Credit history is a Digital Asset in an underserved market

credti score

Adult life in the US is highly dependent on your credit history.

Your credit history, which is sourced from 3 credit bureaus and checked against the US overdrawn database; is your Digital Asset! Wake up to this reality!

One of the largest underserved segments in the US, are individuals that don’t own this Digital Asset – Credit history.

The CFB reports that 1 in 5 adults don’t have a credit history. So, 20% of US adult population is underserved and the majority is a result of:

  1. Complying with the CARD act of 2009, that requires extending credit to adults between 18-21 to be very tedious.
  2. Initiating any transaction towards building a credit history is still a catch22 problem.
  3. User experience of the existing alternatives is old-fashioned.

NerdWallet one of the top online “advisor” and comparison sites for a broad range of consumer needs (credit cards, basic bank accounts, basic investing, mortgages, loans and insurance) summarizes and covers all the traditional alternatives towards building a credit history. The four main ways are the following:

Several tools can help you establish a credit history: secured credit cards, a credit-builder loan, a co-signed credit card or loan, or authorized user status on another person’s credit card.

The first two are options that require a lump sum deposit that is held in an account backing the securing credit card or the “fake” loan. The last two options require another person’s participation. In both cases the user experience is old fashioned.

SelfLender is an alternative way to establish credit, very similar to that offered by credit unions (credit-builder loan or the secured credit card) but that the UX is upgraded to the digitization age (i.e. online). The onboarding and approval takes 5min and the deposit required is a monthly installment instead of an annual upfront lump sum. The bank account that needs to be created, the certificate of deposit and the loan document, are all seamlessly created online. The customer is offered the opportunity to initiate the process of developing a credit history and of monthly savings.

In mid March, SelfLender was included in the NerdWallet platform as an alternative way to build credit and start saving.

SelfLender is operating in a very regulated part of banking. What is more interesting is the way they have chosen to launch their offering. They are operating a revenue sharing business model with the FDIC insured bank they are partnering with. They essentially sit in the back-office of the bank, use the bank’s balance sheet to open bank accounts, issues CDs and loans for the underserved looking to build credit history. SelfLender is in charge of marketing to the huge addressable market (competing of course with those in the secured credit card and credit-builder loan business). SelfLender is also undertaking the loan servicing.

Austin Capital Bank is their FDIC insured customer. SelfLender is keeping it simple for now at least. Their offering to the underserved is:

A one-year loan of face amount $1,100. The SelFLender client pays $98 per month ($1,176). That means the total annual cost for building one’s credit history is $76.

Self Lender is more affordable because one doesn’t have to put down the entire lumpsum from their own money as upfront collateral and can instead simply pay off the loan in monthly installments.

This is the first all-online credit builder loan; ideal for students, young adults especially those in no-mans land 18-21yrs old, foreign students, immigrants, H1-B visa holders, and others with zero credit history who need to establish credit.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.

 

 

Fintech Opens IPO Window with BATS and says sorry about earlier IPO fluffs.

IPO-Window

Image courtesy Westwick Partners

The IPO window has been shut down for a while. The January crash put a padlock on that window. According to Renaissance Capital, 22 IPOs raised about $3.5 billion up to mid-May, which is down 63% by deal count from the same period last year. The IPO window is starting to re-open and one of the first ventures to go through is the BATS (Better Alternative Trading System). We covered BATS in an earlier research note on Fintech in action on Western Stock Exchanges. The key point is that BATS is number 1 in ETFs. This is important because ETFs are powering Robo Advisers. In this research note we look a bit deeper at BATS and their recent IPO.

Started by a Programmer 10 years ago in Kansas

Far away from any Fintech Capital, Kansas is too low profile to even become a stop on our 19 stop Fintech Global Tour. Then we reckoned we had missed some and so we added the Alternative Fintech Capitals. Even on that tour we missed Kansas. Sorry Kansas! Kansas is in the “show me” state of Missouri which is appropriate to this story as investors are in a sceptical show me state of mind.

