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 

 

 

 

 

The NAB SME Hackathon

The recent week-long Intersekt fintech festival kicked off with a 48-hour hackathon, sponsored by NAB, hosted by Stone & Chalk and York Butter Factory, and designed to meet the needs of NAB’s SME customers.

Using NAB’s own transaction data APIs, participants were asked to come up with a solution to one of the following challenges:

1. How to make the lives of SME owners easier
2. How to help SMEs generate more business

12 teams competed over the weekend, and each presented their ideas to a panel of industry experts. Clearly, these were not the usual startup pitches (and none have a public website), but it was interesting to see the results. Projects are listed here in the order they presented:

NABTax – “tax audit insurance”
Designed to encourage better/best practice tax governance among SMEs, it uses a combination of a tax risk rating linked to a reduced cost of premiums for tax audit insurance.
The solution would help SMEs to be better prepared for an ATO request for information, aid understanding of the ATO’s current small business benchmarks, and provide insights on the ATO’s data matching protocols.
Essentially it would generate a risk rating based on quantitative and qualitative analysis of supporting documents supplied by the SME.

EasyPay – “reconciling invoices and receipts”
Deploying an e-invoicing model, the platform would generate a unique reference number, linked to an ABN, and generate a QR code to be scanned by the payer.
At its heart, it would better match invoices and payments. The service would be sold under a freemium model, and would be compliant with the New Payment Platform (NPP).
The main challenge would be in reaching and gaining traction with consumers (the bill payers).

ORDR – “managing cash-flow, inventory ordering and sales”
Drawing on a dashboard showing SKUs of items in stock, it would use machine learning
to predict stock ordering requirements. Although this concept was based on actual SME experience, the panel felt that there would be integration issues with existing POS and supply chain systems. Also, how would it link to CRM data, and how would it be able to both accommodate new season stock, and accurately forecast demand?
Finally, what level of SKU data is actually available from NAB transaction data?

Just-In-Time MBA – “a financial/business coaching app for SME owners”
According to data presented by the team, 60% of SMEs fail within their first three years. And given there are something like two million micro-businesses in Australia, and 250,000 new ones established each year, if nothing else, there is a huge opportunity to reduce this failure rate.
Using the available APIs (plus data from the SMEs’ accounting systems), the platform would analyze payments data and issue alerts designed to prompt remedial action.
Based on the presentation, it seemed that the proposed analysis is only capturing cash-flow – clearly, the real value and insights would come from holistic health checks.

NAB SME Connect – “connecting small business to customers”
Using a number of data inputs, this service would push deals in real-time to your smart phone. The customer app shows only relevant offers – based on preferences, proximity, etc. The client SMEs can see the level of interest and demand, to generate “Smart Deals” based on transaction data. The panel wondered about the opt-in model, and also felt there were already similar competitor products, or that any competitive advantage would be difficult to defend.

Wait< – “wait less for elective surgery”
Aimed at time-poor SME owners, the team wanted us to think of this as an “eBay plus Afterpay for elective surgery”. Taking the approach of a two-sided marketplace, it would
support transactional loans to cover the cost of surgery, and match customers (patients) to suppliers (health care providers). Drawing on NAB’s current healthcare payment services, the solution would combine NAB’s transaction banking and health APIs, plus Medicare APIs (for patient and practitioner verification), to generate a pre-populated lending form. No doubt designed to appeal to NAB Health, this was a very niche project.

Tap & Go – “turning customer loyalty into rewards more easily and more cheaply”
This idea would enable SMEs to use transaction data to decide who gets a discount, and how much. Built on a merchant administration platform, it would capture transaction data from POS systems. It would be offered as a subscription service for merchants. The panel wondered how this solution compared to the competition, such as Rewardle.

