ASIC’s new regulatory sandbox for #FinTech #startups

Last week, ASIC published its eagerly awaited public consultation paper on the so-called FinTech regulatory sandbox. ASIC Commissioner, John Price and his colleague Mark Adams launched the paper at a special meeting of the FinTech Melbourne group, hosted by KPMG. There was also participation by FinTech Australia represented by its new CEO, Danielle Szetho, and by the Digital Finance Advisory Committee, represented by Deborah Ralston.

sandbox-295256The Commissioner was at pains to stress that, notwithstanding the developments within FinTech, and ASIC’s contribution via the Innovation Hub, the primary focus of the regulator is to “promote confident and informed consumers and investors, and to promote fair, transparent, orderly and efficient markets”.

To reiterate the point, Mr Price stressed that while the Innovation Hub is designed to help FinTech startups navigate the regulatory system, as well as reducing red tape, there should
be no compromise in ASIC’s fundamental regulatory and licensing regime.

ASIC will continue to adopt what it calls a modular approach to licensing and regulatory oversight, that includes: the ability to operate as a representative of an existing licensee; a focus on organisational competence; and the use of waivers and the “no-action” policy and decisions.

However, ASIC recognises the issues and barriers to entry that face some FinTech startups such as speed to market (a function of technology outpacing compliance?) and organisational competence (do firms need to hire in these skills and/or provide specific undertakings to that effect, or can they make use of third-party resources?). In ASIC’s view, by helping firms to reduce the time to market and to enhance their organisational competence, FinTech startups will be able to overcome the further barrier of access to capital. But there still needs to be acceptable consumer and investor outcomes, and efficient markets.

The proposals include additional guidance and discretion on organisational competence, and a limited license model that makes use of third parties as an alternative to establishing in-house organisational competence from day 1 (e.g., using an accounting firm as an external reviewer or sign-off), and limited exemptions during a defined test phase, yet still subject to some constraints to maintain a balance.

To clarify, ASIC currently exercises its discretion when assessing organisational competence based on the nature of the financial services and financial products to be offered, and the collective knowledge and skills of the people in the business. Under the proposals, the limited license will offer some additional flexibility to heavily automated business services and models, whereby the business can rely on professional third-party sign-off for compliance plans.

The sandbox exemptions will only be available to new Australian entities (to focus on startups) and only for a 6-month duration. It will be confined to certain financial services only – such as providing advice and arranging transactions. It will not include market making, and consumer protection will remain paramount. Once the limited license has expired, companies will either be instructed to cease operations, become an authorised representative of an existing licensee, or submit a full license application.

Other restrictions on the sandbox exemptions mean that applicants must be advising or dealing in liquid products (equities, managed funds and deposits), so not superannuation, insurance or derivatives. There will also be a cap on the number of investors (e.g., 100 retail clients), and on individual exposures (e.g., $10,000 per client), with an overall cap of $5m (but possibly unlimited in respect to wholesale clients?).

Participants must demonstrate they have adequate compensation arrangements, such as holding appropriate professional indemnity insurance and participating in an external dispute resolution process. They must also operate under core conduct and disclosure principles (e.g., disclosing trailing commissions).

There is some thought that sandbox participation could be “sponsored”, by third-party advisers, startup hubs or venture capital funds. This would operate on a “no liability” basis, and would primarily offer a preliminary health check of the FinTech applicant’s proposed business model. Above all, there will need to be adequate notification and reporting requirements, including a feedback process.

When comparing these proposals to what some international regulators are doing, ASIC believes they are more progressive than their counterparts. The UK is adopting a restricted licensing model, the US is using a “No action” process (more focused on credit providers?), and Singapore has recently announced a hybrid sandbox proposal.

