What should we expect from our banks?

As I have written elsewhere, bank bashing is a favourite Australian pastime. In recent months, this has struck a new crescendo. There have been various allegations, legal cases and regulatory investigations surrounding such misconduct as mis-selling of products, rate fixing, over-charging and money laundering, all culminating in a hastily announced Financial Services Royal Commission.

Cartoon by David Rowe, sourced from the AFR, published November 30, 2017

The banks had tried to get on the front foot, by abolishing ATM fees, reigning in some of their lending practices, and appointing a former Labor politician to help them navigate the growing calls for a Royal Commission (largely coming from her former colleagues in the Labor party). But the (Coalition) government clearly decided enough was a enough, and sprung their own inquiry into the industry.

For the benefit of overseas readers, Australia has a highly concentrated banking sector, which is also highly regulated, highly profitable, and in some ways, a highly protected market oligopoly. There are only four major banks (also know as the four pillars, as they cannot acquire one another, nor can they be acquired by foreign banks), and a few regional banks. There is a smattering of non-bank financial institutions, but by their very nature, they don’t offer the full range of banking products and services. As an example of this market concentration, the big four banks traditionally account for something like 80% or more of all home loans.

Aside from the Royal Commission, there are a number of policy developments in play which will inevitably change the banking landscape, and the dynamic between market participants. In addition to the growth of FinTech startups aiming to disrupt through digital innovation, there are four key areas of policy that will impact traditional banking:

  1. Open Banking – giving customers greater access to and control over their own banking data
  2. Comprehensive Credit Reportingmandating the hitherto voluntary regime among the big four banks
  3. The New Payments Platform – designed to allow real-time payment and settlement between customers, even without using bank account details
  4. Restricted ADI Regime – to encourage more competition in the banking sector

The major banks have tried to laugh off, rebuff or diminish the threat of FinTech disruption. They believe they have deeper pockets than startups and just as good, if not better, technology processes. Moreover, customers are traditionally so sticky that there is an inherent inertia to switch providers.

But with banks having to set aside more risk-weighted capital to cover their loans, they may be vulnerable to startups focussing on very specific products, rather than trying to be a full service provider. Banks no longer have the technology edge, partly because of the legacy core banking systems they have to maintain, partly because they lack the know-how or incentive to innovate. And changing demographics will influence the way new customers interact with their banks: “mobile first”, “end-to-end digital”, and “banking for the gig economy” are just some of the challenges/opportunities facing the sector.

So what should we expect from our banks? I would say that at a minimum, a bank should provide: trust (but with Blockchain, DLT and trustless, zero-knowledge proof solutions, banks are no longer the sole arbiter of trust); security (linked to trust, but again, with biometrics, digital ID solutions and layered encryption, banks do not have a monopoly on these solutions); capital protection (although no bank can fully guarantee your deposits); reasonable fees (still a way to go on account keeping fees and some point of sale transaction fees – while disruptive technology will continue to challenge legacy costs); and an expectation that it will not bet against the direct interests of their customers (like, shorting the housing market, for example). The latter is particularly tricky, when banks are mainly designed to deliver shareholder value – although of course, most Australian bank customers also own shares in the banks, either directly, or indirectly through their superannuation.

In recent months, and based on personal experience, I think a bank should also know its customers. Not just KYC (for regulatory purposes), but really understand a customer as more than just a collection of separate products, which is how most banking CRM systems seem to work. Given how much banks spend on consumer research and behavioral data, and how much they talk about using big data, artificial intelligence and machine learning to anticipate customer needs, it’s a constant frustration that my bank does not really know me – whenever I contact them, for any reason, I always feel like it’s a process of “product first, customer second”.

Moreover, I can’t think of a single new product that my bank has launched in the past 15 years of being a customer. Sure, they have rolled out mobile apps and online banking, and they may have even launched some new accounts and credit cards – but these are simply the same products (accounts, loans, cards) with different prices and a few new features. Even the so-called “special offers” I get for being a “loyal” customer bear no relation to my interests, or even my spending patterns (despite all the data they claim to have about me). And because banks are product or transaction-driven, rather than relationship-driven, their internal processes fuel silo behaviors, to the extent that the left hand very often does not know what the right hand is doing.

Finally, with more and more of the working population becoming self-directed (self-employed, freelance, portfolio career, contracting, gig-economy, etc.) banks will have to innovate to meet the financial services needs of this new workforce. Bring on the disruption, I say.

