Startup Vic FinTech Pitch Night

The Australian tech sector, especially at the startup end of the industry, is having to grapple with what is fast becoming a major structural and operational challenge: how to hire, remunerate and retain staff. With closed international borders cutting off the supply of overseas students and graduates, and a lack of sufficient home-grown skills, it’s a problem that established businesses and startup ventures alike are having to address. Just last week, the AFR reported that some wages in the tech sector have gone up 30% in the past 12 months. Perhaps this issue was on the minds of the four founders who presented at the recent Startup Victoria FinTech Pitch Night.

The judges for this on-line event, sponsored by LaunchVic, were: Nicole Small, Investment Director at Rampersand; Kim Hansen, Co-founder and CEO of Cake Equity; Caitlin Zotti, Operations Manager at Pin Payments; and “the people’s judge,” Eike Zeller, Community Lead at Stone & Chalk Melbourne. Compered by Josh Sharma, Head of Labs & Startups at LUNA, the evening also featured a virtual fireside chat between Rebecca Schot-Guppy, CEO of FinTech Australia, Dom Pym, Co-Founder of Up, and Julia Bearzatto, Head of Technology for Financial Services at MYOB.

The four startups in order of presentation were (links in the names):

Elbaite

Claiming to be the “first non-custodial cryptocurrency exchange“, part of Elbaite’s mission is to prevent theft or misappropriation of crypto assets held in exchange wallets. What makes Elbaite different from other decentralized exchanges (DEXs) and peer-to-peer platforms is that they escrow the fiat involved in any transaction. While they may not be charging the fees of centralized exchanges (CEXs), they are charging a 1% on crypto purchases (although there is 0% commission on sales). Elbaite is hoping to target institutional clients who may not be as comfortable trading on “traditional” crypto exchanges – although in my experience, many institutional clients actually need third-party custody services as part of their governance and compliance obligations. The judges felt that this is a crowded space (there are more than 250 crypto exchanges globally, plus numerous fiat on/off ramps, brokers, OTC desks and P2P platforms).

Sequrr

Speaking of custody and escrow, who would have guessed that stolen house purchase deposits are such a major issue, unless the team at Sequrr had told us? Despite the use of Real Estate Trust Accounts within the industry, apparently there is not much to stop the account holders from walking off with the deposits. Which rather begs the question why the industry does not already use something like multi-signature digital wallets, which mean that the funds can only be moved once all parties to the transaction agree. Even though this is a tech solution using a 3-way verification model (innovation patent pending), the different real estate laws in each State means that it’s not that simple to roll out nationally. However, the team also see opportunities for other professional and commercial sectors: solicitors, builders, aged care. (Note to the founders: I know that invented brand names were once flavour of the month for tech startups, but I question the wisdom of adopting a word that reads like a spelling error, and sounds like someone coughing up phlegm – especially if you want to be taken seriously by banks and solicitors. Just a thought.)

Nextround

Another issue of trust exists between employers and employees when it comes to reward and recognition schemes. There’s always a risk that whatever structure and incentives companies use, someone will try to game the system (or collude with colleagues) especially if the stakes are high; or, if the rewards are simply handed out for turning up and doing your job, their currency becomes debased. Then there’s the (ill-advised) link between rewards and recognition on the one hand, and performance reviews (plus bonuses and salary adjustments) on the other. It’s a balancing act which Nextround are addressing by making it easier (and less expensive) to reward and recognise all of your staff, not just the usual top 5-15%. They do this by offering managers and team leaders access to rewards of a smaller (yet still meaningful) value, which can be easily redeemed by the recipients, for hospitality rewards, events and experiences. The commercial model relies on an annual corporate subscription fee, and taking a cut of the reward vouchers. Nextround consults with employers on their preferred merchants and suppliers, who don’t necessarily see the vouchers as eroding their margins – rather, it’s another sales channel. This is not a hospitality app (e.g., loyalty program), more of a procurement app. And although there are numerous competitors for reward and recognition schemes, the “smarts” are in the way managers and HR teams can budget and allocate accordingly, without the need for onerous expense form claims because the transactions can all be tracked from the point of redemption back to the point of issuance. The resulting data will also generate a further revenue stream from the valuable analytics, although would I want my employer to know how I used my vouchers (assuming they are not tied to a specific reward)? My other reservation is that if the rewards really are as small as a cup of coffee, or even a round of drinks at the pub, isn’t it a bit like tipping?