So lets go back an eon to June 2005 when BATS was founded by a computer programmer called David Cummings. What could be more Fintech credible than being founded by a computer programmer? This is no old school financial institution. According to BATS entry in Wikipedia:

“Cummings said he was inspired to start the company after observing Archipelago Holdings be acquired by the New York Stock Exchange and Instinet be acquired by NASDAQ within a week of each other in 2005. After the launch of Bats, other brokerage firms, hedge funds and other clients became involved with the company. Cummings publicized the Bats service by sending emails to companies highlighting the niche that could be carved out by trading on platforms other than the big two—NASDAQ and NYSE.[3] The niche that he sought for the company was for it to be “a neutral, private, broker-dealer owned, semi-profitable utility” with no party owning more than 20 percent.[4] He noted that the consolidation of the New York Stock Exchange and NASDAQ eliminated competition and they raised prices for their services. The Bats system was intended to charge less.[5] Among the items it did to draw customers was to offer free listings to companies with shares that traded a certain amount each day.

Back from the dead to IPO

BATS made an aborted attempt to go public in 2012 and withdrew due to a disastrous tech error (hint to Fintech entrepreneurs – it has to actually work, not just be a disruptive proposition with a great UX). The price dropped from $16 to 4¢ a share. There was a management reshuffle.

Amazingly the company recovered from this. In December 2015 they announced plans to IPO again. The company was clearly ready. The market was obviously not ready. So they waited until April 2016 to price and in May delivered some good earnings results. As of time of writing their valuation is over $2.5bn and the price is over the IPO price (which may not mean much, performance post IPO needs longer to find an appropriate level).

The Fintech slough of despond and Lending Club

Some earlier Fintech IPOs – notably Ondeck and Lending Club – have been a disaster for investors. In the case of Lending Club this was an over reaction (as we outlined in this post). If you were lucky enough to get in at that bottom of 3.51 you got some appreciation (disclosure, I bought the day after posting this and did get in at 3.51).

The IPO window is open but only the best can get through. The headwinds are still there for Fintech but skilled sailors are needed to ride the wind through turbulent weather.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

 

Pirates with Ties interview with David Thompson of Western Union

Pirates with ties

In the Pirates with Ties interview series, we are interviewing people who are leading digital transformation and innovation in major Financial Institutions.

David Thompson is the Executive Vice President, Global Operations & Chief Information Officer at Western Union. In this interview we learn about WU Edge, their recently launched cross border payments platform for SME.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

What we learned about the transformation of Consumer Banking from 5 Pirates with Ties interviews

transformation-2

One of the things that makes this job so much fun is the ability to talk to the really smart people in a dynamic market. Doing a startup is hard;  we are entrepreneurs ourselves so we get that. However we want to counter the myth that all innovation comes from VC funded startups. To do that we need to find real innovation that has had an impact (not just “innovation by press release” about experiments) and then find people within established financial institutions who are willing to talk about on the public record.

Having done 5 of these interviews, we decided to reflect on what we had learned.

The 5 Interviews

These are all in Consumer Banking. We have done interviews in other segments but we have seen the quickest uptake in Consumer Banking, because this is a segment within Fintech that is already fairly mature. Pioneers recognized the disruption some time ago in Consumer Banking and some of them took action.

ING-DiBa

SpareBank1

Hellenic Bank

Chebanca!