During the Q&A session, the following issues were aired:

  • Is ASIC in favour of mandatory client recording? No, it will continue to rely on industry best practice
  • Is general insurance included in the sandbox? No, ASIC is not looking at risk-management products to be part of the exemptions.
  • If incubators and/or VC’s are able to be sandbox “sponsors”, how will ASIC deal with potential bias? ASIC says it is alert to practices such as unreasonable “fees”.
  • Would a new entity or product from an existing authorised representative be able to access the sandbox? It wasn’t clear whether this would be covered, but presumably not if it did not meet the “new business” requirement?
  • Would the sandbox be available to non-financial services co-creating products for existing AFSL holders? Again, it wasn’t clear – but if it was a new business applicant, presumably it would. (This also raised the issue of “mature” businesses using disruptive or outsourced services as a way to access the sandbox.)
  • ASIC will encourage companies to apply for a full license prior to end of the six month test, to ensure timely compliance
  • What will happen as a result of people playing in the sandbox? Clearly, ASIC has a vested self-interest in learning about and getting exposure to innovation, but it needs to demonstrate a pro-active and efficient approach.
  • What are the key criteria for the sandbox exemption? ASIC does not have a prescriptive approach (subject to the sandbox restrictions), so it will look at each application on its merits (e.g., short vs long-dated products, simple vs complex, retail clients vs wholesale), and focus on the financials, the organisational competence, and the business model. And obviously, experience counts.
  • Timing of the sandbox? ASIC hope to see it operating by the end of September (Responses to the CP260 are due in by July 22).

Subject to the consultation feedback, there seems to be general industry consensus that the sandbox proposals are to be welcomed. But there are still some grey areas, as evidenced by the Q&A, and nowhere did I here anything specifically relating to the new emerging class of programmable currencies and other digital assets, many of which are pushing the regulatory boundaries, as well as disrupting traditional markets. And with current equity crowdfunding proposals stuck in Parliament, nothing happening there either.

(For some other responses to Consultation Paper CP260, check the following articles:

http://m.smh.com.au/business/banking-and-finance/asic-to-build-fintech-startups-a-regulatory-sandbox-to-test-ideas-20160608-gpe4l7.html

http://www.financialobserver.com.au/articles/fintechs-welcome-regulatory-sandbox-proposal

http://www.fintechaustralia.org.au/#!Why-the-Fintech-Regulatory-Sandbox-is-a-Game-Changer/ll9ed/5757cd8f0cf245cf71a32089)

Next week: Customer service revisited

#FinTech Melbourne’s latest #pitch event

The latest FinTech Melbourne meetup event was the second of their pitch nights. Co-hosted by NAB (at their Docklands Arena venue) and Capgemini (who were promoting the World Retail Banking Report 2016), the pitches were preceded by a panel discussion on a regulatory sandbox for Fintech startups.

The list of contenders.... (Photo By Andrew Lai, sourced from Meetup)

The list of contenders…. (Photo By Andrew Lai, sourced from Meetup)

The panel was composed of Ben Heap from H2 Ventures, Deborah Ralston from the Australian Centre for Financial Services (who is also the inaugural Chair of ASIC’s Digital Finance Advisory Committee), Sudhir Pai (CTO at Capgemini), and NAB’s Todd Reichmann. This is a topic that FinTech Melbourne has aired before, but it seems despite much industry anticipation and some cautiously positive noises from government, bureaucrats and regulators, there are still, to date, no concrete developments or proposals.

I fully understand the need for formal regulation in financial services, and FinTech in particular, to support investor protection, foster market confidence and maintain industry stability. But the cost or burden of compliance can act as an inhibitor for innovation and entrepreneurship. And of course, regulation and compliance are no guarantees that nothing will ever go wrong, even among our established and highly regulated financial institutions. The debate needs to move on to some practical solutions – such as ring-fencing FinTech startups so that they can trial new products and services in the market, within a limited, defined and narrowly permitted scope and range of activity, under some sort of provisional permit prior to obtaining fully licensed status.

