Another #pitch night in Melbourne…

If there is one basic theme emerging from Startup Victoria‘s monthly pitch nights, it is this: whatever market you are in, regardless of your business model, and however disruptive you are trying to be, if you don’t know how to engage or reach your customers your idea is far less likely to succeed. This message came across loud and clear during last week’s event where four startup hopefuls pitched their business ideas to a panel of judges in front of a packed audience.

Picture sourced from Startup Victoria Meetup page

Picture sourced from Startup Victoria Meetup page

So let’s look at this specific issue in respect to each of the pitches:

First came JobPokes, an online recruitment service designed to help candidates match job opportunities to their career preferences. Because it claims to be addressing the hidden job market, candidates aren’t applying for specific roles – instead, it’s a form of reverse enquiry, where recruiters target potential applicants via their registered profiles. I applaud the focus on the non-advertised job market, but while it may well offer an additional channel for recruiters, I’m not sure there was a clear strategy to reach job candidates who need to create a user account, and who are probably already using platforms like LinkedIn and Seek.

Next was Airly, which is sort of “Uber for private aircraft”. The business model involves signing up a minimum number of customers (who pay a monthly subscription fee, entitling them to unlimited flights), and securing sufficient seat capacity via scheduled charter contracts. There is no doubt that the idea of flight flexibility, and an element of passenger exclusivity met with audience approval (Airly took out the people’s choice vote on the night). Also, the PR around Airly has generated in-bound enquiries, suggesting there is demand. But how does this market interest convert to individual customers, when many corporate travel policies rely on wholesale and bulk-purchase models (i.e., aggregation, consolidation, vendor discounts, agency rebates, preferred airlines) rather than catering for individual travel needs or preferences? Unless the target customers are business travelers that manage and pay for their own tickets?

If Airly was about the Uberisation of air travel, RagRaider revealed another aspect of the shared economy model. Squarely aimed at fashion- and budget-conscious women, RagRaider offers a peer-to-peer service whereby customers can hire clothes for one-time use. No doubt there is a market (high school formal, spring carnival, wedding reception…) but the question is how to connect with actual lenders and hirers? We know that the per customer cost of acquisition for 2-sided markets is a key metric, and it wasn’t clear how the founders were addressing this, other than a pre-launch website and some social media. As one observer has commented, the “model is focusing on the ‘product’ part first which is the reverse of how it should be”, and another commented that despite a defined market, the barriers to entry are considerable. The judges also questioned some of the proposed pricing, commission rates and logistics.

Finally, Rounded is another FinTech startup looking to service the SME sector, specifically sole traders, freelancers, sub-contractors and tradies. Another spin on the invoice solution when suppliers need to get paid efficiently, Rounded does not claim to be a full-service accounting software – but, as one attendee commented, key to success will be reaching and educating the end-user market.  Also, they are entering a competitive space, where a new entrant like Xero has already disrupted incumbents like QuickBooks, Reckon and MYOB. I wasn’t able to stay for the pitch, but I did have the opportunity to speak with the founders beforehand. Clearly driven by their own experience and needs, there is a solid but simple idea here – but as Xero and others are increasingly able to serve similar customers, Rounded will find it really difficult to compete.

If anything, these latest pitches showed how hard it is to compare apples with oranges, although the voting criteria (market traction, product viability, team composition, pitch presentation, and responses to judges’ questions) are designed to deliver a consistent evaluation. It was also apparent that these pitches divided audience opinion more so than previous contestants – which is probably a good thing as variety is the spice of life….

Acknowledgments: thanks to Graphican, Marlene M., Cornell and Dale G. for their input.

Next week: Re-Imagining Human-led #Innovation


Seeing Japan with #Airbnb

Hotels in Japan can be very expensive, and despite the fact that the shared economy operates in something of a regulatory grey area, I am pleased to say that the experience of using Airbnb throughout my recent visit was a great success. Luckily, my travelling partner had done extensive advance research, so there were very few hitches.

Kan Yasuda: “Shape of Mind” (2006) Photo © Rory Manchee – all rights reserved

Whether innovation is on the rise in Japan, or whether the “illicit” sharing economy is gaining traction, it seems that Airbnb in particular appeals to certain enterprising and entrepreneurial types who see an opportunity in the current market. The various hosts comprised an agent managing several properties on behalf of the owners, professional couples renting out an investment or spare apartment, and a self-motivated entrepreneur also building social enterprises.