TAP – “smarter marketing solutions”
Commenting that only 16% of SMEs are maximizing their online presence, this service is designed to increase merchants’ digital presence. It would use NAB APIs to manage and track campaigns – by comparing the data to past sales periods and previous campaigns. Campaigns would also be linked to social media accounts. The panel questioned how the solution would fare against competitors such as Hootsuite.

StopOne – “integrated hub for making data driven decisions and connect with a NAB banker”
Conceptually, this was a very ambitious project, designed to let SMEs use dashboards and forecasting from NAB transaction data (and other sources), to drill down into visualized data records. It would also integrate with social media insights, incorporate a messaging platform to allow SMEs to communicate with their bankers, and enable SMEs to share their dashboard with a business banker. The panel queried the cost of the data analytics for the SME, which presumably comes on top of their existing accounting software.
They also suggested the team take a look at what 9 Spokes is already doing in this space.

Spike – “accounts payable solution”
Currently, paying invoices can involve a 10 step process. The average SME has 90 suppliers. Accessed via a NAB accounts payable login, the solution incorporates the Google vision API to capture an image of the invoice and extract key data points. The SME then chooses the date and account for payment, the invoice is stored in the cloud, from where is posted to the Xero ledger, and the NAB payments portal. In addition, the client can share purchase order data with their supplier to pre-populate the invoice. It could
also optimize expenses, by recommending offers or product switches. When asked about the commercial model, the team suggested it could be offered free by NAB, who get access to extra data.

nablets – “focus on things that matter”
According to this team, 90% of SMEs are not taking full advantage of digital tools. Using NAB APIs and event-based triggers, clients would use their NAB Business Connect account login to create “if this then that” rules and tasks. It would also leverage open banking data APIs. The panel asked about the logic and the parameters to be embedded in the rules-based activities, as well as the proposed categories and range of functions to be automated. They also wondered how it would actually help SMEs to adopt digital tools – some of which are already integrated into the current banking portal.

NAB Hub – “Small Business Hub”
Designed to present banking data the way customer wants to see it (P&L, balance sheet, net asset position etc.), it would also help in generating leads for pre-approved loan products, and help with investments via optimized rates, and for insurance cover it would
assist with policy reviews, claims and risk analysis. The panel asked if this was intended to be a NAB add-on or a standalone product. They also suggested the team look at what Tyro is doing around lending analysis – but recognized that there was possibly a place for this type of tailored advice.

Based on the judging, the winners and runners-up were:

1. Just-in-time MBA
2. Spike
3. NABTax

Meanwhile, the crowd favourite was Just-in-time MBA, and the best innovative idea was TAP.

If I had to summarise the presentations, it would be as follows:

1. Most of the presentations were still talking about yesterday’s/today’s banking products, rather than products of the future
2. There was very little evidence of projects designed to help SMEs grow their business
3. Any effort to gain traction for these projects will revolve around changing customer (and bank) behaviours….

Next week: VCs battle it out in the reverse pitch night

 

 

ANZ’s new CEO on #FinTech, CX and #digital disruption – 10 Key Takeaways

I went to the recent Q&A with the new CEO of ANZ, Shayne Elliott, organised by FinTech Melbourne. It was the first public speaking appearance by Shayne since becoming CEO (excluding his gig at the Australian Tennis Open), and followed a similar event last year with Patrick Maes, the bank’s CTO.

600_446693337The key themes were:

  1. Improving the customer experience (CX) is paramount
  2. Maintaining the high level of trust customers place in their banks is key
  3. Being aware of FinTech disruption is important, but remaining focused on core strategy is even more important
  4. FinTech can coexist with traditional banks, but the latter will win out in the end
  5. The bigger opportunity for FinTech is probably in SME solutions, rather than B2C
  6. Increased process automation is in support of CX, not about reducing headcount
  7. Big data and customer analytics are all very well, but have to drive CX outcomes
  8. Customers still see the relationship with their main financial institution in terms of basic transaction accounts, which is why payment solutions (a high volume/low margin activity) are vital to the banks’ sustainability
  9. ANZ is about to appoint a head of digital banking who will report direct to the CEO
  10. ANZ has been rated as one of the top global banks in terms of its use of Twitter and social media (but from what I have seen, much of the Big 4 banks’ social media presence can be attributed to their sports sponsorship…)

