ASIC updates – Sandbox and Crowdfunding (plus #FinTech Hub)

In recent weeks, ASIC Commissioner, John Price and his team have been making presentations to the FinTech community on two key topics: the ASIC Regulatory Sandbox, and the forthcoming Equity Crowdfunding legislation.

Image by TeeKay, sourced from Wikimedia

blogged about the sandbox when it was announced last year, and at the time, the proposed safe harbour provisions for FinTech startups were seen as being key to fostering innovation within the sector. However, at the time of the presentation I attended (June 13), there was only one confirmed participant in the sandbox scheme. According to the Commissioner, the low take-up was probably due to the timing of the regulations, being so close to summer holidays.

On the other hand, the sandbox has such a limited application, that the Government is proposing to expand its scope to include the provision of products (not just distribution), the provision of credit services, and to extend the current 12-month license waiver period to two years.

The Commissioner also mentioned the consultation process on RegTech combined with a hackathon event to be held later this year, as evidence of the direction the ASIC Innovation Hub is taking. Let’s just hope they can keep up with how fast the FinTech community (especially in blockchain and crypto-currency) is evolving, since regulation usually lags innovation.

At a separate series of FinTech and startup briefings, Mr Price discussed the new equity crowdfunding provisions, due to take effect on September 29. Currently undertaking a consultation process on the detailed regulations, the legislation applies only to ordinary shares issued by companies with a maximum of $25m in assets and annual turnover, and which become public companies once the legislation comes into force.

Eligible crowd-sourced funding companies (CSF’s) can raise a maximum of $5m per annum, and investors can invest a maximum of $10,000 per company each year. CSF’s cannot invest in other businesses or securities, and cannot have simultaneous multiple offers on participating crowdfunding platforms.

The Commissioner spoke about the temporary reporting and corporate governance concessions under the scheme: eligible public companies don’t need to have Annual Public Meetings or audited accounts for a period of 5 years; and the offer documents do not have to be as detailed as a full IPO prospectus. Whether these concessions will be enough to attract issuers, or whether the limitations prove more of a deterrent, it will be interesting to see if the new legislation meets the expectations of government, ASIC, issuers and investors.

Meanwhile, things are getting interesting for anyone following the FinTech hub story, and the perennial Melbourne-Sydney startup rivalry:

First, the Victorian government has issued an RFP for a Melbourne FinTech Hub (submissions close tomorrow…). The state government has also announced its partnership with Fintech Australia and others to host the intersekt festival, following last year’s Collab / Collide event.

Second, Melbourne’s York Butter Factory has recently announced plans to expand into Sydney. While not purely a FinTech hub, this new venture will feature the Commonwealth Bank as an anchor tenant. With former ANZ CEO Mike Smith as its Chair, YBF might also be expected to make a submission to the Victorian RFP.

Third, Sydney’s Stone & Chalk has just announced it will be opening a new FinTech hub in Melbourne. Given that a number of key Melbourne-based financial institutions (such as ANZ, NAB, AustralianSuper, Findex, Genworth and Liberty Financial) are backing this new venture, could it suggest they can’t wait for the Victorian RFP process to finish?

Next week: StartupVic’s Machine Learning / AI 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…

A big year in #FinTech

Looking back over the past year, it’s easy to see that 2015 has seen a giant leap forward for #FinTech in the Melbourne #startup scene. Much of this progress can be attributed to the efforts of the FinTech Melbourne Meetup Group, which, in little over a year, has established itself as one of the leading local startup groups, culminating in its first pitch night last month.
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Backdrop

There have been some significant business developments this year, including the launch and expansion of new P2P lending providers, payment platforms, digital currency solutions and robo-advice services. And while Melbourne does not yet have an equivalent to Sydney’s Stone & Chalk (a dedicated FinTech hub), there is enough momentum across the network of co-working spaces and the startup ecosystem of founders, advisors, incubators and accelerator programs to ensure that the city is building on its status as a financial centre.