I won’t specify the apartments I stayed in, partly because these particular hosts in Tokyo, Kobe and Kyoto are proving very popular (especially over the upcoming holiday season), and partly to avoid any potential “regulatory” hassles. But hopefully the following insights will be helpful in planning your own trip.

First, the bookings were all for self-contained apartments (usually a studio dwelling, close to public transport), and selected based on previous positive feedback. In each case, the accommodation was situated in older, low-rise developments, located in mainly residential neighbourhoods. In one case, it was a traditional apartment, complete with tatami mats, sliding doors/room dividers, and an older style wet-room bath and shower.

Second, the “hosts” were all very helpful in giving travel directions, offering suggestions on where to eat nearby, and/or providing local guides and maps. One had even posted a self-made YouTube video showing the walk from the train station to the front door. Obviously, the fact that they were happy to take bookings from foreign visitors meant that all of the communication was conducted in English.

Third, for the most part decor was simple but comfortable, but some of the beds were on the small side. And one apartment was owned by a fan of a certain cartoon character, with furnishings to match, which was quite surreal.

Fourth, due to the apparent semi-legal nature of Airbnb in Japan, the hosts were keen to make sure that not only did their guests not make any noise or disturb the neighbours, they did not want guests either to talk to or to answer the door to strangers. One host even suggested that if guests put rubbish in the wrong place for collection, they would be extorted by the local Yakuza.

Lastly, although the basics were consistent (bedding, towels, soap, shampoo, hairdryer, cutlery, crockery), there were some significant differences in what other facilities were provided, as follows:

Apartment 1

Location: Close to the Metro, convenience stores, restaurants, bars and a shopping mall. Also, in the vicinity of museums, galleries and other cultural attractions.

Accommodation: Studio apartment, with own bathroom and kitchenette.

Amenities: No TV, but free WiFi, kettle, microwave, single-burner stove, fridge, washing machine.

Apartment 2

Location: Reasonably close to the local private railway station, supermarkets nearby, and a couple of small shops in the area. No bars or restaurants in the immediate neighbourhood, which was mostly residential, but there were the ubiquitous vending machines. More choices in the nearby suburbs.

Accommodation: 3-bedroom traditional apartment (tatami mats, futons), with own bathroom and kitchen/diner. Very spacious.

Amenities: No WiFi and no washing machine, but free-to-air TV, kettle, microwave, single-burner stove, fridge. And no knives. Of any kind.

Apartment 3

Location: Very near to a large JR station and major bus routes, with a supermarket and a couple of convenience stores on the same street, and several small bars and restaurants close by. Mixed residential, commercial and light-industrial area.

Accommodation: Studio apartment, with own bathroom and kitchenette.

Amenities: Free portable WiFi, free-to-air TV, kettle, single-burner stove, fridge, washing machine. But no microwave.

Apartment 4

Location: Few hundred meters from a major interchange station, and very close to several convenience stores, bars, restaurants and a decent coffee shop. Adjacent to a very popular shopping, eating and entertainment precinct, getting very trendy with the hipster brigade (even some co-working spaces in the neighbourhood!).

Accommodation: Studio apartment, with own bathroom and kitchen/diner.

Amenities: No microwave, no stove and no TV. But free WiFi, hot-water urn, fridge, and washing machine.

Finally, the only major criticism I have is that the Airbnb app itself was not that easy to use while travelling, so messages to/from hosts were often delayed. (More on Japan in coming weeks….)

Next week: navigating #MedTech

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.


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

Online Pillar 2: #Finance

Along with the launch of the iPhone 6, Apple also announced a new mobile payments system. OK, so it’s not the first smart phone app that will help you manage (read: SPEND) your money, but it’s likely to be a market leader very quickly. After all, financial services mean big money in the interconnected online economy.

This week’s blog is #2 in my mini-series on the Three Pillars. Away from NFC solutions, digital wallets and virtual currencies, what else is helping to drive online innovation in financial services?

First, as with last week’s look at Health, it’s important to consider that despite being both a defined business vertical, and a highly regulated industry, the financial services sector is also vulnerable to market disintermediation, horizontal challengers and disruptive technologies.

Although most of us tend to stick with a single financial institution for the bulk of our banking products and services, we will likely use different providers across our credit cards, insurance policies, personal investments, retirement plans and foreign currency. The major banks don’t always do a good job of being a single provider of choice because they tend to manage their customers from a product perspective, and not always from the vantage point of a life-cycle of different needs.