There was also some discussion around ANZ’s Asian strategy, and the statement last year that the “new” strategy is about becoming a digital bank. Shayne was quick to point out that they are not abandoning the Asian strategy (it’s not either/or) but because they embarked on Asia 8 years ago, most of the work has been done. Now they need to consolidate and expand the platform they have built. He also placed ANZ’s Australian business as being a comparatively small part of the group’s portfolio, and also took the view that despite ANZ’s size, resources and reach, digital products have to be developed market by market – it’s not a one size fits all approach. (Several FinTech founders in the audience took a very different perspective on this.)

And, in a bid to appear entirely approachable, both Shayne and Patrick were happy for people to contact them direct by e-mail… So if any budding FinTech founders have an idea to pitch to a major bank, you know who to contact.

Next week: Making the most of the moment…

Assessing Counterparty Risk post-GFC – some lessons for #FinTech

At the height of the GFC, banks, governments, regulators, investors and corporations were all struggling to assess the amount of credit risk that Lehman Brothers represented to global capital markets and financial systems. One of the key lessons learnt from the Lehman collapse was the need to take a very different approach to identifying, understanding and managing counterparty risk – a lesson which fintech startups would be well-advised to heed, but one which should also present new opportunities.

In Lehman’s case, the credit risk was not confined to the investment bank’s ability to meet its immediate and direct financial obligations. It extended to transactions, deals and businesses where Lehman and its myriad of subsidiaries in multiple jurisdictions provided a range of financial services – from liquidity support to asset management; from brokerage to clearing and settlement; from commodities trading to securities lending. The contagion risk represented by Lehman was therefore not just the value of debt and other obligations it issued in its own name, but also the exposures represented by the extensive network of transactions where Lehman was a counterparty – such as acting as guarantor, underwriter, credit insurer, collateral provider or reference entity.

Before the GFC

Counterparty risk was seen purely as a form of bilateral risk. It related to single transactions or exposures. It was mainly limited to hedging and derivative positions. It was confined to banks, brokers and OTC market participants. In particular, the use of credit default swaps (CDS) to insure against the risk of an obiligor (borrower or bond issuer) failing to meet its obligations in full and on time.

The problem is that there is no limit to the amount of credit “protection” policies that can be written against a single default, much like the value of stock futures and options contracts being written in the derivatives markets can outstrip the value of the underlying equities. This results in what is euphemistically called market “overhang”, where the total face value of derivative instruments trading in the market far exceeds the value of the underlying securities.

As a consequence of the GFC, global markets and regulators undertook a delicate process of “compression”, to unwind the outstanding CDS positions back to their core underlying obligations, thereby averting a further credit squeeze as liquidity is released back into the market.

Post-GFC

Counterparty risk is now multi-dimensional. Exposures are complex and inter-related. It can apply to any credit-related obligation (loans, stored value cards, trade finance, supply chains etc.). It is not just a problem for banks, brokers and intermediaries. Corporate treasurers and CFOs are having to develop counterparty risk policies and procedures (e.g., managing individual bank lines of credit or reconciling supplier/customer trading terms).

It has also drawn attention to other factors for determining counterparty credit risk, beyond the nature and amount of the financial exposure, including:

  • Bank counterparty risk – borrowers and depositors both need to be reassured that their banks can continue to operate if there is any sort of credit event or market disruption. (During the GFC, some customers distributed their deposits among several banks – to diversify their bank risk, and to bring individual deposits within the scope of government-backed deposit guarantees)
  • Shareholder risk – companies like to diversify their share registry, by having a broad investor base; but, if stock markets are volatile, some shareholders are more likely to sell off their shares (e.g., overseas investors and retail investors) which impacts the market cap value when share prices fall
  • Concentration risk – in the past, concentration risk was mostly viewed from a portfolio perspective, and with reference to single name or sector exposures. Now, concentration risk has to be managed across a combination of attributes (geographic, industry, supply chain etc.)

