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

Is Federation still working?

As three of the six Australian States (and one of the two Territories) grapple with fresh COVID outbreaks, their respective lock-down measures reveal quite different responses to what should be considered a common problem. It’s not just the differences within their own borders, but also how they react in relation to each other in terms of classifying “hot spots” and imposing travel restrictions. It’s a fresh example that despite defining itself as a single nation, the Commonwealth of Australia remains a patchwork quilt, hurriedly stitched together from the remains of colonialism, under the pretext of “Federation”.

Federation feels even more of an artificial construct than the former British colonies themselves. In my view, the inconsistencies between each State and Territory in dealing with COVID, and their fractious collective and individual relationships with the Commonwealth, can be linked to questions of national identity, the legacy of imperialism, a lack of consensus on a Treaty with our First Nations people, and the failure of Republicanism to pave a way forward.

For a start, Australia tries to maintain four different codes of professional football – yet not every State or Territory is represented in the national competitions. Of these codes, one is essentially a Victorian competition, with a couple of other States brought in on merit, and a couple of the others only included after some fabricated interstate franchises. (And how long before a Victorian club has to relocate to Tasmania?)

Another football code runs an interstate competition, but only two States compete – and sometimes they compete in another State (just for the hell of it, or to try and instill “national” relevance?)

Cricket may rightfully claim to be a national sport at a professional level, but even the major Sheffield Shield competition excludes the two Territories.

These observations may appear flippant, but in a sport-loving nation, such examples might help explain why we don’t feel a very cohesive place – not all of us even get to barrack for our own State or Territory on the playing field!

There are many other examples of arbitrary differences between the States – e.g., unicameral or bicameral Parliaments; recognition of Public Holidays; the calculation of State election dates; the width of railway tracks; connectivity with energy grids; the minimum legal age for driving a car; the size of beer glasses in pubs; and the term for a “corner shop”.

Back in 1901, Federation must have felt like part of a grand scheme towards a modern era, designed to galvanize a bunch of colonies into a cohesive whole, and forge a new nation. But we don’t formally celebrate its existence with a public holiday. Rather, each State prefers to mark the Queen’s Birthday (albeit on different dates…) instead of recognizing the Act of Federation, which was supposed to confirm Australia’s independence from the UK. Not only that, but the “National Day” we do observe is Australia Day, which is highly contentious and increasingly overshadowed by its association with foreign invasion, imperial expansion and colonial oppression.

Back to COVID: recent events have shown that the “social contract” between the Commonwealth of Australia on the one hand, and the States and Territories on the other, is purely transactional. In respect to the pandemic, the Federal government has had two primary responsibilities: 1) international border control and quarantine; 2) vaccine acquisition and distribution. Although they have maintained closed borders, the Commonwealth has “delegated” quarantine arrangements to the States, with all the resulting inconsistencies and glaring mistakes. The Commonwealth has also fudged the vaccination roll-out (too many reasons and causes to go into here).

On the need for dedicated quarantine centres: while the States have taken on (or been lumped with) an unenviable task, after 18 months of the pandemic, I don’t understand why the States haven’t taken it upon themselves to build their own facilities, and then stick the Federal Government with the bill. If landlords won’t undertake essential property repairs when brought to their attention, I think most of us would agree that their tenants would have a valid case for getting the work done themselves and deducting the cost from the rent.

Except that the States don’t have that sort of leverage over the Federal Government (despite what Queensland and Western Australia might say and think).

In short, Federation is merely a way to distribute taxes levied by the Commonwealth – even then, this distribution is mired in political horse-trading and pork-barreling. The States, unable to raise their own revenue (other than via payroll tax, stamp duty, land tax and fees from providing certain services, issuing permits and granting licenses), are heavily reliant on Federal handouts. While this allocation is often dressed up in the guise of achieving minimum targets and standards, in reality funding is tied to political objectives.

I suppose even after 120 years, Federation can still be called a work in progress. Whatever the future debate on Australia Day and an indigenous Treaty (plus constitutional recognition and parliamentary representation), and whatever the prospect of a Republic, we may need to consider that the States, as currently constituted, have had their time and are increasingly redundant. Part of me thinks we might be better off by dissolving them (along with our local authorities) and re-constituting regional government and administration around the lands of the original settlers to this island. Just a thought.

Next week: Startup Vic FinTech Pitch Night

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?

How about that AAA rating?

As the State of Victoria weighs up the costs of yet another lock down, you could be forgiven for thinking that the local economy has taken a further beating after the horrendous events of the past 15 months. Across Australia, thousands of companies and individuals accessed various government-sponsored financial aid packages to keep afloat, causing the federal government to borrow more money, at something like 8x the equivalent rate pre-COVID. National public debt is now expected to grow to more than 40% of GDP by the 2024-25 fiscal year – effectively double what it was in 2018-19.

So what has Australia done to retain its coveted AAA sovereign rating from Standard & Poor’s, and have the rating outlook upgraded from negative to stable? According to the ratings agency, and economists such as Westpac’s Bill Evans, there are probably three or four key factors that have warranted this optimistic economic reckoning.

First, while government borrowing (Quantitative Easing) has blown out as a proportion of GDP, the current low interest rates mean that the cost of servicing that debt is manageable.

Second, while the pursuit of QE has destroyed any hope of returning to an overall budget surplus, the deficit will return to similar levels last seen after the GFC, and the current account will continue to return a modest surplus over the coming quarters.

Third, despite the significant economic risks that were identified at the start of the COVID pandemic, the actual impact on the budget has been less than feared, and the economy is recovering faster than expected (as evidenced by latest employment data and consumer sentiment).

Fourth, Australian banks have seen an increase in customer deposits, meaning they are less reliant on more expensive overseas borrowing for their own funding.

Overall, just as with the GFC, Australia has managed to dodge a bullet (the shock to the system was less than anticipated) – in large part thanks to a resurgence in iron ore prices (again).

But weaknesses and disparities remain:

The over-reliance on commodity prices (mainly based on demand from China) hides the true nature of Australia’s balance of payments – we manufacture less than we used to, and our supply chains have been severely tested during the pandemic. And with international borders closed, we won’t see the same levels of GDP growth that resulted from immigration.

Our household savings rate as a percentage of disposable income has come down from its peak of 22% in July 2020, to less than 12% this past quarter, as people held on to their cash for a rainy day (or 3 months lock-down). The savings rate is expected to come down even further as consumers feel more confident and start spending again.

As with the GFC, home owners have chosen to pay down their mortgage debt – but the picture is more complex. Yes, interest rates remain low (and will likely stay so for at least another 18 months), despite commentary from another economist, Stephen Koukoulas suggesting that the RBA will have to raise rates sooner than expected. With property prices expected to increase 5-10% over the next 12 months, home owners will feel wealthier (but asset rich and cash poor?) as mortgage repayments reduce as a percentage of their home’s value. And while analysts at S&P expect banks’ credit loses to remain low while the economy recovers, the fact that two-thirds of banks’ exposures are to highly leveraged residential property could see increased stress when interest rates rise and if wage growth remains sluggish (more on the latter next week).

Australia’s sovereign credit rating is something of a badge of honour, and represents membership of an exclusive club – fewer than a dozen countries are rated AAA; no wonder it’s a big deal, and partly explains why the Prime Minister gets to attend the G7 (albeit as an observer). Comparatively speaking, Australia is doing very well when it comes to managing COVID (although we could be doing a lot better on a number of measures), and has an economy that continues to be the envy of many. Expect more on that AAA rating (“How good was that?”) as we head into the next Federal election…

Next week: Where is wage growth going to come from?