An open letter to American Express

Dear American Express,

I have been a loyal customer of yours for around 20 years. (Likewise my significant other.)

I typically pay my monthly statements on time and in full.

I’ve opted for paperless statements.

I pay my annual membership fee.

I even accept the fact that 7-8 times out of 10, I get charged merchant fees for paying by Amex – and in most cases I incur much higher fees than other credit or debit cards.

So, I am very surprised I have not been invited to attend your pop-up Open Air Cinema in Melbourne’s Yarra Park – especially as I live within walking distance.

It’s not like you don’t try to market other offers to me – mostly invitations to increase my credit limit, transfer outstanding balances from other credit cards, or “enjoy” lower interest rates on one-off purchases.

The lack of any offer in relation to the Open Air Cinema just confirms my suspicions that like most financial institutions, you do not really know your customers.

My point is, that you must have so much data on my spending patterns and preferences, from which you should be able to glean my interests such as film, the arts, and entertainment.

A perfect candidate for a pop-up cinema!

Next week: Life After the Royal Commission – Be Careful What You Wish For….

 

The Future of Fintech

Predicting (or at least hypothesising upon) the Future of FinTech in 2019 at NextMoney last week were three brave souls from the Melbourne FinTech community: Alan Tsen, GM of Stone & Chalk and Chair of FinTech Australia; Christina Hobbs, CEO of Verve Super; and Paul Naphtali, Managing Partner at Rampersand. Referencing the latest CB Insights report on VC funding for Fintech, various regulatory developments in Australia (especially Open Banking), as well as the outcomes of the recent Royal Commission on Financial Services, the panel offered some useful insights on the local state of FinTech.For all the positive developments in the past 2-3 years (Open Banking, New Payments Platform, Comprehensive Credit Reporting, Equity Crowdfunding, ASIC’s Regulatory Sandbox, Restricted ADIs etc.) the fact is that innovation by Australian FinTechs is hampered by:

1) fallout from the Royal Commission (although this should actually present an opportunity for FinTech);

2) the proposed extensions to the Sandbox provisions (which are stuck at the Federal level); and

3) lack of regularity clarity on the new class of digital assets made possible by Blockchain and cryptocurrencies (cf Treasury Consultation on ICOs).

Overall, the panel agreed that the channels of distribution have been locked up in an oligopolistic market and economic structure, especially among B2B services. But things are changing in B2C, with the rise of P2P payment platforms, market places, mobile and digital solutions, and challenger brands (e.g., neo-banks).

However, there are under-serviced segments especially among the SME sector, and products and services for part-time employees, contractors and freelancers. For example, meeting the superannuation and insurance needs of the “gig economy”? (Maybe something will come out of the recent Productivity Commission review on Superannuation.)

A number of areas have already benefited from FinTech innovation and disruption – lending (origination, funding, distribution), robo-advice (at scale but not yet offering truly tailored solutions), and P2P payments (and which largely happened outside of the NPP).

When it comes to disrupting and innovating wealth management and financial advice, there is still a distribution challenge. Whatever your views are on the Royal Commission findings and recommendations, there is clearly a problem with the status quo. But is the appropriate response to “smash the banks” or to enable them?

One view is that we are going through a period of un-bundling of financial services. Personally, I think customers want ease of use and interoperability, not only standalone products that are best in breed. For example, if I have established sufficient identification to open and maintain a bank account with one ADI, shouldn’t I be able to use that same status to open a deposit, savings or transaction account with another ADI, without having to resubmit 100 points of ID? And even use that same ID status with an equivalent ADI overseas?

There is often a tension between incumbents and startups. Whether it’s procurement processes, long-term sales cycles, stringent payment policies (notwithstanding the BCA’s Supplier Payment Code) or simple risk aversion, it is very difficult for new FinTech companies to secure commercial supply contracts with enterprise clients. Even though a Blockchain platform like Ripples is working with major financial institutions, most times the latter don’t readily engage with FinTech startups.

Then there is the problem with “tech for tech’s sake”. For example, don’t offer “smart” solutions that actually make it harder or more complex. And don’t build great tech products that offer lousy UX/UI.

A key issue is defining “trust” – whether at the sector level (on the back of the Royal Commission); or at the individual level (the current environment of personal privacy, data protection, identity theft): or at the product level (e.g., decentralised and “trustless” platforms). As one panelist commented, despite the news, “headlines don’t change behaviours”. We love to bash our banks, but we rarely switch providers (mainly because it is far more difficult than it actually needs to be…) And the backlash against social media companies has not resulted in any major movement to unfriend them (witness the response to campaigns like QuitFacebookDay…).

