balance sheets, and they worked closely with the RBA to avert the full effects of the GFC.

In fact, so enamoured are we of our banks that, despite the Royal Commission, the banks will not face significant regulatory reforms. One economist at a major fund manager I spoke to suggested that even an in-coming Labor Government would have to confine itself to some sort of bank tax. Anything that would undermine the 4-pillar policy (such as increased competition, rationalisation or foreign ownership) would likely be seen as unacceptable in the current political environment. In addition, since the financial sector makes up such a significant part of the market capitalization of the Australian stock market, most voters hold shares in the banks, either as direct or discretionary investments, or through their superannuation fund. Impacting the financial performance of the banks will have a knock-on effect for customers and shareholders alike.

Despite the relative strength of Australia’s financial services regulatory regime, it’s clear that part of the blame for the current malaise lies with the regulators themselves. None of the transgressions complained of at the Royal Commission or uncovered by APRA’s report on CBA suggest that new regulation is needed (unless we are talking about structural reforms…) In the wake of the GFC, and in line with global banking standards, banks have had to adjust the levels of risk-weighted capital they hold, and meet more onerous compliance costs – as well as rein in riskier lending practices. Yet, it feels like the regulators have not been as vigilant or as pro-active as they might have been – or there is such a “checklist” mentality towards compliance and risk management that banks and their regulators have lost sight of the substance of the law, not just the form.

Having read the APRA report on the CBA, there are a number of issues which need to be addressed, as I suspect that they are replicated (in whole or in part) among the other major banks:

  • All of the incidents covered by the APRA report occurred since the GFC – so, maybe increased compliance obligations are not the answer to these problems, but better supervision and enforcement?
  • Technology is only mentioned about a dozen times in the report – and technology was placed very low in the organizational framework for CBA’s Better Risk Outcomes Program (BROP) – yet banks are increasingly becoming technology businesses
  • Decision-making was seen as being too slow and too reactive, in part due to a collegiate and collaborative environment (surely, the signs of a positive culture?)
  • I would suggest there was a lack of external or independent input at the executive and even board level, and an over-reliance on in-house technical experts – especially in the areas of IT and risk
  • Further, the typical silo structures within large, complex organisations like banks, are the result of an over-emphasis on products and processes, rather than on customers and outcomes. To quote the APRA Report:

“…too many handoffs between silos and layers, with accountability often not clear enough and agreements hard to reach…”

  • Equally, a lack of delegation (especially to front line and customer facing staff) only compounds the lack of empowerment, accountability and transparent decision-making

Despite the strength of the 4-pillar banks and the market share they command, they face disruption and disintermediation from digital platforms, Blockchain technology, decentralized applications, P2P solutions and challenger brands. In fact, banks will increasingly become the digital custodians of our financial data – we will end up paying them to manage our data (rather than simply charging us transaction fees). Banks will also need to restructure their products and services around our personal financial needs and obligations according to our stage of life and other circumstances (rather than simply selling us products), along the lines of:

  • Essential – housing, living, education, health, retirement
  • Mandatory – superannuation, taxes
  • Discretionary – investments, holidays, luxuries

That way, banks will also have a much better “whole of client” view of their customers, rather than the current product bias.

Next week: Culture Washing

 

 

 

Wholesale Investor’s Crypto Convention

Another day, another blockchain and crypto event. This time, the latest Wholesale Investor pitch fest in Sydney featuring companies that are looking to raise funding from accredited investors – either to invest in other crypto businesses, or as equity in their blockchain projects, or via a token sale.

Fran Strajnar, CEO and Co-Founder of Techemy delivering the opening Keynote Presentation

The pitches were punctuated by a number of keynote presentations, and panel discussions, to provide some context on what is going on in crypto, from a market, technology and regulatory perspective.

The presenting companies ranged from Xplora Capital, a specialist fund investing in blockchain technology, to Enosi, a platform for retail energy distribution. There were a few projects linked to the entertainment and event industry (Zimrii, FairAccess and Hunter Corp Records), and a couple operating in precious metals (MetaliCoin and Kinesis Monetary System). Ethereal Capital is focused on crypto mining, while Horizon State is bringing blockchain technology to voting systems. Systema is using AI on the blockchain to personalise e-commerce, Amber is like Acorns for crypto, Sendy* is an e-mail engagement platform, and Tatau* is building a distributed computation platform for GPU-based machines.

There was no doubting the level of interest in blockchain and crypto among the audience, but whether they are ready to invest is still open to debate. With the markets sending mixed signals (despite the generally positive industry news in recent weeks), institutional money continues to sit on the sidelines awaiting buying opportunities. My guess is they probably won’t want to wait too long, especially if we see the adoption of new security token standards, crypto-backed ETFs, and other asset diversification.

Meanwhile, over at Chartered Accountants ANZ, there was a very interesting seminar on the taxation of crypto assets. While there have been some positive developments (such as dropping GST on crypto transactions), the ATO is still being somewhat ambiguous about the treatment of crypto for CGT and income tax purposes. In particular, whether crypto assets will be recognised on the revenue account, or on the capital account, has implications for crystallising capital gains (or losses), and for carrying forward certain revenue gains (or losses). The inference being, there is a desire to extract as much as possible from accrued capital gains, while minimising the ability to rollover losses (especially given that many investors are probably sitting on unrealised losses if they bought in to the market during the late 2017 bull run). Essentially, crypto is not recognised as currency (whereas in Japan, for example, crypto is recognised as a legal form of payment), but as an asset that at a minimum, represents a bundle of rights. But the same could be said of a software license…

Next week: Tales from Tasmania

* Declaration of interest: Sendy and Tatau are both clients of Techemy, a company I consult to.