The Finnies

The third annual FinTech Australia awards were celebrated in Melbourne last week, following the organisation’s relocation from Sydney during the past 12 months. Any concerns the organisers and sponsors may have harboured (given the switch in geography) were easily allayed, as the event was sold out, with over 300 guests in attendance.

The overall winners were definitely B2C brands – challenger banks, consumer lenders, payment providers – with Airwallex, Afterpay (which despite some recent negative press was named the FinTech of the year for the third time) and Up Bank taking out more than a third of the awards between them.

Despite the 30 per cent increase in the number of entries (over 230 in all), it did feel like the Fintech community is still something of a village, as several award presenters were themselves presented with awards. Maybe something for the organisers to think about for next time, as it’s not always a good look when winners end up presenting to each other.

On the other hand, the organisers are to be commended for the running order – unlike some industry events, the awards were all presented in a single session, and not dragged out from soup to nuts. It was also a great decision to use the Victorian Innovation Hub as the venue, as well as have grazing-style catering instead of a sit-down dinner. And the choice of live band was excellent, as past, current and future bankers cut a rug.

Next week: Brexit Blues

 

Life After the Royal Commission – Be Careful What You Wish For….

In the wake of the recommendations from the Royal Commission into Misconduct in the Financial Services Industry (aka the Hayne Report), one of the four major banks announced that it would be removing bonus payments for its front line tellers. This was supposedly in line with Hayne’s proposal that performance-linked remuneration, financial incentives and sales commissions in the financial services industry need to be restructured.

Image sourced from Small Caps

This prompted a mixed reaction among the public, based on some of the comments I have read on social media. Some felt that the tellers were being made scapegoats for the banks’ bigger failings – others felt that this was an inevitable outcome from the banking backlash.

Personally, I believe the announcement is potentially just one of the many likely “unforeseen consequences” to come out of the Royal Commission – I’m not saying this particular decision is good or bad, just that we need to be aware of what’s likely to happen based on Hayne’s key recommendations. Be careful what you wish for. And, as an underlying theme to this whole debate, let’s not forget that most Australians are shareholders (directly or indirectly via their Super) of the Four Pillar Banks (one of the greatest government-endorsed and legislatively protected market oligopolies around which also helped steer us through the GFC relatively unscathed….).

So, what else might we see?

First, as with financial advice, residential mortgages will move to a “buyer pays” model. Brokers would not be able to receive commissions from mortgage providers or other intermediaries based on the products they sell, recommend or refer – instead, mortgage applicants will be expected to pay for the services of a broker, who will therefore be under an obligation to find the best product for their client. But removing trailing commissions and other conflicted remuneration may also mean that brokers could seek to earn additional fees from their mortgage clients by re-contacting them a year or so later (with permission, of course) to inform them of a better deal. (Even now, lenders are not explicitly obliged to let existing customers know if they have a newer product that may be better for them). Some estimates suggest that fee-for-service will add about $3,000 to the initial cost of applying for a mortgage. Whether this will also lead to more competition among mortgage providers (who will no longer have to pay broker commissions) is not clear.

Second, the increased focus on acting in the best interests of the customer may result in placing all financial planners, brokers, advisors, insurers, and banks (and their officers, agents and employees) under a fiduciary duty of care to their clients – even if they are not directly managing specific assets, selling a specific product or advising on specific services or financial strategies. In other words, advisors etc. will be deemed to have taken ALL of a client’s needs and circumstances into account. (This is largely the result of the miss-selling of financial products, and the charging of fees for “no service”, by banks and their retail wealth management arms.)

Third, the increased cost of compliance will disproportionately impact smaller financial institutions such as credit unions, member-owned banks and other mutual societies, who came through the Royal Commission pretty much unscathed. Those costs will need to be passed on, to customers and members. Of course, there has also been some political debate around the need for some sort of banking levy – which will ultimately be passed on to shareholders or customers (who are often the same people…).

Fourth, and related to the above, the separation of roles between those superannuation trustees who act as both fund trustees and as responsible entities of managed investment schemes will have a knock-on effect in terms of operating and compliance costs. Such dual-regulated entities will have to decide whether to focus on their trustee role, or appoint a separate and independent responsible entity in respect of the asset management.

Fifth, the higher compliance and regulatory obligations may deter or inhibit more competition – either from new market entrants from overseas, or from local start-ups. The recent restricted ADI model (aimed at enabling challenger or neo-bank brands) has not exactly seen a raft of applications, and off-shore banks tend to come and go in successive waves, largely driven by market conditions. If lending standards are further tightened, it may be less attractive for foreign firms to set up local operations. In fact, there have been calls to force some smaller superannuation funds to merge with larger funds, or exit altogether for reasons of scale and efficiency – potentially taking out some of the competition in that sector. And if mortgage brokers have to move to a fee-for-service model, it will likely force some providers to exit the industry, as happened with the FOFA reforms in financial planning and wealth management.

