#FinTech: The 8 things I want from mobile banking apps

Posted on October 27, 2015 by Content in Context

As we await the launch of ApplePay in Australia, and in light of the plethora of mobile banking tools, here is my wish list against which all such apps should be assessed:

TRUST – is my money safe?
CONVENIENCE – can I do multiple transactions from within the same app?
SECURITY – is my personal data secure?
RELIABILITY – will it always be there when I need to use it?
FLEXIBILITY – can I access and transact with all my accounts, brands and products from a single app?
COST – can I expect lower transaction, service and account fees if I use it?
SPEED – is it real-time?
EASE OF USE – is it intuitive?

Next week: Finding a career in #FinTech

Assessing Counterparty Risk post-GFC – some lessons for #FinTech

Posted on September 29, 2015 by Content in Context

At the height of the GFC, banks, governments, regulators, investors and corporations were all struggling to assess the amount of credit risk that Lehman Brothers represented to global capital markets and financial systems. One of the key lessons learnt from the Lehman collapse was the need to take a very different approach to identifying, understanding and managing counterparty risk – a lesson which fintech startups would be well-advised to heed, but one which should also present new opportunities.

In Lehman’s case, the credit risk was not confined to the investment bank’s ability to meet its immediate and direct financial obligations. It extended to transactions, deals and businesses where Lehman and its myriad of subsidiaries in multiple jurisdictions provided a range of financial services – from liquidity support to asset management; from brokerage to clearing and settlement; from commodities trading to securities lending. The contagion risk represented by Lehman was therefore not just the value of debt and other obligations it issued in its own name, but also the exposures represented by the extensive network of transactions where Lehman was a counterparty – such as acting as guarantor, underwriter, credit insurer, collateral provider or reference entity.

Before the GFC

Counterparty risk was seen purely as a form of bilateral risk. It related to single transactions or exposures. It was mainly limited to hedging and derivative positions. It was confined to banks, brokers and OTC market participants. In particular, the use of credit default swaps (CDS) to insure against the risk of an obiligor (borrower or bond issuer) failing to meet its obligations in full and on time.

The problem is that there is no limit to the amount of credit “protection” policies that can be written against a single default, much like the value of stock futures and options contracts being written in the derivatives markets can outstrip the value of the underlying equities. This results in what is euphemistically called market “overhang”, where the total face value of derivative instruments trading in the market far exceeds the value of the underlying securities.

As a consequence of the GFC, global markets and regulators undertook a delicate process of “compression”, to unwind the outstanding CDS positions back to their core underlying obligations, thereby averting a further credit squeeze as liquidity is released back into the market.

Post-GFC

Counterparty risk is now multi-dimensional. Exposures are complex and inter-related. It can apply to any credit-related obligation (loans, stored value cards, trade finance, supply chains etc.). It is not just a problem for banks, brokers and intermediaries. Corporate treasurers and CFOs are having to develop counterparty risk policies and procedures (e.g., managing individual bank lines of credit or reconciling supplier/customer trading terms).

It has also drawn attention to other factors for determining counterparty credit risk, beyond the nature and amount of the financial exposure, including:

Bank counterparty risk – borrowers and depositors both need to be reassured that their banks can continue to operate if there is any sort of credit event or market disruption. (During the GFC, some customers distributed their deposits among several banks – to diversify their bank risk, and to bring individual deposits within the scope of government-backed deposit guarantees)
Shareholder risk – companies like to diversify their share registry, by having a broad investor base; but, if stock markets are volatile, some shareholders are more likely to sell off their shares (e.g., overseas investors and retail investors) which impacts the market cap value when share prices fall
Concentration risk – in the past, concentration risk was mostly viewed from a portfolio perspective, and with reference to single name or sector exposures. Now, concentration risk has to be managed across a combination of attributes (geographic, industry, supply chain etc.)

Implications for Counterparty Risk Management

Since the GFC, market participants need to have better access to more appropriate data, and the ability to interrogate and interpret the data, for “hidden” or indirect exposures. For example, if your company is exporting to, say Greece, and you are relying on your customers’ local banks to provide credit guarantees, how confidant are you that the overseas bank will be able to step in if your client defaults on the payment?

Counterparty data is not always configured to easily uncover potential or actual risks, because the data is held in silos (by transactions, products, clients etc.) and not organized holistically (e.g., a single view of a customer by accounts, products and transactions, and their related parties such as subsidiaries, parent companies or even their banks).

Business transformation projects designed to improve processes and reduce risk tend to be led by IT or Change Management teams, where data is often an afterthought. Even where there is a focus on data management, the data governance is not rigorous and lacks structure, standards, stewardship and QA.

