Do we need a #FinTech safe harbour?

As part of the recent FinTech Melbourne Meet Up, there was some discussion on the regulatory challenges startups face when trying to validate an early-stage concept. The notion of a safe harbour or “regulatory sandbox” has gained some momentum, with ASIC’s Innovation Hub, and a commentary by Deborah Ralston, of the Australian Centre for Financial Services, who is also inaugural Chair of ASIC’s Digital Finance Advisory Committee.

If we assume that the main purposes of financial regulation are: system stability, minimum professional standards, consumer confidence, investor protection, market transparency and risk mitigation, then I doubt anyone can deny the benefit of a formal and robust compliance regime. However, technology and innovation are combining to challenge and disrupt the inherent inefficiencies that can accrue within a static regulatory environment (especially one that is reactive, rather than pro-active), which is largely designed to monitor legacy frameworks and incumbant institutions.

While the ASIC initiative is not the same as obtaining an ATO private tax ruling, it does at least show that the regulator is keen to be more consultative in helping startups test new ideas. But the reality is the cost of initial compliance and licensing can be a barrier to a new venture, before the concept has even been market-tested. So perhaps there is an opportunity to ring-fence emergent FinTech ventures, so they can explore real-world applications, but limited by market scope, number of participants, transaction values and timeframes. (Such a model already exists for private equity offerings….)

As it stands, in the case of P2P lending platforms, a startup might find itself having to be licensed and regulated as a financial services provider, an approved consumer credit provider, an authorised depository institute and possibly a licensed financial planner as well. That’s a lot of compliance for a new business that might not even have a single customer.

From my own experience, what constitutes “financial advice” is subject to very wide interpretation. Several years ago, I was responsible for introducing a new financial product to the local market – a bond pricing information service. The service was aimed only at institutional investors (not retail customers), based on collated and published data supplied by existing market participants. Nor was it a real-time data feed; rather, it delivered intraday and end of day prices calculated on actual traded bonds. Yet the regulator determined this constituted “financial advice”, even though no trading recommendation or investment decision was inherent in the data. It was also designed to offer a more transparent and objective process for pricing portfolios of less liquid or rarely traded securities, where mark-to-market solutions are unavailable or inappropriate – thereby providing some clarity to market participants.

Meanwhile, the responses to shady advice and other malfeasance inflicted upon retail investors by “established” financial institutions and “traditional” financial planners usually take years to work their way through the legal and regulatory processes of investigation, mediation, settlement and prosecution. (And if anyone wants to understand what actually caused the GFC, well before the term FinTech had been coined, check out John Lanchester’s book “Whoops!”)

Next week: What I want from a mobile banking app.

The future of #FinTech is in Enterprise Solutions

Talk to anyone involved in FinTech, and apart from telling you the sector is “hot”, there’s little consensus on what happens next. Despite positioning itself as a disruptive force within financial services, much of what goes on in the sector is either driven by regulatory reform, or by technological developments in allied fields. Most of the disruption so far is in retail and B2C services, yet the more significant opportunities are likely to be found in enterprise and B2B solutions. But as The Economist commented recently, “The fintech firms are not about to kill off traditional banks.”

The Current State

In broad terms, FinTech is working in four main areas:

  • Cryptocurrencies
  • Payments
  • P2P lending
  • Financial Advice and Planning

The first two are responding to dual technological advances – namely, the use of block chains and cryptography; and increased sophistication around mobile and GPS. Patrick Maes, CTO of ANZ Bank, has stated that “Bitcoin and block chain are the first payments innovations in 2,000 years.” He also has a FinTech “wish list”.

The second two (at least, within Australia) are benefitting from regulatory changes, such as the new positive consumer credit reporting regime, and the Future of Financial Advice reforms. And when the National Payments Platform scheduled for 2017 mandates real-time settlements, everyone will have access to immediate inter-bank payment services.

Of course, there is some overlap among these categories, which in turn are also benefitting from developments in big data analytics, mobile solutions, social media platforms, and consumer trends like crowdsourcing and the shared economy.

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It may be interesting – but it’s not whole picture

Disintermediation May Not Be Enough?

Most of the FinTech disruption has been in the nature of disintermediation – displacing the role of traditional banks and merchant services in providing payment solutions, point-of-sale facilities and personal loan products. But given the relatively small margins on these services, you either need to have a totally different cost structure, or a significantly large market position to achieve scale and volume.

You will have seen the above infographic, often quoted with a sense of wonder at how these companies have built huge businesses seemingly without having to own any physical assets. Well, yes, but dig deeper, and what do we find? The banks have always worked on the same principle – they take customer deposits (which they don’t own), and then lend them to borrowers (whose secured assets they don’t own unless there is a default).

The main difference is that banks are highly regulated (unlike most of these digital market disruptors), and as such they have to hold sufficient capital assets to cover their exposures. Meanwhile, the banks finance the car loans taken out by Uber drivers, they provide credit facilities and export guarantees to Alibaba traders, they underwrite the mortgages on properties used for Airbnb, and will likely provide e-commerce services to advertisers who use Facebook.

For me, probably the last major FinTech disruptor was Bloomberg (founded back in 1981), because it changed the way banks and brokers accessed news and information to support their trading activities, by introducing proprietary analytics and data tools via dedicated terminals, screens and datafeeds. So successful has Bloomberg been that it now owns about one-third of the global market for financial data, and is the single-largest player (albeit by a very small margin over main rival Thomson Reuters – itself, a merger of two key data vendors). Plus Bloomberg is still privately held.

The Future State

I don’t believe FinTech can truly come of age until a major enterprise solution appears. For different reasons, Stripe and BlueDot could be on their way, but both are primarily operating in the consumer payments sector.

I have written previously on the areas where FinTech could impact institutional banking and securities trading, including loan origination, data analytics and risk management. I’ve also reported on the opportunity to disrupt traditional market data vendors by changing the pricing and consumption models. And elsewhere, I have hypothesized on how banks’ trade finance services could be disrupted.

The areas where “Big FinTech” could truly make a difference are:

  • Counterparty Risk Management
  • Predictive Credit Risk Analytics
  • Loan Pricing Models
  • Unit Pricing Calculations
  • Collateral Management
  • Portfolio Performance Attribution
  • Sentiment-based Trading and Risk Pricing

However, the final word should go to Patrick Maes, who suggested that a huge opportunity exists in deposit products linked to customer loyalty programs and frequent flyer points – what if your credit card points could be used to finance a car lease or as part of the deposit on your first home?

Next week: Change Management for Successful Product Development