Token Issuance Programs – the new structured finance?

We’ve known for some time now that Blockchain and Bitcoin were designed to disrupt the financial services sector. But I suspect that not even the earliest proponents of distributed ledger technology nor the most avid supporters of crypto-currencies anticipated how far and how quickly that disruption would spread. In addition to P2P payments and lending, alternative stock exchanges, and self-executing smart contracts, recent events suggest that digital assets issued on Blockchain infrastructure are themselves the new source of venture capital, that they may even come to be seen as the new form of structured finance (albeit with less complexity and more transparency).

Image: Maria’s Cakes founder issues her own record…. (Source: Maria Lee website)

In the past few weeks, we have seen Token Issuance Programs (sometimes referred to as ICOs – “initial coin offerings” – or token sales) raise extraordinary amounts of capital – $53m for MobileGo, $150m for Bancor. Even allowing for the fact that VC funding rounds have been increasing in recent years, these results are quite staggering – given that the sellers of these tokens have not had to relinquish any equity, or incur any debt either. Because tokens do not represent shares in a company or units in a corporate bond. Nor are they securities in the usual sense, as they do not create any interest or obligation other than an entitlement to be granted a given number of tokens at a predetermined price.

Of course, these tokens may carry the right to use proprietary software or access marketplace platforms, and even acquire future products. In this way, they also resemble crowdfunding projects. But because of the potential returns generated by the increased value tokens may accrue (a combination of network effects, scarcity and market appreciation), there is buyer demand for new tokens backed by the right project.

These token sale results have also benefited from the increased price of Bitcoin, Ethereum and other leading digital currencies – or perhaps the other way round? – as investors get more comfortable with this new asset class. That’s not to say there isn’t talk of a market correction, or even a bubble. But despite the apparent risks, and the occasional exchange outage, new token issuance and crypto-currency trading are generating growing interest – not just from currency speculators, but also asset managers and traditional investors. No doubt helped by developments in markets like Japan, where crypto-currencies are now a legally recognized form of payment.

As for structured finance, some projects are looking to issue tokens that are linked to or represent an underlying asset, such as a pool of loans. In the case of securitization, for example, Blockchain technology can not only help to structure the token issuance (via smart contracts, for example), it can also provide better transparency on the underlying loan performance (using real-time repayment data from bank feeds, for example).

Of course, there have been some speed bumps along the way for Blockchain-derived assets, most notably the infamous DAO “hack” of last year.  Plus, the price of Bitcoin continues to display considerable volatility, which makes it harder for some investors to embrace. And if anyone is wondering why this week’s blog features an image of a Hong Kong cake shop owner, it relates to the Asian Currency Crisis of 1997-98. Maria’s Bakery was a famous chain of shops that sold coupons at a discount, that could be redeemed for cakes at any time in the future. It was a practice that spread to other retail sectors. But during the market jitters caused by failing currencies and a tightening of credit, there was a run on Maria’s coupons, which coincided with a 2% fall on the Hong Kong stock exchange. This may have been coincidental, but it also demonstrates that financial markets can be sidelined by the most unexpected events. Like, who would have made the connection between over-extended home owners in parts of the USA with the worst global financial crisis for 80 years…?

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin or any other organisations I work with. These comments are intended as opinion only and should not construed be as financial advice.

Next week: Expert vs Generalist

Spaceship launches the future of superannuation

Backed by some stellar names in the tech and startup worlds, Spaceship describes itself as a superannuation fund designed to “invest where the world is going, not where it’s been”. Squarely aimed at 18-35 year-olds (and savvy people in their 40s and 50s….), it is the brainchild of Paul Bennetts (a Partner at AirTree Ventures), Andrew Sellen (ex-Marketing Manager at Australian Ethical Investments) and two tech co-founders, Dave Kuhn and Kaushik Sen. Their central thesis is that global tech stocks are the future, and that these assets should form a greater part of a fully diversified portfolio, with a 10-year plus investment horizon.

spaceship-logo-03I first connected with Paul a couple of years ago, when I was working with a legal technology startup that was an early graduate of the Melbourne Accelerator Program. He was interested in what we were doing at Ebla, but the company was at too early a stage for him to invest in. But I’ve kept an eye on what Paul has been doing since, and have followed the Spaceship story quite closely. We last caught up very briefly during a recent roadshow event in Melbourne, as part of the Spaceship beta launch.

Any new superannuation brand, especially if it is neither an industry fund nor a retail fund backed by a major financial institution, is going to struggle to attract members: the industry and public sector funds have the benefit of workplace incumbency (sometimes backed by industrial awards), and the big retail funds have extensive distribution channels via advisor platforms, dealer groups and financial planners. As for corporate superannuation funds, in my experience, many of these employer-run funds are often a re-badged or customised version of an existing retail fund, or a highly outsourced business that retains the company name for brand recognition among employees.

