Crypto House Auction

Earlier this month, through my work with Brave New Coin, I was lucky enough to attend the first live property auction to be conducted in cryptocurrency. Although the property was passed in on the day, the event generated enough interest and PR value that it will surely be only a matter of time before more large ticket assets are transacted in this way.

Image sourced from LJ Hooker

Let’s not forget that it’s nearly 9 years since Laszlo Hanyecz paid 10,000 BTC for two pizzas (then valued at about US$41).

Although we may not yet be paying for our morning espresso with Bitcoin, a growing number of merchants are enabling customers to pay for goods and services with crypto, via payment platforms and intermediaries such as Living Room of Satoshi, and TravelbyBit. And services such as Coin Loft and CoinJar make it easier to buy and sell the most popular cryptocurrencies without having to set up accounts on multiple exchanges.

Meanwhile, the house in Casuarina, on the northern coast of New South Wales, was passed in at 457 BTC (A$3.4m). The property was listed by LJ Hooker, and the auction was facilitated by TrigonX and Nuyen, while Brave New Coin supplied real-time market data convert the crypto bids to Australian dollars.

Next week: Demo Day #1 – Startupbootcamp

 

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

An open letter to American Express

Dear American Express,

I have been a loyal customer of yours for around 20 years. (Likewise my significant other.)

I typically pay my monthly statements on time and in full.

I’ve opted for paperless statements.

I pay my annual membership fee.

I even accept the fact that 7-8 times out of 10, I get charged merchant fees for paying by Amex – and in most cases I incur much higher fees than other credit or debit cards.

So, I am very surprised I have not been invited to attend your pop-up Open Air Cinema in Melbourne’s Yarra Park – especially as I live within walking distance.

It’s not like you don’t try to market other offers to me – mostly invitations to increase my credit limit, transfer outstanding balances from other credit cards, or “enjoy” lower interest rates on one-off purchases.

The lack of any offer in relation to the Open Air Cinema just confirms my suspicions that like most financial institutions, you do not really know your customers.

My point is, that you must have so much data on my spending patterns and preferences, from which you should be able to glean my interests such as film, the arts, and entertainment.

A perfect candidate for a pop-up cinema!

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

 

The Future of Fintech

Predicting (or at least hypothesising upon) the Future of FinTech in 2019 at NextMoney last week were three brave souls from the Melbourne FinTech community: Alan Tsen, GM of Stone & Chalk and Chair of FinTech Australia; Christina Hobbs, CEO of Verve Super; and Paul Naphtali, Managing Partner at Rampersand. Referencing the latest CB Insights report on VC funding for Fintech, various regulatory developments in Australia (especially Open Banking), as well as the outcomes of the recent Royal Commission on Financial Services, the panel offered some useful insights on the local state of FinTech.For all the positive developments in the past 2-3 years (Open Banking, New Payments Platform, Comprehensive Credit Reporting, Equity Crowdfunding, ASIC’s Regulatory Sandbox, Restricted ADIs etc.) the fact is that innovation by Australian FinTechs is hampered by:

1) fallout from the Royal Commission (although this should actually present an opportunity for FinTech);

2) the proposed extensions to the Sandbox provisions (which are stuck at the Federal level); and

3) lack of regularity clarity on the new class of digital assets made possible by Blockchain and cryptocurrencies (cf Treasury Consultation on ICOs).

Overall, the panel agreed that the channels of distribution have been locked up in an oligopolistic market and economic structure, especially among B2B services. But things are changing in B2C, with the rise of P2P payment platforms, market places, mobile and digital solutions, and challenger brands (e.g., neo-banks).

However, there are under-serviced segments especially among the SME sector, and products and services for part-time employees, contractors and freelancers. For example, meeting the superannuation and insurance needs of the “gig economy”? (Maybe something will come out of the recent Productivity Commission review on Superannuation.)

A number of areas have already benefited from FinTech innovation and disruption – lending (origination, funding, distribution), robo-advice (at scale but not yet offering truly tailored solutions), and P2P payments (and which largely happened outside of the NPP).

When it comes to disrupting and innovating wealth management and financial advice, there is still a distribution challenge. Whatever your views are on the Royal Commission findings and recommendations, there is clearly a problem with the status quo. But is the appropriate response to “smash the banks” or to enable them?

One view is that we are going through a period of un-bundling of financial services. Personally, I think customers want ease of use and interoperability, not only standalone products that are best in breed. For example, if I have established sufficient identification to open and maintain a bank account with one ADI, shouldn’t I be able to use that same status to open a deposit, savings or transaction account with another ADI, without having to resubmit 100 points of ID? And even use that same ID status with an equivalent ADI overseas?

There is often a tension between incumbents and startups. Whether it’s procurement processes, long-term sales cycles, stringent payment policies (notwithstanding the BCA’s Supplier Payment Code) or simple risk aversion, it is very difficult for new FinTech companies to secure commercial supply contracts with enterprise clients. Even though a Blockchain platform like Ripples is working with major financial institutions, most times the latter don’t readily engage with FinTech startups.

Then there is the problem with “tech for tech’s sake”. For example, don’t offer “smart” solutions that actually make it harder or more complex. And don’t build great tech products that offer lousy UX/UI.

A key issue is defining “trust” – whether at the sector level (on the back of the Royal Commission); or at the individual level (the current environment of personal privacy, data protection, identity theft): or at the product level (e.g., decentralised and “trustless” platforms). As one panelist commented, despite the news, “headlines don’t change behaviours”. We love to bash our banks, but we rarely switch providers (mainly because it is far more difficult than it actually needs to be…) And the backlash against social media companies has not resulted in any major movement to unfriend them (witness the response to campaigns like QuitFacebookDay…).

So what are some of the predictions for the next few years (if not the next few months)?

  1. Within 5 years, the 5th pillar will be a challenger bank.
  2. A period of un-bundling followed by re-bundling
  3. A trend for “Financial Wellness” (especially financial education and literacy, not just wealth management and accumulation)
  4. A switch in personal asset allocation/accumulation from mortgages to superannuation – (i.e., new brands like Verve want to be your lifetime financial partner, so that “we invest together”)
  5. Superannuation funds will obtain banking licenses (or maybe one of the FAANGs will?)
  6. Personal Statements of Advice vs ASIC’s MoneySmart – who’s going to be paying for financial planning, advice, products and distributions?
  7. Capitalizing on the lack of trust among incumbents and centralised platforms
  8. More diversity and inclusivity in access to products and services
  9. Payments FinTechs that will disrupt lending (if they can solve the problem of
    going international)
  10. The growth of RegTech – a model of agile governance supported by great UX
  11. The equivalent of open banking for Personal Financial Management services
  12. Banks as data fiduciaries

Next week: An open letter to American Express