SpendAble

Letting people make their own financial decisions is also a form of trust. Most of us would feel we can be trusted to spend our own money how we like. But this assumption may be challenged when it comes to people with a disability. SpendAble is developing payment, saving and investment solutions for people who face physical, societal and intellectual barriers to managing the financial affairs. Starting with a budget-based spending app, SpendAble helps users to allocate, identify and track their purchases more easily, and with much of the payment friction removed. The team will also develop specific applications such as voice-controlled functions for the visually impaired. Largely reliant upon the NDIS for funding and end users to cover transaction costs, SpendAble will plug into existing banking platforms – which might be a better way to underwrite the app? However, some of the online chat on the night suggested that SpendAble could provide well-needed general financial education to school kids as part of its offering, as well as helping to address financial inclusion.

Such was the enthusiasm for SpendAble that they took out the Peoples’ Choice as well as the Judges’ Award.

Next week: Accounting for Crypto

Where is wage growth going to come from?

How good is the Aussie economy? On the back of the stable outlook on our AAA sovereign credit rating, last week’s employment data showed a better-than-expected post-COVID recovery in terms of the headline unemployment rate and overall workforce participation. This has led to speculation of a potential uplift in wages, due to labour shortages amplified by the current halt on immigration (thanks to closed borders).

But where will this expected wage growth actually come from?

According to ABS data for February 2021, the top 5 industries by number of people employed are: Health Care; Retail Trade; Professional, Scientific and Technical; Construction; and Education. (See above chart.)

Now, contrast this with three other relevant data points: 1) the number of Australian companies by size; 2) the annual change in employment growth/reduction by industry; and 3) the national GDP contribution by industry.

First, there are nearly 2.5m registered business entities, according to ABS data. Over 1.5m of these are designated as “Non-employing” – including sole traders, self-employed, independent contractors or freelances. Over 850 thousand establishments employ fewer than 200 people. Fewer than 5,000 businesses employ more than 200 people. Although there was an overall growth of 2% in the number of registered businesses, the largest increase was in the “sole trader” category, while the largest decreases were among medium-sized companies, and large enterprises. (See table below – the next ABS data is due in August.)

Second, the largest employment growth by industry sector in 2019-20 came from logistics and healthcare – no doubt in large part to the impact of COVID. Primary industries and mining both registered decreases.

Third, the main contributors to output (GDP) are Health and Education (13%), Mining (11%), Finance (9%), Construction (8%) and Manufacturing (65) – based on a recent RBA Snapshot. But the data is always subject to further examination and clarification – for example, while construction employs over 1.1m people, many of these are engaged as independent tradies or through sub-contractors, and in spite of the huge number of major infrastructure projects (just look at Victoria’s Big Build and all the cranes in Melborne CBD), there was only negligible growth in overall employment within the sector. And while mining is a major contributor to GDP, it does not employ huge numbers of people (it’s actually on a par with the arts…), yet the fewer than 9,000 people who are employed as mining engineers are in the top 10 occupations by salary (according to ATO data analysed by the ABC.)