Typical vendor solutions for managing counterparty risk tend to be disproportionately expensive or take an “all or nothing” approach (i.e., enterprise solutions that favour a one-size-fits-all solution). Opportunities to secure incremental improvements are overlooked in favour of “big bang” outcomes.

Finally, solutions may already exist in-house, but it requires better deployment of available data and systems to realize the benefits (e.g., by getting the CRM to “talk to” the loan portfolio).

Opportunities for Fintech

The key lesson for fintech in managing counterparty risk is that more data, and more transparent data, should make it easier to identify potential problems. Since many fintech startups are taking advantage of better access to, and improved availability of, customer and transactional data to develop their risk-calculation algorithms, this should help them flag issues such as possible credit events before they arise.

Fintech startups are less hamstrung by legacy systems (e.g., some banks still run COBOL on their core systems), and can develop more flexible solutions that are better suited to the way customers interact with their banks. As an example, the proportion of customers who only transact via mobile banking is rapidly growing, which places different demands on banking infrastructure. More customers are expected to conduct all their other financial business (insurance, investing, financial planning, wealth management, superannuation) via mobile solutions that give them a consolidated view of their finances within a single point of access.

However, while all the additional “big data” coming from e-commerce, mobile banking, payment apps and digital wallets represents a valuable resource, if not used wisely, it’s just another data lake that is hard to fathom. The transactional and customer data still needs to be structured, tagged and identified so that it can be interpreted and analysed effectively.

The role of Legal Entity Identifiers in Counterparty Risk

In the case of Lehman Brothers, the challenge in working out which subsidiary was responsible for a specific debt in a particular jurisdiction was mainly due to the lack of formal identification of each legal entity that was party to a transaction. Simply knowing the counterparty was “Lehman” was not precise or accurate enough.

As a result of the GFC, financial markets and regulators agreed on the need for a standard system of unique identifiers for each and every market participant, regardless of their market roles. Hence the assignment of Legal Entity Identifiers (LEI) to all entities that engage in financial transactions, especially cross-border.

To date, nearly 400,000 LEIs have been issued globally by the national and regional Local Operating Units (LOU – for Australia, this is APIR). There is still a long way to go to assign LEIs to every legal entity that conducts any sort of financial transaction, because the use of LEIs has not yet been universally mandated, and is only a requirement for certain financial reporting purposes (for example, in Australia, in theory the identifier would be extended to all self-managed superannuation funds because they buy and sell securities, and they are subject to regulation and reporting requirements by the ATO).

The irony is that while LEIs are not yet universal, financial institutions are having to conduct more intensive and more frequent KYC, AML and CTF checks – something that would no doubt be a lot easier and a lot cheaper by reference to a standard counterparty identifier such as the LEI. Hopefully, an enterprising fintech startup is on the case.

Next week: Sharing the love – tips from #startup founders

#AngelCube favours B2B #startups…

Posted on September 1, 2015 by Content in Context

The latest intake to AngelCube‘s accelerator program presented at the recent Startup Victoria meetup event. It was interesting to see that all 6 pitches were aimed at B2B audiences, since I have heard several angel investors and startup advisers express a strong preference for end-consumer products (or those with 2-sided markets). Perhaps there is more appetite for enterprise solutions, despite the longer lead times for sales, and the challenge of strategies required to displace incumbant products.

Whether there is a new interest in B2B startups, or whether more founders are identifying B2B opportunities, there’s probably some further analysis to be done. Meanwhile, here are the 6 fledgling startups in the order they pitched on the night:

1. Peer Academy

Peer Academy aims to “change the way professionals learn”. It does this by offering students access to open enrollment classes via an online market place. The classes are conducted by facilitators and experts (“hosts”) who have been “screened” for quality by Peer Academy, with a focus on “soft” management and leadership skills.

Peer Academy hopes that students will act as “warm leads” for corporate sales, by taking their classroom experience back into their organisations, and acting as champions or brand advocates. With follow-up introductions to training and HR managers, Peer Academy then curates programs for corporate clients, by matching training needs to individual users.

I like the notion of “peer-to-peer” learning (although I presume that the hosts are expected to have more advanced and developed skills than their students), and there is certainly a trend for alternative learning platforms. At least one major bank has expressed interest in sourcing corporate training via Peer Academy, who take a 30% commission on course sales.

A huge challenge will be to engage corporate clients who already have established relationships with trusted training providers, or who have existing panels of approved organisations, or who outsource training procurement to third parties.

2. Jack

Workplace wellbeing is becoming big business ($5bn and counting?), and in the process, sedentary workers are in the firing line. According to Apple CEO TIM Cook, “Sitting is the new cancer”, and hence the recent fad/trend/fashion for sit-stand desks which is driving market interest in ergonomic solutions. The team at Jack have built a device that can monitor how much time people are sitting or standing, and even provide some feedback on user posture.