Next week: Box Set Culture 

 

 

 

 

Conclusions from the Intersekt Festival

The first Intesekt Festival of FinTech in Melbourne, incorporating the second Collab/Collide Summit, ran from October 27th to November 3rd, and included an academic symposium, a hackathon, various co-working space open days and corporate field trips, a Blockchain Day, a pitch competition, as well as the 2-day Collab/Collide event. Plans are already being made for 2018….

Like all such multi-stream conferences, you have to be selective, and hopefully pick out the most interesting and relevant sessions and events. Overall, the event attracted solid numbers, a great selection of overseas speakers and delegates, and managed to debate some of the hot topics in FinTech today.

First, kudos to the Victorian Government, and in particular Minister Philip Dalidakis and his team for again partnering with FinTech Australia to bring this event to Melbourne (especially after a difficult year, with the LaunchVic and 500 Startups debacle).

Second, respect to the Federal Treasurer, Scott Morrison, for again speaking at the conference. Last year, he announced his open banking data policy; this year, he announced the comprehensive credit reporting (CCR) policy. (Needless to say the Treasurer found himself having to discuss Parliamentarians’ genealogy with the press pack outside the conference hall.)

Third, over recent times I have been encouraged by the level of engagement between the FinTech sector, and the Australian regulators, most notably ASIC and its Commissioner, John Price. (Good to see a number of ASIC staff at the conference as well, as it’s critical for them to see and hear what is going on in the industry.)

Some of the overarching and consistent themes of the conference were (understandably): Big Data, AI, machine learning, regulatory oversight, digital disruption, financial literacy, FinTech startup inclusivity, and the future of financial services.

I covered the hackathon and the pitch night previously – as well as the reverse pitch night by some leading VC funds. There were also some engaging presentations from challenger banks and disruptive FinTech brands. Always interesting to hear from other markets.

On the Blockchain day, and at the Collab/Collide conference, there were a number of presentations on ICOs and token issuance programs. Unfortunately, there was a lot of misinformation and confusion about the regulatory and other legal issues associated with this new phenomenon – even among lawyers.

Elsewhere, there were updates on the EY FinTech Australia Census, various regulatory developments, and a session on alternative funding models with the introduction of new equity crowdfunding rules. P2P lending also made an appearance, as did robo-advice and the New Payments Platform.

Finally, the dilemma of the major banks in responding to the new world of financial services was illustrated by the announcement of NAB’s job cuts, in response to technology and automation – which sort of goes to the heart of FinTech.

Next week: Consensus: Invest and Blockchain Expo

 

 

The NAB SME Hackathon

The recent week-long Intersekt fintech festival kicked off with a 48-hour hackathon, sponsored by NAB, hosted by Stone & Chalk and York Butter Factory, and designed to meet the needs of NAB’s SME customers.

Using NAB’s own transaction data APIs, participants were asked to come up with a solution to one of the following challenges:

1. How to make the lives of SME owners easier
2. How to help SMEs generate more business

12 teams competed over the weekend, and each presented their ideas to a panel of industry experts. Clearly, these were not the usual startup pitches (and none have a public website), but it was interesting to see the results. Projects are listed here in the order they presented:

NABTax – “tax audit insurance”
Designed to encourage better/best practice tax governance among SMEs, it uses a combination of a tax risk rating linked to a reduced cost of premiums for tax audit insurance.
The solution would help SMEs to be better prepared for an ATO request for information, aid understanding of the ATO’s current small business benchmarks, and provide insights on the ATO’s data matching protocols.
Essentially it would generate a risk rating based on quantitative and qualitative analysis of supporting documents supplied by the SME.

EasyPay – “reconciling invoices and receipts”
Deploying an e-invoicing model, the platform would generate a unique reference number, linked to an ABN, and generate a QR code to be scanned by the payer.
At its heart, it would better match invoices and payments. The service would be sold under a freemium model, and would be compliant with the New Payment Platform (NPP).
The main challenge would be in reaching and gaining traction with consumers (the bill payers).

ORDR – “managing cash-flow, inventory ordering and sales”
Drawing on a dashboard showing SKUs of items in stock, it would use machine learning
to predict stock ordering requirements. Although this concept was based on actual SME experience, the panel felt that there would be integration issues with existing POS and supply chain systems. Also, how would it link to CRM data, and how would it be able to both accommodate new season stock, and accurately forecast demand?
Finally, what level of SKU data is actually available from NAB transaction data?