So what are some of the predictions for the next few years (if not the next few months)?

  1. Within 5 years, the 5th pillar will be a challenger bank.
  2. A period of un-bundling followed by re-bundling
  3. A trend for “Financial Wellness” (especially financial education and literacy, not just wealth management and accumulation)
  4. A switch in personal asset allocation/accumulation from mortgages to superannuation – (i.e., new brands like Verve want to be your lifetime financial partner, so that “we invest together”)
  5. Superannuation funds will obtain banking licenses (or maybe one of the FAANGs will?)
  6. Personal Statements of Advice vs ASIC’s MoneySmart – who’s going to be paying for financial planning, advice, products and distributions?
  7. Capitalizing on the lack of trust among incumbents and centralised platforms
  8. More diversity and inclusivity in access to products and services
  9. Payments FinTechs that will disrupt lending (if they can solve the problem of
    going international)
  10. The growth of RegTech – a model of agile governance supported by great UX
  11. The equivalent of open banking for Personal Financial Management services
  12. Banks as data fiduciaries

Next week: An open letter to American Express

Token ring – a digital ID solution

The latest event organized by DIG ID (the Melbourne Digital Identity Meetup) featured a Q&A with Steve Shapiro, CTO of Token, moderated by Alan Tsen, General Manager of Stone & Chalk Melbourne. Given the current level of interest in solutions to address online fraud, ID theft, data protection, privacy and personal security, the discussion covered a lot of conceptual and technical topics in a short space of time, so here are some of the key points.

First off, Steve spoke about his start-up and tech journey, that took him from IM (Digsby, Tagged, Bloomberg IB), to cryptocurrency and digital wallets (Case), to digital ID with the Token ring. The pivot towards an ID solution came about after working on Case, where he realized that most consumers don’t understand private key management and the issue of permanence (as compared to the internet, where password re-sets are relatively easy, and often regularly enforced upon users).

If the goal is to provide fool-proof but highly secure end-user authentication, the solution has to focus on the “signing device”, by making it much easier than the status quo. Hence the combination of two-factor authentication (2FA) and bio-metrics to enable Token ring users to live key-less, card-less and cashless, and without having to constantly remember and update passwords. In short, the Token ring works with anything contactless, as long as the relevant permission/authentication protocol layer (challenge and response process) is compatible with the ring’s circuitry.

In assessing the downside risk, gaining consumer adoption is critical, to ensure that users see the benefits of the convenience combined with the credentialing power. Equally, success will depend on the ability to scale as a hardware manufacturer, and the potential to drive traction through virality.

There is still a lot of design work to do on the hardware itself (to enable assembly, customization and distribution as locally as possible). And the platform needs to bring on more partner protocols, especially in key verticals. At the end of the day, this is still a Blockchain solution, with a UX layer for the cryptographic component.

When asked about the future of ID, Steve felt that in the medium term, consumers will no longer have to carry around multiple cards or have to remember multiple passwords. Longer term, governments will no longer be the central authority on managing ID: unlike today, a driver’s license will no longer be the gold standard – instead, solutions will be based on decentralized, contextualized and user-defined ID.

This led to a discussion about Sovereign IDe-government and digital citizenship (e.g., Dubai and Estonia) – and the break up of big government in favour of more city-states. (Which could result either in a “small is beautiful” approach to self-governing and sustainable communities, or a dystopian nightmare of human geo-blocking, as in a film like “Code 46”).

For the tech buffs, the Token ring’s IC hosts a total of 84 components, including the main secure element (as with mobile phones and other devices), finger print reader, optical scan, Bluetooth, NFC, accelerometer, MCU, Custom inductive charging etc.

Finally, there was a discussion about the risk of cloning, mimicking or breaching the unique and secure ID attributes embedded in each Token ring. While it is possible for users to encrypt other knowledge components as part of their individual access verification and authentication (e.g., hand gestures), there is still a need to rely upon trusted manufacturers not to corrupt or compromise the secure layer. And while the public keys to core protocols (such as credit cards and swipe cards) are maintained by the protocol owners themselves and not stored on the device or on Token’s servers, it will be possible for other third parties to on-board their own protocols via a SDK.

Next week: Startup Vic’s EdTech Pitch Night

 

 

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