As you would expect, Jack uses cloud connectivity to monitor user activity, and to relay data via cross-platform apps and dashboards. It also uses elements of social media engagement and gamification, and has already launched a pilot scheme with several desk suppliers, as well as a paid beta at a well-known payments provider.

Customers will buy the device plus pay for a monthly subscription service. There is a direct competitor, but Jack claim their device can be retrofitted to any sit-stand desk. The unit price is much higher than, say a Fitbit, but since this is not a consumer product, Jack is confident it can sustain current pricing.

Finally, with the data it aims to collect, Jack reckons it may even be able to help reduce insurance premiums, although this will no doubt be subject to actuarial scrutiny, Work Cover and OH&S requirements, as well as data privacy issues.

3. Coin-Craft

In the professional services and consulting sectors, tracking project costs and resourcing have become highly demanding activities – witness the plethora of project management, costing, billing, ERP and time-tracking solutions on the market. Based on personal experience, the founders of Coin-Craft have identified a specific need among architects, and have built an all-in-one tool for Project Management, Cashflow Analysis and Resource Planning. Built “for architects by architects”, Coin-Craft is designed to help clients stay optimal, by managing staff over/under utilisation, and tracking cashflow projections.

The system also claims to integrate with third-party accounting software, and has around a dozen firms using the service, with another 30 in the pipeline. Although Coin-Craft have chosen a niche client base to protect their market entry, they claim the solution can also be adopted by engineering practices, graphic art studios and project management firms.

However, feedback from the audience suggested there are already similar, mature products that are tracking individual billable hours against specific projects, so Coin-Craft may need to work on their value proposition and differentiation.

4. CurveUp!

As social media and content marketing become more ubiquitous (if not more sophisticated), companies need to understand the value of their direct marketing spend. Mostly, they can do this via web analytics, e-commerce tracking, campaign conversions, and cost of customer acquisition. According to CurveUp! however, measuring the ROI of your PR activity is not so easy using “conventional” social media monitoring tools. For example, CurveUp! claim they can deliver tailored reports to show which blog post or article converted to a ticket sale for a concert or event.

Currently using web and online sources only, CurveUp! track mentions and link this to customer data. Some platforms, such as Instagram, are harder to track, and even via a possible API solution, it will only be possible to monitor the number of views and shares, but otherwise little or no data will be available.

However, at least one online market place has expressed interest, and CurveUp! has the potential to integrate with Facebook and Google, so that clients could possibly use campaign codes to track referral activity from mention to firm sale. Overall, the service will need to align itself with the ROI outcomes linked to PR campaign goals – which will vary between clients and markets, depending on organisational KPIs around brand advocacy, share of wallet, products per customer and customer satisfaction.

5. TribeGrowth

In a similar vein, the team at TribeGrowth claim to have built “artificial intelligence for social media marketing“. Their goal is to help clients build an audience and get customers, via the use of “intelligent engagement” to generate conversions.

Initially targeting startups, professional service providers and the hospitality sector, TribeGrowth offers a tiered monthly subscription service, and claims to be a (cheaper) alternative to agencies or even Twitter ads.

Currently in private beta (and so far, only designed for Twitter and Instagram), TribeGrowth focuses on audience growth by careful selection of connections and influencers. According to the founders, this is not “pay & spray”, but uses machine learning to refine audience outreach and engagement.

6. SweetHawk

Finally, and in what was probably the most technical presentation of the evening, came SweetHawk, which is building “voice for e-commerce”. I have to confess that, although I had previously heard about this product, I’m still not totally clear how it works.

In essence, it’s an outbound platform that enables companies to have more focused/targeted real-time conversations with warm sales prospects, namely people who are visiting their websites. Personally, I would find that a bit spooky, if I was browsing a site and suddenly a widget popped up asking me if I wanted to receive a call right there and then. Isn’t it a bit like stalking?

The business model is designed to offer tiered services in return for monthly subscription fees – depending on call volumes and functionality, such as workflow tools. I would see it as sitting somewhere between an outbound sales call centre and a SaaS-style inbound helpdesk solution.

On the plus side, I do see the opportunity to deliver superior and more responsive customer service, except that SweetHawk appears to be a sales and prospecting platform, not an after-sales or support solution. I’m also used to live chat tools that pop up on various software and other service sites I use, so I would probably engage with a similar offering if I was browsing to purchase.

Final Thoughts

While none of these pitches has so far demonstrated anything truly disruptive (but let’s not criticise them for that), they all seem reasonably sensible and logical solutions using a mix of digitally-driven technologies (cloud, mobile, social, peer-to-peer, data analytics) that we are all increasingly familiar with. So, rather than major game changers, I see each of them building on established platforms. By refining the potential that new technologies and business models are creating, they are tapping into better-defined client needs rather than taking a “build it and they will come” approach.