Just-In-Time MBA – “a financial/business coaching app for SME owners”
According to data presented by the team, 60% of SMEs fail within their first three years. And given there are something like two million micro-businesses in Australia, and 250,000 new ones established each year, if nothing else, there is a huge opportunity to reduce this failure rate.
Using the available APIs (plus data from the SMEs’ accounting systems), the platform would analyze payments data and issue alerts designed to prompt remedial action.
Based on the presentation, it seemed that the proposed analysis is only capturing cash-flow – clearly, the real value and insights would come from holistic health checks.

NAB SME Connect – “connecting small business to customers”
Using a number of data inputs, this service would push deals in real-time to your smart phone. The customer app shows only relevant offers – based on preferences, proximity, etc. The client SMEs can see the level of interest and demand, to generate “Smart Deals” based on transaction data. The panel wondered about the opt-in model, and also felt there were already similar competitor products, or that any competitive advantage would be difficult to defend.

Wait< – “wait less for elective surgery”
Aimed at time-poor SME owners, the team wanted us to think of this as an “eBay plus Afterpay for elective surgery”. Taking the approach of a two-sided marketplace, it would
support transactional loans to cover the cost of surgery, and match customers (patients) to suppliers (health care providers). Drawing on NAB’s current healthcare payment services, the solution would combine NAB’s transaction banking and health APIs, plus Medicare APIs (for patient and practitioner verification), to generate a pre-populated lending form. No doubt designed to appeal to NAB Health, this was a very niche project.

Tap & Go – “turning customer loyalty into rewards more easily and more cheaply”
This idea would enable SMEs to use transaction data to decide who gets a discount, and how much. Built on a merchant administration platform, it would capture transaction data from POS systems. It would be offered as a subscription service for merchants. The panel wondered how this solution compared to the competition, such as Rewardle.

TAP – “smarter marketing solutions”
Commenting that only 16% of SMEs are maximizing their online presence, this service is designed to increase merchants’ digital presence. It would use NAB APIs to manage and track campaigns – by comparing the data to past sales periods and previous campaigns. Campaigns would also be linked to social media accounts. The panel questioned how the solution would fare against competitors such as Hootsuite.

StopOne – “integrated hub for making data driven decisions and connect with a NAB banker”
Conceptually, this was a very ambitious project, designed to let SMEs use dashboards and forecasting from NAB transaction data (and other sources), to drill down into visualized data records. It would also integrate with social media insights, incorporate a messaging platform to allow SMEs to communicate with their bankers, and enable SMEs to share their dashboard with a business banker. The panel queried the cost of the data analytics for the SME, which presumably comes on top of their existing accounting software.
They also suggested the team take a look at what 9 Spokes is already doing in this space.

Spike – “accounts payable solution”
Currently, paying invoices can involve a 10 step process. The average SME has 90 suppliers. Accessed via a NAB accounts payable login, the solution incorporates the Google vision API to capture an image of the invoice and extract key data points. The SME then chooses the date and account for payment, the invoice is stored in the cloud, from where is posted to the Xero ledger, and the NAB payments portal. In addition, the client can share purchase order data with their supplier to pre-populate the invoice. It could
also optimize expenses, by recommending offers or product switches. When asked about the commercial model, the team suggested it could be offered free by NAB, who get access to extra data.

nablets – “focus on things that matter”
According to this team, 90% of SMEs are not taking full advantage of digital tools. Using NAB APIs and event-based triggers, clients would use their NAB Business Connect account login to create “if this then that” rules and tasks. It would also leverage open banking data APIs. The panel asked about the logic and the parameters to be embedded in the rules-based activities, as well as the proposed categories and range of functions to be automated. They also wondered how it would actually help SMEs to adopt digital tools – some of which are already integrated into the current banking portal.

NAB Hub – “Small Business Hub”
Designed to present banking data the way customer wants to see it (P&L, balance sheet, net asset position etc.), it would also help in generating leads for pre-approved loan products, and help with investments via optimized rates, and for insurance cover it would
assist with policy reviews, claims and risk analysis. The panel asked if this was intended to be a NAB add-on or a standalone product. They also suggested the team look at what Tyro is doing around lending analysis – but recognized that there was possibly a place for this type of tailored advice.

Based on the judging, the winners and runners-up were:

1. Just-in-time MBA
2. Spike
3. NABTax

Meanwhile, the crowd favourite was Just-in-time MBA, and the best innovative idea was TAP.

If I had to summarise the presentations, it would be as follows:

1. Most of the presentations were still talking about yesterday’s/today’s banking products, rather than products of the future
2. There was very little evidence of projects designed to help SMEs grow their business
3. Any effort to gain traction for these projects will revolve around changing customer (and bank) behaviours….