Unicredit

9 Themes that emerged from these 5 interviews

  • The Bank spinoff intrapreneurial model works. The Bank spinoff model is clearly working from the examples of ING DiBa and Chebanca! One can also see that the overnight sensation idea popularised by startup banks and Fintechs may not be realistic. For example Chebanca! was founded in 2008 and ING DiBa took 15 years to get to the amazing scale they have reached today. Banks have more patient capital than traditional VC Funds; so Banks can afford these longer runways to success. Both were started when Internet and mobile penetration was much lower. It would be interesting to see how quickly a digital bank can get to the scale that ING DiBa achieved now that Internet and mobile penetration is so much higher.
  • Crisis is spur to action that drives cultural change. This came out most strongly in the story of Hellenic Bank in Cyprus, but is also evident in the banks from Italy (a country that has gone through a lot of turmoil during the Eurozone crisis). Frogs in slowly heating water feel comfortably warm until it is too late. The greatest big company transformation – IBM under Lou Gerstner – was made possible because of an existential crisis.
  • Omnichannel Banking, cultural change and the cannibalization challenge.  In the SpareBank1 and Unicredit interviews, neither Christopher Hernaes nor Holga Tavlas attempt to downplay the cannibalization challenge. It is hard. Mediobanca as parent of  Chebanca! did not face this issue because it was an investment bank launching a retail bank. Goldman Sachs launching GS Bank may follow the same trajectory. The banks like Hellenic Bank, Unicredit and SpareBank1 that create services which customers interact with through multiple channels including existing branches is tougher but maybe more sustainable over the long term.
  • Bank Scale is bigger than venture scale, but it takes time. In the ING DiBA interview I was staggered to learn about a digital only bank with 8.5m customers and EUR 1 billion in pre tax profit. And that is only one part of ING Direct and that is only one part of ING. Yet it took 15 years to get there. VC funds that have to give liquidity back to LPs don’t usually have that kind of patience.
  • Friction eradication is key to scale. ING DiBa has partnered with Fintech startups that use video chat for onboarding, fingerprints to make payment data entry quicker and new ways to avoid passwords and pins without jeopardizing security,
  • Customer centric thinking matters more than technological innovation. Holga Tavlas summed this up best when he said “we can do great innovation with what we already have”.
  • Some Banks have moved to level 3 on the partnership maturity curve. In this post we define 3 levels of maturity in the relationships between Fintechs and Banks. Although the PR we read is almost all about Level 2 (Corporate Venture Capital), in these interviews we heard about many real partnerships that moved the revenue needle for both parties. For example, ING DiBa referenced ways to eradicate friction in onboarding and payments as well as new upselling partnerships and SpareBank1 referenced partnerships in mobile payments.
  • The challenge of Education Awareness Understanding (EAU) in the Bank. While we may define 3 levels of maturity in the partnerships between Fintechs and Banks, the reality is more complex because some people (such as the people we interview) have a very high level of awareness while other people running a line function need a lot more help to come up to speed and it is hard to change mental models of how to work if different stakeholders have radically different levels of understanding of what is happening in Fintech and digital banking.  This came out particularly strongly in the Unicredit interview when Holga talks about the differing business practices and regulations in the 12  different countries where the Bank operates.

That was what I learned by listening to the podcasts. I asked Efi Pylarinou, who conducted the interviews for her perspective and this is what she had to say:

“The last two Pirates with Ties interviews, revealed real consumer banking innovations that came about from necessity, which has been and still is the mother of invention. Two regional digital transformation stories that came about in dark times. Hellenic Bank was inevitably in the midst of the financial earthquake that hit the Cypriot economy 3 years ago. Natasha Kyprianides implemented a mobile first transformation to keep the existing customers from fleeing. This may seem simple in theory, but it is not easy in practice. The biggest challenge is how the internal corporate culture unconsciously resists because of fears of cannibalisation. Anytime a bank is looking to move from a 100% branch and relationship based way of doing business, to a hybrid online-relationship way of interacting there is a friction. Up north in Milan, Chebanca! (pronounced Ke-banca) is another retail banking transformation story that came about much earlier (2008) to solve a liquidity problem of an established investment bank. Stepping into a market that was very much saturated in Italy (retail banking) at a very dark time (Italy hit by the financial crisis) and with very low mobile adaptation rates of the Italian population; this really takes vision. As Roberto mentioned to me (off the record), if anybody tells me it is easy to step into a new business (an investment bank moving into retail banking) I will be very surprised. 

There were two different regional stories that solved actual problems for the existing organisations. Hellenic bank’s story is a delivery story. David Brear picks an image of fast food to convey the essence of the innovation. I see the EuropaPark foodloop as the appropriate one. Chebanca is more of an Alessi design, functionality and experience, image; this is a growing business from basic checking, saving services now offering only investment capabilities with a yellow robo offering.

