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 

 

 

 

 

FF18 pitch night – Melbourne semi-final

As part of the Intersekt FinTech festival, Next Money ran the Melbourne semi-final of their 2018 Future FinTech pitch competition.

Ten startups presented, in the following order, in front of a panel of judges representing different parts of the Melbourne startup ecosystem:

BASIQ

Describing itself as “the future of finance”, and quoting the trendy mantra of “Data is the new oil”, BASIQ is an API marketplace for financial data. Designed to counter-balance “the Faustian pact” of big data, social media and search, and to compensate for the information asymmetry of bank-owned data, BASIQ espouses open banking, even though it is backed by two bank-related VC funds (NAB Ventures & Reinventure – see last week’s blog). With a focus on the needs of app developers, the commercial model is based on a licensing fee per user per transaction. Leveraging the AWS security layer (presumably to maintain privacy and data integrity), the pitch also mentioned “screen scraping” – so it wasn’t clear to me whether the data is only coming from publicly available sources? Currently, the platform only connects to financial institutions in Australia and New Zealand.

Breezedocs

A participant in the FF17 Semi-Final earlier this year, Breezedocs is a robotic document processing solution. In short, it can read/scan, sort and extract relevant data from standard documents that need to be presented by customers in support of a loan application. Operating via an API, it can work with multiple document types and multiple formats: data can be structured, semi-structured, or even unstructured. The benefits for lenders and brokers are reduced loan approval times and increased conversion, with much
better CX for the loan applicant as well. The goal is to help the standard loan origination process to go paperless, and could be extended to life insurance, income protection insurance, and immigration and visa applications.

Doshii

Doshii ensures that apps and POS solutions can connect to one another, via a common POS API platform. Apparently, there are 130 different POS providers in Australia, and many merchants use multiple services. Now backed by Reinventure, Doshii has a focus on the hospitality sector. The biggest challenge is physically connecting a POS to the API, so Doshii has developed a SDK. However, so far, only five of the 130 providers have signed up.

egenda

I hope I got this right, but egenda appears to be the new product name for the WordFlow solution for board agendas and meetings. Offering an “affordable web-based solution for every meeting”, the product is currently being trialed by a number of universities. The platform can convert PDF/word files into HTML, transforming and enriching them into a single secure website.
The panel asked how egenda compares to say, Google productivity suite or IntelligenceBank. A key aspect seems to be that egenda is platform agnostic – so it doesn’t matter the source of the document (or where it needs to be published to?). A key challenge in managing board papers is that it’s like herding cats – so a single but highly functional repository would sound attractive?

HipPocket

This US-based app is looking to launch in Australia. A phone-based financial decision app linked to a user’s bank account, it is designed to help with personalised goal-setting, budgeting and financial engagement. Asked whether it can support long-term goals, the pitch referred to data that suggests an increasing number of people are effectively living from pay-day to pay-day, and have no capacity to meet even the smallest of unexpected  bills. Having attracted a grant from the Queensland government, they are currently experimenting with different customer acquisition models, but they hope to prove that with daily engagement, it is possible to build a long-term relationship.

ID Exchange

With a tag line of “privacy protection power”, ID Exchange addresses a key issue of the “consent economy” – how to control who has access to your personal data, and how much, and for what purpose. With the whole notion of “trust” being challenged by decentralised and trustless solutions such as Blockchain applications; the plethora of data connections with the growth of IoT; and the regulatory framework around KYC, AML, CTF, data protection and privacy, there is a need for harmonised solutions. Under an “OptOut/OptIn” solution (from the website, it looks like this is a partnership with digi.me?), the idea is that users take more responsibility for managing their own data. ID Exchange offers a $20 subscription service – but unfortunately, based on the pitch, it was not clear what does this actually meant or included.

Look Who’s Charging

This is a platform for analysing credit and charge card transactions, to identify anomalies and reduce disputed charges. Currently with about 7.5% market penetration (based on merchant volumes?), it can help with fraud checks and spend analysis, by combining AI, crowd-sourcing and data science. But from the pitch, it wasn’t clear where the data is coming from. Also, a key part of the problem might be the data mismatch between card acquirers (merchant services) and card issuers (banks and financial institutions). Given that the growth in credit card fraud is coming from online shopping and CNP (card not present) purchases, it would seem that a better solution is to tighten procedures around these transactions?

Plenty

Plenty describes itself as a “financial GPS”, and is designed to address the issue of poor financial awareness. Only 20% of people see a financial planner, but now with robo-advice tools, even personalised advice can be scalable. Essentially a self-directed financial planning tool, it is free for customers to create a basic financial plan and when searching for a mortgages. For a subscription fee, customers can begin to access other products and advisors, which generates commission-based fees to Plenty.

Proviso

Another of these FinTechs to have featured in this blog before, as well as competing at FF17, Proviso makes “financial data frictionless”, in particular the loan application process. With 250,000 users per month, and 150 financial institutions signed up, their success can be ascribed to the way they standardise the data and the UX. Plus, they can access more data, from more sources, quicker. And then there are the analytics they can offer their institutional clients. In the future, there will be open banking APIs, plus insights, such as the categorisation of transaction types, affordability analysis, and decision-metrics.

Trade Ledger

This is a new platform that supports SME lending based on receivables, that also reduces the effort for SMEs seeking this form of financing. Given that cashflow issues are inextricably linked to insolvency risk, Trade Ledger has developed a unique credit assessment method, and is product-type agnostic. It also aims to offer automated solutions, with an emphasis on the digital UX of products, and use machine learning to generate a predictive probability of default (PPD). Currently the biggest challenge is in the multiple variations of bank credit and lending processes and models that need to be integrated or streamlined.

Of the ten pitches on view, I have to say that none really had a “wow” factor (although if Trade Ledger can scale their PPD model, and if ID Exchange spent a bit more time on defining their key message, both could be huge products). They were mostly worthy ideas, but still defined by current banking and finance procedures. Maybe these platforms need to do more with the transactional and customer data they generate or process, to uncover more opportunities. Or think about what they could do to disrupt adjacent markets? Anyway, on the night, Proviso proved the favourite with the judges.

Next week: Conclusions from the Intersekt Festival

 

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