Some members of the panel were in favour of a principles-based regulatory framework (e.g., focus on outcomes and intentions, rather than a reductive model, where nothing is allowed unless it is expressly permitted). The problem with this is that the industry already has to work within a very broad definition of what constitutes “financial advice” that is subject to regulation. So there needs to be a further re-think about what “financial advice” means, especially as between retail, sophisticated and institutional investors; and in turn, I see an opportunity for a more variegated approach to licensing or regulating different advice models: e.g., face-to-face and custom financial planning; scaled and personalised robo-advice; or broader, generalised “class” or “category” advice (by product, platform or service type). (Analagous models to draw on already exist in the areas of therapeutic goods licensing and food labelling measures.)

The panel also thought that partnerships between FinTech startups and established licensees offer one way to navigate the regulatory regime. And I can see that the right type of roboadvice could bring truly independent and objective financial advice on product and brand selection.

There was also a suggestion that the sandbox model could act as an umbrella entity for FinTech innovation. While there may be some merit in the idea (e.g., for regulating the API’s that provide access to customer financial data and credit history – although these should already be adequately covered by data protection and privacy requirements), I am sceptical of regulators’ ability to innovate. Plus, the key retail investor failures during the GFC were about investor ignorance, not just “poor”advice; so the need for financial literacy cannot be overstated.

On to the pitches themselves, which were judged by Ben Heap, Deborah Ralston and Rohen Sood from Reinventure:

Smartbit

Offering an automated finance layer for the Internet of Things, Smartbit has already built a secure, Blockchain-backed price index. The goal is to enable automated, real-time payments, between any two devices connected to the internet. They see themselves as the “Blockchain of Things”, and proceeded to give a cute (if somewhat pointless?) live demo of switching on a LIFX bulb with a Bitcoin payment token.

The judges were curious to know what the actual use case was (apart from turning on light bulbs…). In reply, they were told that Smartbit can deliver real-time settlement (unlike the 15 minutes delay of an US competitor), and is designed to support micropayments. Personally, I think the technology is already proven, but the need less so, at least from a B2C perspective. The fact that so many banks, exchanges and clearing houses are exploring Blockchain solutions means that it’s day will soon come when it is not just a “Bitcoin thing”, but will be an integral part of financial services, data solutions and digital asset management.*

Dragonbill

This is a smart payments platform to reduce cashflow stress. The main benefit is to shorten the time SME’s have to wait before they get paid. It offers both a secured payment facility (escrow), and an express payment option (e.g., a tradie can get paid as soon as they finish a job).

The chosen paths to market are social media, accountants, business advisors and mentors, and (unusually?) sports clubs. But it becomes clearer when you consider that clubs need to manage multiple, small membership payments; and many members of sports clubs are SME owners, independent tradies and sole proprietors. Dragonbill are also setting up a partnership with Xero accounting software.

The main questions from the judges concerned the ability to scale the business, and whether Dragonbill generates interest on amounts in escrow.

Truepillars

Another version of the peer-to-peer lending platform for SME borrowers, the business model is based on an online auction system where, for as little as a $50 bid, investors can bid on specific loan requests, with risk-adjusted interest rates, that are also determined by the number and amount of competing bids.

Access to traditional SME loans under $500k is increasingly limited as banks need to allocate more risk-weighted regulatory capital to cover their SME exposures, making them an inefficient and expensive use of bank capital.

The Truepillars platform offers borrower and investor dashboards for tracking and portfolio reporting, but the panel were worried that it wasn’t a unique proposition. However, unlike some of their competitors, Truepillars offers loan terms out to 5 years. It would also be interesting if investors (lenders) could build proper fixed income portfolios (by loan duration, yield curve, exposure type, recourse/rollover etc.), and if borrowers could cap the number of, and limit their exposure to, individual bids or lenders/borrowers.

Proviso

Claiming to be transforming lending, Proviso work with lenders to streamline the submission of borrowers’ financial data and bank statements in support of their loan applications. The prospective borrower logs into their account and gives permission for the lender to access their banking information, but Proviso does not “see”, hold or store the customer data – it merely acts as a pass-through. The goal is to reduce borrower application abandonment, and the service is already being used by 180 financial institutions – generating 60,000 requests per month. The business is being driven by enhanced customer experience, and ASIC directives on more prudent lending processes. In short, they claim to offer better, faster data.