ING-Diba is has been leading branchless and digital banking before anybody was paying attention. The simplest evidence of catchup from the conventional consumer banking businesses comes from Canada. ING-Direct moved to Canada 20 yrs ago and nobody paid attention. They have built a 1.8 million customer base and Scotia Bank decided to buy them at $3+billion in 2012. Now renamed Tangerine Bank. M&A of early but mature Fintech with a traditional business.

ING continues to digitize and lead in Fintech consumer banking in several European regions. Very recently, they launched a financial advising app, Coach Epargne, in France. They have Genoma in Spain and Noje in Poland. 

 Unicredit has made a major announcement since I interviewed Tolga.  This is the launch of a new mobile-only banking subsidiary in Italy called  BuddyBank; this another example of a Bank spinoff. Unicredit will fund  the new smartphone-only banking subsidiary bank with €50 million.

SpareBank1 is a story of how an alliance (owned by the participating banks) can continue to innovate, with a strong commitment to community education, cultural adaptation and a partnership approach. ”

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

If you worry about Black Swans, look at these big data Catastrophe Insurance ventures 

Hindenburg_burning

Black Swan events cannot be predicted. Who could have predicted that Lending Club would do something wrong that caused the Founder CEO to leave and the stock to tank? We cannot plan for hurricanes, tsunamis and other extreme weather – we just put that in the Force Majeure clause. Yet big companies have to plan for these types of eventualities and consumers insure against them – making the subject important for the Global 2000 and mission critical for Insurance companies. Insurance companies do have to predict what has historically been called unpredictable. Having come off a lousy ski season, I am more inclined to believe in global warming and therefore an increase in extreme weather related risk. Seriously, business people who have anything to do with winter sports, tend to plan seriously for global warming. It is not an academic debate for them. It is certainly not an academic debate for Insurance or Reinsurance companies who have to payout if something goes wrong. It is certainly a serious concern for those investors who searched for yield in a ZIRP world and found the big payouts from Catastrophe Bonds (Cat Bonds). If the incredibly complex system known as the earth’s climate has been disturbed, all our conventional modelling systems will have to be discarded. However the global climate is only one of many massively complex networks where a butterfly flapping its wings can do a lot of damage – financial markets triggering price risk, social networks triggering reputation risk, cybercrime networks triggering operational risks. Traditional statistical models don’t work so well in these chaotic/complex networks. Any companies that offer solutions to this modelling problem could do well. We cover two of them – Praedicat and Meteo Project. Please note, this post will NOT cover either the science or politics of climate change, we restrict our ourselves to the geeky subject of non-linear modelling. 

Linear vs Non-Linear Models 

Like so many others I read Chaos: Making of a New Science by James Glick in 1987 and it deeply influenced my thinking. I went on to read some books about Complexity Science and what the Santa Fe Institute were doing and around 2002 got involved with a tech startup that applied these theories to the hairball complexity of dependency management in giant old legacy software systems (there was a successful exit). So when the Global Financial Crisis happened in 2008, it simply looked to me like a chaotic/complex system being disturbed. This is the same thinking that one needs to apply to climate and other network driven risks. Disturbed complex systems turn chaotic and that is what leads to risks such as more violent weather, mass law suits, reverse network effects based on reputation risk etc. This is the cheery subject that Insurance/Reinsurance actuaries and Cat Bond investors/traders need to think about.

Praedicat – big data for emerging liability risk 

Praedicat is a Los Angeles based venture that has raised $12m (but their last raise was in 2013, so they have either become cash flow positive or they could be having trouble raising money). They focus on “improving the underwriting and management of liability catastrophe risk” using big data analytics. Insurance companies are a natural target, but the market is broader. All big companies work on “enterprise risk management”, the complex intersection of operational risk, market risk, reputation risk and regulatory risk.

If you want to really dig into this, read the Lloyds report on Emerging Liability Risks (Harnessing Big Data Analytics). Or read DailyFintech for a quick heads up (join over 9,000 of your peers and subscribe by email, its free). We read this kind of wonky stuff so that you don’t need to.

Mostly when we read about Big Data Analytics it is about finding that one needle in a haystack that will tip a consumer into hitting the buy button (or some other action that leads to the buy button). Praedicat is using Big Data Analytics in a different way. This is hard core enterprise stuff (which will impact consumers in their premiums). The Lloyds report is co-authored with Praedicat and linked to from their front page. That is some useful validation for a startup.