Most retail banks have launched customer apps – mainly for account management and transaction purposes – and likewise, other platforms such as PayPal offer smart phone solutions. As with our other two pillars (Health and Education), Finance apps proliferate – e.g., calculators, account aggregators, budgeting tools and branded customer products from major financial institutions. But unlike Health apps, at least the Australian retail banks have to comply with consumer information requirements – although I suspect this is more a requirement of APRA than Apple. (Question: should apps offering stock market data, or enabling customers to plan investment strategies have to include product disclosure statements, or ensure customers have first completed a mandatory risk profile?)

Disruption in the banking and finance sector is coming from a variety of directions:

  • traditional retailers extending their existing credit card and insurance services into deposit accounts and investment products;
  • technology startups creating online payment systems;
  • trading platform Alibaba offering microfinance, trade finance services, deposit accounts and investment funds; and
  • online retailers and market places collecting a lot of useful behavioural data on customer creditworthiness and implied financial risk – for example, platforms like eBay and PayPal are using transactional data to assign customers a quasi-credit rating score or ranking.

Elsewhere, the financial services sector drives the use of data and technology to streamline stock trading and settlement – across algorithmic trading strategies, low-latency trading, straight-through securities processing, transaction and security data matching, market identifiers and real-time data analytics. The use of social media sentiment and stock #hashtags is also creating new trading strategies among savvier investors – one major Australian bank I spoke to recently boasted of having a Media Control Centre, where they can monitor client engagement, customer activity and brand profiles across the social web.

Crowdsourcing services, along with other platforms for raising capital and early-stage funding (plus new online listing and share trading platforms) threaten to disintermediate established stock exchanges, investment banks and stock brokers. Yet I see a huge opportunity for traditional bank and non-bank lenders to use these techniques for themselves. For example, banks love asset-backed and secured lending, as opposed to overdraft or cashflow lending. However, most startups don’t have physical assets such as plant or machinery, and young entrepreneurs are less likely to own property that can be put up as collateral.

So, what if banks see startup clients as a new channel to market? By investing part of their marketing costs or R&D budgets to underwrite new business ventures, they could help fund early stage ideas, and gather valuable information on customers and suppliers. Some banks are sort of moving in this startup direction – NAB and RBS, for example – but they have yet to demonstrate new business models or innovative product solutions that align with the lean startup and new entrepreneurial generation. I have observed many founders bemoan the lack of support from banks when it comes to offering merchant services that align with the needs of startups.

On another level, banks could do more to connect ideas with capital, customers with vendors, and buyers with suppliers – as the increasingly online and highly networked economy introduces new supply chains and innovative business models. (Hint to my bank manager: referrals and recommendations are often the most cost-effective way to acquire new customers – so, maybe we can help each other?)

Of course, where financial institutions really need to lift their game is in coming to grips with the shared economy. If consumers no longer see the need to buy or own assets outright (thereby reducing the reliance on mortgages, personal loans, hire purchase agreements and even credit cards….) what are the implications for financial services? Maybe banks need to take more interest in these “shared” asset eco-systems. For example, if I have taken out an investment loan to buy an apartment, which I plan to list on Airbnb, wouldn’t it be in the bank’s best interest to make sure I am getting as many bookings as possible – by helping to market my property to their other customers, or by making it really easy for people to book and pay for the accommodation via their smart phone banking app, or by enabling me to run online credit checks on prospective customers?

It’s nearly ten years since the term “distributed economy” was coined to encapsulate the new approaches to innovation, collaboration and sustainable resource allocation. Apart from microfinance and some developments in CSR and ethical investing, I’m not sure that financial institutions really grasped the opportunities presented by the distributed economy – sure, they were quick to outsource and offshore back office operations, but this was largely a cost-cutting exercise. Innovation in financial products mainly resulted in complex (and risky) derivative instruments – and ultimately, led to the GFC.

In the current low/slow/no growth economic climate, banks have to look at new ways of generating a return on their capital. They can’t just keep paying out higher shareholder dividends (not when banking regulations require them to increase their risk-weighted capital allocation); so they must engage with the new business models and the people behind them, and they must be willing to do so with a new mindset, not one built on staid financing models. Sure, they need to maintain prudent lending standards, and undertake relevant due diligence, but not at the risk of stifling innovation in the markets where their customers increasingly operate.

(For a related article on this topic, see here. Since I drafted this blog, PayPal has launched an SME loan platform, and it has just been announced that the ex-CEO of bond fund PIMCO has taken a key equity stake in an online Peer-to-Peer lending platform.)

Next week: Online Pillar 3: #Education