For myself, the year in FinTech really got going with the inaugural FinTech Startup Weekend, which for me was a steep learning curve. I not only learned how to survive a hackathon, but I also gained a much deeper understanding of FinTech itself. I had become increasingly aware of the topic, via other meetup events, business networking and through reading (and writing for) specialist trade publications.* But until you actually see some of the innovative and practical ideas on new technical solutions for financial services, FinTech can seem like a lot of vaporware.

Emerging Winners

At the recent FinTech Melbourne Pitch Night, five local startups presented to a panel of distinguished judges in front of a packed audience at Melbourne Town Hall. Representing core fintech sectors (and the key messages from their pitches) were:

  • Fuzo – mobile payments platform: “2.5bn people don’t have a bank account”
  • CoinJar – a Bitcoin exchange: “targeting digital nomads”
  • StockLight – investment research: “24% of investors want help with analysis”
  • Moula – SME lending: “not a lender of last resort”
  • Timelio – cashflow finance: “factoring has missed the internet generation”

In what is traditionally a bank-dominated area of trade finance, Timelio is challenging the usual models for invoice discounting, while offering a new asset class for selected investors. I’ve featured Moula in this blog before, but this time around, I felt the presentation was quite low-key, and rather coy about the business model and the financials – maybe that’s because things are moving very quickly, and Moula is in the process of building significant traction via key commercial partnerships. The Fuzo pitch was quite complex (and probably too much technical information to present given the format), but the SIM card-based technology looks very interesting. StockLight‘s proposition is quite simple, and with access to quality content and a range of commercial models, could be one to watch as every financial institution is having to rethink wealth management and personal advice. However, on the night, CoinJar took out the first prize, and not for the first time, demonstrated how a simple concept can actually make the complex more straightforward: if nothing else, it proves that “Bitcoin can be done”.

Backlash

Some comments in the specialist trade publications have been quite scathing about FinTech, in particular those few startups that have embarked on public listings and IPOs. Much of this backlash relates to governance, disclosure and transparency; fair enough, they are important issues. But these criticisms should not be used to undermine the innovative technology, new business models and strategic partnerships that FinTech startups are bringing to the market.

Going mainstream

When otherwise conservative institutions such as industry superannuation funds start to embrace FinTech (e.g., Equip’s tie-up with Clover), or if the ASX decides to deploy blockchain technology to replace the CHESS clearing and settlement platform, it means that FinTech is definitely on the map, and can’t be written off or even ignored as some sort of irritating, disruptive upstart.

Next Steps?

In the wake of announcing the Victorian Government’s $60m LaunchVic startup initiative, the minister for small business, innovation and trade, Philip Dalidakis has been on a flurry of highly visible public speaking engagements, networking events and social media posts. Keen to get the message out there that his government intends to make Victoria a startup success, the minister is certainly generating considerable goodwill in the community.

I’m yet to understand fully the actual remit and stated goals of this new Quango. For example, what does “investing in core infrastructure” mean? Do we really need another bureaucratic body? Couldn’t the initiative have been better structured as a peak body to represent and support the private sector activities already underway?

If the minister is going to be true to his introductory remarks at the recent #hscodefest hackathon, the government needs to create the right environment for startups to flourish, not try to pick winners – leave that to the investors, entrepreneurs and industry experts. As an example, run a FinTech-themed hackathon to improve the Myki system…..

The Last Word…

Finally, for anyone needing an overview on crypto-currency and the future of money, I highly recommend Torsten Hoffmann‘s award-winning 2015 documentary, “Bitcoin: The End of Money as We Know It”, which received its Melbourne premiere last week at Collective Campus.

FOOTNOTE:

* I can’t claim any credit, but a few months after my Trade Finance blog, ICICI and Alibaba announced a new partnership – in part proving my theory that collaboration soon follows in the wake of disruption

Next week: Crate-digging in Japan

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