The Lloyds/Praedicat report focusses on the tipping point that triggers class action lawsuits. That makes sense. It is something that Board Directors worry a lot about and a simple rule of big companies is that whatever Board Directors worry about tends to get budget allocation:

“this approach estimates the probability of a general consensus being reached that exposure to a substance or product causes a particular form of injury. This is the critical threshold at which lawsuits become more likely to succeed; a liability catastrophe could emerge if a successful lawsuit gains traction and triggers mass litigation. This information is then overlaid on an insurer’s portfolio to identify potential accumulations of liability risk. The analysis can be used to develop quantitative estimates of mass litigation, allowing a liability catastrophe model to be built from the bottom up.” 

This is not Force Majeure. This is something that BigCo did – or did not do but should have done.

One new factor in this kind of risk is the reputation risk and mass mobilisation of consumer action enabled by mass adoption of social media. We have witnessed corporate reputations go down in flames thanks to one tweet or video that goes viral. That in turn can trigger class action law suits. You cannot get rid of social media or class action law, so the only choice is to model what kind of behaviour triggers that kind of consumer reaction and then figure out how to price that risk. That is what Praedicat is trying to do.

They are less concerned with Force Majeure type events. Companies leave that problem up to Insurance. They are less worried about what Mother Nature might do than what BigCo will do such as “large-scale catastrophes such as bodily injury from toxic chemical exposures or property damage from accidents during energy production.” 

Meteo Protect 

Meteo Protect is a Paris based venture is coming at this from a different direction. They are focussed on one type of Force Majeure risks, those arising from climate change. They put a number on the problem, claiming that weather can cause $500 billion in lost profits in America alone. This is not just about catastrophic risk. The low hanging fruit is being able to predict when consumers will buy ice cream vs umbrellas (taking a most simplistic example). Getting that inventory decision right is critical and depends on weather forecasting. So is Meteo Protect a weather forecaster? Not really. The key is in the Protect part of the name. This is really about taking existing weather forecasts and intersecting them with consumer behaviour and your product line. In a White Paper on their site they take the bold position that Credit Rating Agencies should include climate vulnerability into their analysis.

This is the sort of market that big enterprise vendors such as IBM, SAP and Oracle are focussed on as well as the management consulting firms serving the Global 2000. Meteo Protect uses SAP HANA technology. See our earlier coverage of Meteo Protect here.

Unpredictable Reputational Risk

The Lending Club story is at heart a reputational risk issue based on an ethical lapse and a failure of business process management controls. Insurance companies do offer reputational risk insurance. For example, Allianz focusses on these risks:

  • Health and safety incidents
  • Operational crises and events (e.g. pollution)
  • Product recalls and quality control errors
  • Business and service interruptions
  • Financial losses and irregularities
  • Negative associations with third parties Management and governance topic
  • Legal and regulatory investigations Allegations over business practices
  • Ethical violations and challenges

In the same week that we had the Lending Club meltdown, we also had Salesforce.com suffering an outage lasting many hours causing huge amounts of lost productivity for millions of users. The “sky is falling” crowd rushed to say that lending Marketplaces and Cloud Computing are just hype and passing fads (a bit of an over reaction to put it mildly). Both incidents are likely to trigger class action lawsuits and an increase in Insurance costs. In both cases, people will say “but it was unpredictable”. That answer is no longer acceptable. If we don’t have the tools and processes to predict events like that, then we had better work on them. Ventures that solve that type of problem should do well both with Global 2000 and with Insurance companies.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.

Polite persistence pays – SMEs harness fintech to get paid on time

AYSVGBFCHG

If a doctor only treated the symptoms of your illness, rather than the root cause, you could be looking at a hefty medical bill at the end of the year, not to mention repeated trips to the surgery. Such an analogy could well be applied to the rise of invoice finance as a remedy for cash flow issues in small businesses. Instead, could addressing the root cause of the need to access invoice finance, the delay in payment of invoices, in fact be a better (and cheaper) way to improve the overall cash flow health of a business?