The judges wanted to know how Proviso compares to Yodlee: “we’re local, and less painful to use” was the response – meaning that proximity offers speed and local market knowledge. Finding a market among non-conforming customers, Proviso is also looking at providing validation services. But in my mind, there is a risk that Proviso could be displaced by an industry-owned or regulatory mandated platform or utility (such as the creation of PEXA for real estate conveyancing and settlement.)

Airwallex

With a tag line, “cross-border payments made easy“, this another solution aiming to  transfer money between people, regardless of location, bank, currency, etc. Currently, Airwallex is focussing on Asia Pacific, and is the only Australian holder of a cross-border license to transact in Chinese RMB. It has also integrated with the three largest payment platforms in China – AliPay, WeChatPay and UnionPay, and built an API for e-commerce solutions. Airwallex claims to be faster, cheaper and simpler than the competition, using real-time FX rates.

The panel was naturally curious about how the platform is addressing anti-money laundering concerns and complying with counter-terrorism legislation. In order to offer lower fees than PayPal, and by only taking fees from the FX spreads, Airwallex has to automate the transaction process to achieve mid-market prices – but does the increased automation heighten the risk that the platform can be used for nefarious purposes?

After their deliberations, the judges declared Proviso as the winner – hard to argue with that sort of market traction.

*Note: Declaration of interest – I have recently joined the team at Brave New Coin, a FinTech building market data and infrastructure solutions for Bitcoin and Blockchain.

Next week: #StartupVic showcases the next batch of startup hopefuls

 

Latest #FinTech Round-Up

The first quarter of 2016 has seen some significant FinTech developments in Australia. It feels the sector has finally “come of age”, at least in terms of government policy, as well as some significant deals. For anyone who may have missed the action, here is a very brief round-up:

FinTech_AustraliaThe formation of FinTech Australia as an umbrella group in late 2015 was seen as an important step in reducing inter-state rivalry. Following its first AGM in March, hopefully it will help the industry to attract further visibility, gain critical mass and co-ordinate the debate around legislation, funding, compliance and regulatory licensing, as well as fostering innovation and collaboration.

At the same time, the Federal Government has established the FinTech Advisory Group composed of some heavy hitters and key influencers. One of the first outcomes has been the Treasury’s response to a number of regulatory changes that the industry is prioritizing.

Having spoken to several members of both the Advisory Group and the FinTech Australia Committee, there is a clear sense that the industry has finally “broken through” to get on the ideas and innovation agenda.

FinTech Melbourne hosted a very interesting Meetup on Women in Fintech, set against the backdrop of the continuing gender diversity debate (in particular, across tech startups). An all-women panel comprising Charlotte Petris from Timelio and Jemma Enright from MoneyBrilliant, and facilitated by Anita Kimber from EY, explored some of the opportunities and challenges (and the struggles along the way) of being a startup co-founder, their experiences of launching new businesses and products, and how they go about hiring the right talent and building great teams.

Meanwhile, in London, The FINTECH Book was being launched, which includes a contribution written by DragonBIll‘s Melbourne-based CEO, Luke Hally.

Over at the MBTC , the Melbourne Bitcoin Meetup group hosted Brave New Coin‘s CEO, Fran Strajnar. Fran gave a detailed presentation on the market news, financial data and analytical infrastructure that Brave New Coin is building to support crypto-currencies and block chain technology, including the new Bitcoin Weighted Average Price (aka B-WAP). This new analytic will likely prove to be a key component for real-time and historical pricing data on specific bilateral transactions (e.g., calculating end of day evaluations or annual tax reconciliations), as well as providing underlying reference data (e.g., for index-linked instruments and associated derivatives, swaps, options and forwards). Exciting stuff indeed!

Finally, ASIC, as part of its work in building a more supportive regulatory environment (under its Innovation Hub) has announced a bilateral agreement with the UK’s FCA on greater co-operation between the respective market regulators, that may lead to mutual recognition for FinTech companies. Another similar deal is being explored with Singapore.

Next week: 4 more #startup hopefuls pitch 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…