Spaceship is challenging the market by using technology (and very targeted marketing) to streamline the recruitment and on-boarding process. As evidence of its marketing success, Spaceship claims to have built a waiting list of 12,000 prospective members in just 30 days, mostly through social media and word-of-mouth. And as evidence of its success in attracting “smart” money, witness some of the big names who have backed the venture as investors, or joined as members themselves.*

Not surprisingly, Spaceship is also developing some interesting content marketing and social media tactics to drive member engagement. This includes thought leadership on portfolio diversification, understanding investment horizons, accessing investments in early-stage tech companies, and investing in tech brands that its members love and use.

But while much of the media coverage for Spaceship has been positive, it has already drawn detractors (almost in the same breath…). Some of the latter reckon that it won’t achieve necessary scale to be sustainable (in light of APRA moves to drive consolidation among smaller funds), it will be highly concentrated in its exposure to tech stocks (which have a tendency to be more volatile), and without face-to-face contact with members, it will be harder to drive customer engagement.

Given that, following some delays, Spaceship does not launch to the general public until the end of this month (it is still running a waitlist), it’s probably a bit churlish to say it is doomed to failure before it has even really begun. Equally, having worked in financial market research myself, I have met with a number of industry, public sector, retail and corporate superannuation funds who cite member engagement and retention as one of their biggest challenges. The main issue is this: how do you interest an 18-year old in something from which they won’t derive any benefit for at least 40 years?  And once you have got their attention, how do you sustain that interest over the lifetime of their membership and into retirement?

Now technology is having a larger part to play in disrupting the superannuation industry, and changing the way members interact with their fund. As the COO of a major industry fund said recently at a FinTech Victoria event, “consolidating your super balances is only three clicks away” (to which Spaceship, replied “it’s now only one click!”). But it’s not enough to have a smart phone app to check your balances, switch investment options or make voluntary contributions. Members are looking for other services, such as financial education, estate planning, insurance, loans and mortgages, and tailored advice. Plus, they expect much more streamlined processes and pro-active member support.

I suspect that a key factor that will likely contribute to Spaceship’s potential success is the growth of the gig economy:

First, with more people working as freelancers, contractors or becoming self-employed, they will have no ties to a fixed workplace or a single employer – so they will be drawn to a fund product that appeals to their independence and flexibility.

Second, much of the gig economy lies in the tech and startup sectors, so again, prospective members might well be looking for a fund that invests in what they are interested and involved in themselves.

Third, if we are all expected to live and work longer, and if we are going to have to rely more on our own accumulated retirement assets, a fund that fully aligns with this long-term investment philosophy is hopefully going to be better placed to help us meet our financial goals.

Of course, it’s worth remembering that the Australian superannuation industry is both large ($2.1tn in assets as at September 2016, and the 3rd largest pool of pension funds in the world), and highly regulated (for very good reason). Equally, it has been slow to adapt to a changing economy and to different market factors, and is increasingly dominated by just a few big funds. Among some large industry funds, there is almost a cosy, symbiotic relationship between their members (who work in say, construction, energy, mining) and some of the assets the funds invest in (infrastructure, buildings, utilities). (But that may prove to be Spaceship’s USP – representing members who work in the tech sector?)

Although the Australian superannuation and managed funds sectors have established strong capabilities in administration, trustee, custody and asset management services, many of these back-office operations run on legacy IT systems which are potentially ripe for disruption. Plus, while government initiatives look for ways to attract more offshore institutions to place their assets with Australian fund managers, under various financial passport arrangements Australian institutions can invest in offshore funds domiciled and managed in key investment centres such as Luxembourg and Singapore.

Finally, new entrants to the superannuation industry are less likely to be reliant on incumbent and legacy service providers, and more able to take advantage of emerging technologies such as blockchain solutions (distributed ledger platforms), and fully integrated end-to-end CX (mobile apps and tools).

* Declaration of interest and disclaimer: I was successful in signing up to Spaceship in beta/waitlist, and have allocated a small portion of my own super to the fund. I do not have any other commercial connection with Spaceship or its founders. I have not been paid to write this article, nor should it be construed or interpreted as financial advice – it has been provided for general information only. BE SURE TO SEEK YOUR OWN INDEPENDENT FINANCIAL ADVICE BEFORE MAKING ANY FINANCIAL INVESTMENT.

Next week: Gaming/VR/AR pitch night at Startup Victoria

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…