Implications for Counterparty Risk Management

Since the GFC, market participants need to have better access to more appropriate data, and the ability to interrogate and interpret the data, for “hidden” or indirect exposures. For example, if your company is exporting to, say Greece, and you are relying on your customers’ local banks to provide credit guarantees, how confidant are you that the overseas bank will be able to step in if your client defaults on the payment?

Counterparty data is not always configured to easily uncover potential or actual risks, because the data is held in silos (by transactions, products, clients etc.) and not organized holistically (e.g., a single view of a customer by accounts, products and transactions, and their related parties such as subsidiaries, parent companies or even their banks).

Business transformation projects designed to improve processes and reduce risk tend to be led by IT or Change Management teams, where data is often an afterthought. Even where there is a focus on data management, the data governance is not rigorous and lacks structure, standards, stewardship and QA.

Typical vendor solutions for managing counterparty risk tend to be disproportionately expensive or take an “all or nothing” approach (i.e., enterprise solutions that favour a one-size-fits-all solution). Opportunities to secure incremental improvements are overlooked in favour of “big bang” outcomes.

Finally, solutions may already exist in-house, but it requires better deployment of available data and systems to realize the benefits (e.g., by getting the CRM to “talk to” the loan portfolio).

Opportunities for Fintech

The key lesson for fintech in managing counterparty risk is that more data, and more transparent data, should make it easier to identify potential problems. Since many fintech startups are taking advantage of better access to, and improved availability of, customer and transactional data to develop their risk-calculation algorithms, this should help them flag issues such as possible credit events before they arise.

Fintech startups are less hamstrung by legacy systems (e.g., some banks still run COBOL on their core systems), and can develop more flexible solutions that are better suited to the way customers interact with their banks. As an example, the proportion of customers who only transact via mobile banking is rapidly growing, which places different demands on banking infrastructure. More customers are expected to conduct all their other financial business (insurance, investing, financial planning, wealth management, superannuation) via mobile solutions that give them a consolidated view of their finances within a single point of access.

However, while all the additional “big data” coming from e-commerce, mobile banking, payment apps and digital wallets represents a valuable resource, if not used wisely, it’s just another data lake that is hard to fathom. The transactional and customer data still needs to be structured, tagged and identified so that it can be interpreted and analysed effectively.

The role of Legal Entity Identifiers in Counterparty Risk

In the case of Lehman Brothers, the challenge in working out which subsidiary was responsible for a specific debt in a particular jurisdiction was mainly due to the lack of formal identification of each legal entity that was party to a transaction. Simply knowing the counterparty was “Lehman” was not precise or accurate enough.

As a result of the GFC, financial markets and regulators agreed on the need for a standard system of unique identifiers for each and every market participant, regardless of their market roles. Hence the assignment of Legal Entity Identifiers (LEI) to all entities that engage in financial transactions, especially cross-border.

To date, nearly 400,000 LEIs have been issued globally by the national and regional Local Operating Units (LOU – for Australia, this is APIR). There is still a long way to go to assign LEIs to every legal entity that conducts any sort of financial transaction, because the use of LEIs has not yet been universally mandated, and is only a requirement for certain financial reporting purposes (for example, in Australia, in theory the identifier would be extended to all self-managed superannuation funds because they buy and sell securities, and they are subject to regulation and reporting requirements by the ATO).

The irony is that while LEIs are not yet universal, financial institutions are having to conduct more intensive and more frequent KYC, AML and CTF checks – something that would no doubt be a lot easier and a lot cheaper by reference to a standard counterparty identifier such as the LEI. Hopefully, an enterprising fintech startup is on the case.

Next week: Sharing the love – tips from #startup founders