In conclusion, I was generally impressed by the 6 pitches on offer, although some of the presentations will no doubt be reworked in light of the audience feedback and Q&A, and before the plucky founders hit the investor road show organised by AngelCube.

The event was hosted by inspire9, and sponsored by BlueChilli and PwC.

Next week: More on FinTech – another look at data and disintermediation

Deconstructing #Digital Obsolescence

Posted on July 7, 2015 by Content in Context

Remember the video format wars of the 1980s? At one point, VHS and Betamax were running neck and neck in the consumer market, but VHS eventually won out (although the also-ran V2000 was technically superior to both). Since then, we’ve had similar format battles for games consoles, video discs, computer storage, CD’s and e-books. It’s the inevitable consequence of operating platforms trying to dominate content – a continuing trend which has probably reached its apotheosis with the launch of Apple’s Beats 1 streaming service. This convergence of hardware and software is prompting some contrary trends and, if nothing else, proves our suspicion of hermetically sealed systems…

Trevor Jackson embarks on a format frenzy….

1. Digital Divergence

Earlier this year, UK music producer Trevor Jackson released a collection of 12 songs, each one pressed on a different media format: 12″, 10″ and 7″ vinyl; CD and mini-CD; cassette; USB; VHS; minidisc; DAT; 8-track cartridge; and reel-to-reel tape. Of course, he could have also used 78 rpm shellac records, digital compact cassettes, Digital8 tapes, 3.5 and 5.25 inch floppy disks (still available, I kid you not) or any of the multitude of memory cards that proliferate even today.

While Jackson’s “Format” project might seem gimmicky, it does demonstrate that many digital formats are already obsolete compared to their analogue counterparts (and until very recently, I could have played 8 of the 12 formats myself – but I’ve just donated my VHS player to our local DVD store).

As I have blogged previously, there is an established body of digital/analogue hybrids, especially in data storage, and I can only see this continuing as part of the creative tension between operating systems and content formats.

2. Digital Archeology

Each new hardware/software upgrade brings a trail of digital obsolescence (and a corresponding amount of e-waste). It’s also giving rise to a new discipline of digital archeology, combining forensics, anthropology and hacking.

Back in 2002, it was discovered that a 15-year old multimedia version of the Domesday book was unreadable* – yet the hand-written version is still legible, and available to anyone who can read (provided they can decipher 1,000-year old Norman English). Apparently, it has taken longer to decrypt the 1986 video disc than it took to create it in the first place.

More digital archeologists will be needed to mine the volumes of data that reside in archival formats, if we are to avoid losing much of the knowledge we have created since the advent of the personal computer and the public internet.

3. Digital Provenance

We’re used to managing our data privacy and computer security via password protection, network protocols and user authentication. If we think about it, we also question the veracity of certain e-mails and websites (phishing, scamming, malware, trojans etc.).

A while ago I blogged about the topic of digital forgeries, and the associated phenomenon of digital decay. Just as in the art world, there is a need to establish a method of digital provenance to verify the attributes and authenticity of content we consume.

We are already seeing this happen in the use of block chains for managing cryptocurrencies, but I believe there is a need to extend these concepts to a broader set of transactions, while also facilitating the future proofing and retrofitting of content and operating systems.

4. Digital Diversity

In response to closed operating systems, sealed hardware units and redundant formats, there are several interesting and divergent threads emerging. These are both an extension of the open source culture, and a realisation that we need to have transferable and flexible programming abilities, rather than hardwired coding skills for specific operating systems or software platforms.

First, the Raspberry Pi movement is enabling richer interaction between programming and hardware. This is especially so with the Internet of Things. (For a related example, witness the Bigshot camera).

Second, Circuit Bending is finding ways to repurpose otherwise antiquated hardware that still contain reusable components, processors and circuit boards.

Third, some inventive musicians and programmers are resuscitating recent and premature digital antiques, such as Rex The Dog‘s re-use of the Casio CZ-230S synthesizer and its Memory Tapes to remix their first single, and humbleTUNE‘s creation of an app that can be retrofitted to the original Nintendo Gameboy.

These trends remind me of those Radio Shack and Tandy electronics kits I had as a child, which taught me how to assemble simple circuits and connect them to hardware. (And let’s not forget that toys like LEGO and Meccano started incorporating motors, electronics, processors and robotics into their kits many years ago.)

5. Salvaging the Future

Finally, as mentioned above, built-in digital obsolescence creates e-waste of the future. A few recycling schemes do exist, but we need to do a better job of reclaiming not just the data archives contained in those old disks, drives and displays, but also the materials from which they are made.

* My thanks to Donald Farmer of Qlik for including this in his recent presentation in Melbourne.

Next week: #FinTech – what’s next?

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