Next week: VCs battle it out in the reverse pitch night

 

 

Digital Richmond

How significant is one suburb’s contribution to the startup ecosystem in Melbourne, if not Victoria or even Australia? Well, if the recent panel on Digital Richmond (plus the Victorian Minister for Small Business, Innovation & Trade) are to be believed, VIC 3121 is the epicentre of all things startup.

According to the event description, Richmond (and the adjoining area of Cremorne) is “the stomping ground of choice for Melbourne’s established tech companies and aspiring start-ups alike”.

Hosted in the offices of 99Designs (celebrating bringing their HQ back to Richmond), a panel representing some of the biggest names among Australia’s tech companies (and all local heroes) explored what makes “Digital Richmond” tick – but also identified some of the challenges of growing and sustaining scale-up ventures beyond the confines of a few co-working spaces in converted warehouses and textile factories….

Facilitated by Rachel Neumann former MD of Eventbrite Australia (whose Australian HQ is in Melbourne), and briefly head of 500 Melbourne, the panel comprised some key Richmond/Cremorne tenants: Patrick Llewellyn, CEO at 99designs; Jodie Auster, General Manager for UberEATS in Melbourne; Cameron McIntyre, CEO of Carsales; Nigel Dalton, Chief Inventor at REA Group; and Eloise Watson, Investment Manager at VC fund Rampersand.

To set the scene, mention was made of other established Australian tech-based companies also HQ’d in Melbourne (MYOB and SEEK, the latter of which is also relocating its offices to Richmond), recent local successes such as Rome2Rio and CultureAmp (both born in Richmond), and the steady stream of global tech brands that have come to call 3121 their regional/national home, such as Stripe, Slack, Square and Etsy.

It was evident that each of the panel have previous business connections with one or more of their fellow panelists – so maybe there is simply value in being in close proximity to each other. Success begets success, especially when people are more willing to share connections and introduce new contacts into their networks. (Although, what might this say about diversity? And does it reinforce the notion that “it’s not what you know, it’s who you know”?)

Despite the number of co-working spaces and tech companies based locally, there are very few substantial, modern office buildings in the area, and only one business park of note. Local startups that need more space will likely have to relocate elsewhere.

Property aside, the panel considered other local infrastructure is generally conducive to success – access to public transport (although Richmond and East Richmond stations are both in serious need of an upgrade), a solid talent base, great coffee shops and proximity to the CBD.

On the downside, there was criticism at the lack of NBN access in such a concentrated pocket of tech companies and startups (with the associated numbers of contractors, freelancers and other members of the gig economy who live in the area and work from home). Car parking was also an issue, although with Richmond being a major public transport hub, I was surprised that this came up. A lack of child care facilities was also mentioned.

Being an inner city suburb, with strict planning laws and designated “heritage overlay” regulations, there are limits to the amount of development that can take place, especially as Richmond and Cremorne are also established residential areas, with medium to high population density. Getting the balance right between economic growth, urban renewal, modernisation and local community preservation is tricky – pity that the organisers had not thought to invite anyone from the local council.

The panel also bemoaned the absence of any tertiary education facilities in the area (by implication, does that mean the Kangan Institute campus in Cremorne doesn’t meet local requirements?). But maybe there are other ways to connect with academia?

The panel discussion then moved on to topics that are beyond the control of the local council or even the State government, yet each has an impact on the startup economy: corporate tax rates; employment visas; the schooling system; vocational education and training; and the need for inter-disciplinary and inter-generational hiring. (They may as well have added industrial relations laws, the productivity debate and smart cities – oh, and the National Innovation and Science Agenda.)

I was also surprised at one of the reasons given for 99Designs bringing their global HQ back to Australia – the appeal of an ASX listing. I know that Australia has one of the largest pools of pension funds in the world, and nearly every person in Australia has direct or indirect investments in Australian equities within their superannuation portfolio. But despite being ranked 15th by market capitalisation, the ASX represents less than 2% of the global market, and even after 25 years without a recession, Australia’s capital markets risk being left behind. If we are to grow the local tech sector, there needs to be much more alignment between where (and what type of) capital is needed, and where the pension funds and other institutional investors like to put their money.

Finally, I always get worried when the likes of Carsales, REA Group, MYOB and SEEK are held up as poster children for the local tech and startup sectors – great businesses, sure, but all about to be totally disrupted by the next wave of startups, and not quite the high-tech sectors that the Victorian government wants to champion (FinTech, MedTech, BioTech, NanoTech, AgriTech, Cyber Security, Smart Manufacturing, EduTech….).

Next week: The NAB SME Hackathon