Some other factors to consider as we ask, “Where will wage growth come from?”:

  • While most people are employed by SME’s, these companies are probably under the greatest strain when it comes to overheads and inputs, as they have relatively high fixed costs, and can ill-afford higher wages in the current trading conditions.
  • On July 1, the Superannuation Guarantee is due to increase from 9.5% to 10% – some commentators suggest employers (especially SMEs) may have to reduce or offset wages to pay for the scheduled increase.
  • We have an apparent choice between an asset-led recovery (inflated house prices – but risks leaving people “asset rich and cash poor” when interest rates go up ); a consumption-led recovery (reliant on higher wages so people feel comfortable to spend money); or an investment-led recovery (businesses need to invest in new equipment and projects to boost productivity, and not just bring forward planned expenditure thanks to tax incentives).
  • The sectors where we need more people (health care, aged care, child care and education) are still among the lowest paid on a per capita basis.
  • What is happening to boost manufacturing, or aren’t we interested in making things anymore?
  • Our IT and technical skills shortages have been exacerbated by the absence of overseas students and graduates – there is anecdotal evidence of wage and hiring pressures in this sector, one which is probably more important to our future economy and sustainability than mining coal or building more roads.
  • One leading economist reckons that household incomes have increased by 30% over the past 10 years. If wages have been stagnant, where has this growth come from? Is it because of tax cuts, low interest rates, quantitative easing, real estate prices (or their crypto holdings)? And do we actually feel any wealthier as a result?

Finally, will inflation and/or interest rates undermine any potential increase in wages?

Next week: Is Federation still working?

FinTech Australia Road Show

This week I had hoped to blog about the latest FinTech Australia Road Show in Melbourne – unfortunately, COVID-19 intervened, and the event has been postponed.

So instead, here is my personal quick take on recent developments in the local FinTech scene:

A tale of 2 neobanks

Maybe Australia isn’t ready for challenger banks, despite the early interest and apparent market demand. Xinja* has decided to give back its banking license, having spent a ton of money on obtaining it in the first place. It couldn’t sustain savings and deposit accounts (even in a low-interest rate environment) without sufficient regulatory capital, the funding for which has failed to materialise; and without deposits, Xinja couldn’t offer loans. There is talk of launching a US share-trading app instead (à la Robinhood) but given the recent shenanigans with Wall Street Bets, Reddit, hedge funds and GameStop day traders I don’t suppose the regulatory path to market will be that easy. Xinja looks like it’s done.

Meanwhile, NAB has just announced that it is acquiring the shares in 86 400 that it does not already own, in order to merge it with NAB’s digital brand, Ubank. Which further suggests neobanks can’t survive on their own in the Australian market, with the dominant and regulatory protected cartel of the Big 4. (My good friend Alan Tsen has described this latest transaction as a turducken….)

Other challenger brands in Australia are having to take different approaches: Up is piggybacking off Bendigo and Adelaide Bank’s ADI license; Volt describes itself as a BaaS provider (“banking as a service”); Judo is focused on business banking; and the UK’s Revolut is bringing a mix of credit cards, payment solutions and forex services (including crypto), rather than transaction banking. Meanwhile, another BaaS from the UK, Railsbank is currently recruiting locally for a GM to leads its Australian roll-out.

Finally, despite some concerns about the BNPL sector (“buy now, pay later”), Afterpay is partnering with Westpac‘s BaaS platform to offer banking services to its customers.

Whither the Big 4?

Speaking of which, what are the Big 4 doing in the broader sphere of FinTech?

Despite (or because of?) buying a neobank, NAB has apparently closed down the Labs part of NAB Ventures, the often-mentioned, but largely silent startup incubator. CBA has created X15, a similar FinTech ventures platform with the ambitious goal of launching 25 businesses in 5 years (I seem to recall NAB Ventures once had a similar mandate?). Westpac‘s own FinTech fund, Reinventure is expected to do well out of the forthcoming Coinbase IPO; so much so that Reinventure is planning to decouple from Westpac, and launch a new fund focused on DeFi opportunities. ANZ has been putting out some commentary on its ANZi platform for FinTech innovation and partnerships – but its remit is limited to trade finance, home ownership and open data, and it is being very coy as to what specific bets they are making. Ho hum.

Did somebody mention crypto?

In case you hadn’t realised, we are experiencing something of a bull market in crypto.