Sixth, at the level of corporate governance, boards of financial services providers will need to be mindful of their duty to act in the best interests of the company – which has traditionally meant the share holders – and the increased duty of care towards their customers, which may at times be at complete odds. Non-executive directors willing to serve on the boards of banks and insurers may also be harder to find, at a time when there is already a high concentration of directors who sit on multiple boards across Australia’s biggest companies. So, board diversity may be even harder to achieve, especially if non-executive directorships become subject to even greater formal qualification, to ensure board members have appropriate professional experience, industry knowledge and technical expertise, as well as financial competence and risk management skills.

Finally, all this is happening as we face something of a credit squeeze (thanks to increased lending standards and greater provisioning for risk-weighted assets) heightened economic uncertainty (slowing GDP growth, lower productivity, wage stagnation, falling property prices), and an upcoming General Election campaign during which the Hayne Report will be held up as a key reason for why “things have to change”. The irony being that, except in a few areas, the complaints aired and wrong-doing uncovered during the Royal Commission could have been addressed by the regulators and enforcement agencies via existing laws on financial services, prudential standards, and general consumer protection (unfair contract terms, unconscionable conduct, deceptive and misleading behaviour). Plus, the Australian Financial Complaints Authority (which combines the remit of the former Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal) has a wide jurisdiction over consumer complaints relating to Credit, Finance and Loans, Insurance, Banking Deposits and Payments, Investments and Financial Advice, and Superannuation. And as with most External Dispute Resolution agencies, AFCA and its predecessors have an obligation to report on systemic issues within their industry.

Next week: Pitch X

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

 

 

 

YBF #FinTech pitch night

It’s getting difficult to keep up with all the FinTech activity in Melbourne – from Meetups to pitch nights, from hubs to incubators. The latest Next Money / York Butter Factory / Fintech Victoria pitch night was a showcase for three startups-in-residence at YBF. As such, it was not the usual pitch competition – more an opportunity for the startups to hone their presentations.

First up was Handy, an app-based solution that connects trades with customers to streamline the settlement process for property insurance claims. There is an industry-wide low-level of satisfaction with property claims – which can take up to 60 days to process, even though 80% of claims are for less than $5,000. Handy offers a faster solution, and doesn’t require a lengthy estimate or quoting process, using instead fixed-price rates. With a target market of 100,000 claims per annum, Handy expects to generate 25% savings to the insurance industry, as well as having a broader societal impact in terms of speedier claims, better appreciation of service providers, and more consideration of the respective needs of householders and trades. Launching an MVP in November, there are four insurance firms in pilot test mode. Aiming for a white label solution, Handy will charge clients basic setup and maintenance fees, as well as volume transaction costs (although the exact pricing and revenue model still needs to be worked out). There were audience questions about the liability for quality of work and dispute resolution, the trade supplier on boarding and verification process, and the process for communicating to policy holders whether their insurance provider or broker is covered by the platform.

Next was FinPass, a startup appealing to the 40% of the workforce expected to be freelance by 2020 – a key feature of the gig economy. Targeting so-called “slashies“, FinPass is designed to help customers apply for personal loans when they don’t have a single, steady or stable source of income – and therefore, may lack a formal credit rating or personal credit score – while adhering to the five Cs of credit. Using a combination of blockchain and API to validate a loan applicant’s income profile, FinPass would then make this data available to approved lenders (subject, presumably, to consumer credit and lending standards, customer privacy and data protection requirements). To be fair, this project was fresh from winning a recent hackathon event, and therefore is still at the concept stage. However, it was clear that much needs to be done to define the revenue model, as well as designing the actual blockchain solution. Audience feedback questioned the need for a standalone solution, given the existence of various block explorers, APIs, vendors, protocols and bank feed sources. In addition, while blockchain provides a level of transaction immutability, and since only the hash-keys will be captured, the SHA’s will only confirm the hash itself, not the veracity of the underlying data?

Finally, there was Resolve, a two-sided market place for the insolvency services – a platform to buy and sell distressed businesses. Designed to capture turnaround opportunities, the platform has a target market of 14,000 transactions per annum – of which only 1% currently advertised, simply because it’s too expensive to use traditional media (i.e., finance and business publications). In addition, 92% of companies that enter insolvency return zero cents in the dollar to their creditors. Part bulletin board, part deal room, Resolve aims to create a passive deal flow for this alternative asset class. When asked about their commercial model, the founders expect a turnover based on a few hundred businesses each year, and revenue coming from a flat $1,000 per listing – but the key to success will be building scale.

Each of these early-stage startups represent promising ideas, revealing some innovative solutions, so it will be interesting to follow their respective journeys over the coming months.

Next week: Bitcoin – Big In Japan