Coinspot just announced they have 1,000,000 customers. Raiz Invest has launched its retail savings portfolio product with a 5% allocation to Bitcoin. Other funds like Every Capital are planning similar retail offerings. Luno is advertising on Melbourne’s tram shelters. And the Australian division of eToro is talking up DeFi. Game on!

Next week: Transition – post-pandemic career moves

* Declaration of interest – the author participated in the Xinja equity crowd-sale a few years ago

The Bitcoin halving – what happened?

Last Monday, May 11, at around 19:23 UTC, the third Bitcoin halving occurred. This event is currently scheduled to happen approximately every four years, and is a core mechanism in Bitcoin’s protocol. In short, combined with the finite supply of bitcoin (BTC), the halving acts as an anti-inflationary measure by reducing the number of BTC payable to the miners who confirm each block of transactions, and maintain the integrity of the blockchain ledger. By using dedicated, high-powered computers to solve Bitcoin’s complex algorithms, the miners earn BTC as rewards for their efforts (and to help recoup their energy costs). As a result, the halving is an integral component in measuring key metrics in BTC’s performance, including pricing, supply and mining profitability. What happened around the time of the halving provides for some interesting analysis before and after the event.

BTC price dropped dramatically just prior to the latest halving event – the above graph is plotted using the hourly closing value of Brave New Coin’s Bitcoin Liquid Index.

The halving is programmed to occur after every 210,000 blocks, which themselves are “mined” approximately every 10 minutes. Last week’s third halving was triggered when block number 629,999 was confirmed – from block 630,000 onward, the block reward reduced from 12.5 BTC to 6.25 BTC per block, and is designed to continue halving until the block reward reaches 1 Satoshi (0.00000001 BTC).

Usually, financial markets have already priced in events such as the halving, so traders don’t expect the event itself to have an immediate impact on price. (Think of the halving as just one type of “corporate action” that is peculiar to cryptocurrencies and digital assets. Others might include hard forks, coin burns, and token lock ups.) As with company results and profit announcements, traders and analysts are usually prepared for the best (or worst).

However, leading up to the latest halving, BTC briefly touched a 3-month high of US$10k, before going through an almost typical “market correction” of a 20% decline immediately prior to the halving event. BTC has since recovered some of those losses, and in any case, the price performance before and after each halving event has become yet another indicator of long-term price movement, as the following chart illustrates:

Other metrics to watch include: “hash rate” (the degree of difficulty, and therefore the amount of computing power, to solve the algorithms and mine each block); transaction fees (if miners can’t earn as much from mining activity, they are expected to start increasing their network fees); the price of electricity (as an input cost to mining); and even the cost of computing power itself (as older machines become less efficient and therefore less profitable, while newer, more powerful and more expensive processors come to market).

Indeed, different scenarios used to predict the exact date of the next halving are largely based on the hash rate, which has been relatively volatile before and since the halving, and transaction fees likewise escalated (and then settled down again) around the time of the halving. Key data to track as part of halving analysis and forecasting can be seen in the table below from Brave New Coin:

Other interesting developments around the time of this latest halving include a legendary hedge fund manager reported to be buying BTC as a hedge against inflation; an increase in open interest on CME’s BTC futures contracts (assumed to be coming from institutional clients); and an intriguing message attached to block 629,999 (“NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue”). Given the recent quantitative easing measures pursued by many governments and central banks in response to the Covid-19 pandemic, this choice of headline echoed the message attached to the genesis or very first Bitcoin block, mined in 2009, soon after the GFC (“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”).

Finally, as more data and analysis attaches to the halving events, they form the basis of a fundamental aspect of understanding how financial instruments perform over time – giving rise to the BTC equivalent of a 1, 5 or 10 year yield curve, which in turn will create more sophisticated derivatives and hedging tools, and another level of comfort for traditional and institutional investors.

(My thanks to friends and colleagues at Brave New Coin and Apollo Capital.)

Next week: “How do I become a business strategist?”