Looking at the numbers, there certainly is some debtor heartache for small business. According to the Asset Based Finance Association in the UK, SMEs were owed £67.4 billion as of September 2015, up 36 percent from 2011. The body’s data also indicated SMEs are waiting 72 days for payment of invoices, up from 61 days during the GFC. The story is much the same in the states. Atriadus reports that 46.4 percent of domestic B2B invoices remain unpaid past their due date, creating a myriad of financing and administrative costs associated with carrying B2B trade debt.

Cloud accounting users get paid faster

In 2014, online accounting software provider Xero crunched the numbers globally, aggregating some 16 million invoices across their cloud platform to see if they could work out the average days it took for a business using their software to get paid. They wondered, had there been any improvement since the introduction of a cloud platform?

The good news was that the answer was yes. Xero’s global customers had reduced their average debtor days by 31 percent, down from 48 days in 2011 to 33 days in 2014. But at 33 days outstanding, there was clearly still some more work to be done.

Well since then, there has been an explosion of fintech startups looking to tackle this problem,  connecting into platforms like Xero and Quickbooks to fully automate the collections process and even provide instant credit reports on a small businesses’ debtors, all helping a fledgling entrepreneur understand who they should and shouldn’t be extending terms to.

Crunching the numbers

Sounds great, but compared to getting funding quickly via invoice finance how does investing in a collections add-on stack up? Well, it would seem rather admirably.

Well known invoice finance player MarketInvoice quotes a 1 to 3 percent fee on the face value of the invoice. So anywhere between $1000 to $3000 for a $100,000 invoice. An automated collections service in comparison ranges from completely free to ~$30 per month for the average business. That is a significant cost difference, and one a small business owner can’t afford to ignore. A read through of the comments in the Xero community forum for their debtor tracking software partners shows a gentle nudge can be powerful in getting people to cough up the cash.

Debtor Daddy

Players to watch

Below are a few interesting/notable mentions for the SME collections sector, plus a list of others to watch and follow in the space.

Satago – UK

UK founded fintech startup that launched at Disrupt Europe 2013 in Berlin. Satago offer their base collections platform free to cloud accounting software users. For desktop applications where no doubt more complex integration software and support is needed, the company charges a monthly subscription fee. Satago are looking to monetise its cloud users via its invoice finance platform.

Dragonbill – AUS

Taking invoice payment collection to the other extreme, why wait to be paid when you could be pre-paid? Dragonbill, which initially started out as a membership fees collection platform for clubs and groups is beta testing a platform that removes the uncertainty a tradesperson or freelancer might have when it comes to getting paid, asking the customer to first deposit the funds before the work is started, with the platform releasing them when both parties are satisfied the job has been done.

A similar system is in place for Australia’s skilled labour marketplace Airtasker. The escrow services and backend is powered by up and coming marketplace payments provider PromisePay.

Chaser – UK, expanding to Australia

Xero’s 2016 add-on partner of the year and the accounting platform’s highest rated invoice chasing add-on, Chaser, claim the average user on their platform gets paid 26 days faster. It’s not clear if this augments the Xero data mentioned earlier or is inclusive of – it certainly would be interesting to compare the company’s actual average to the Xero benchmark using the inbuilt Xero reminders.

The company claims their secret sauce is in their ‘automated humanity’ approach, making their email reminders sounds like they are from actual people, rather than bots. They also tie in with a bunch of other Xero features, like bank reconciliation, ensuring you’re not unnecessarily chasing people who have in fact paid, just not yet reconciled in Xero.

Debtor Daddy – NZ

Founded post-earthquake in my own home city of Christchurch, Debtor Daddy came into being thanks in part to an investment by business accelerator Lightning Lab. Available globally, the invoice chasing tool comes in at as little as AU$8 a month for a sole trader. Heather Smith, a reputed Xero commentator and figurehead in the community has an in-depth review here.

Others to keep an eye on:

InvoiceSherpa

TrueAccord

Viewpost

Takeaways

Anything that automates administrative tasks around financial management is a huge win. A number of these platforms remind me of how marketing automation is transforming customer communication, allowing sales teams to prioritise warm verses cold contacts for further follow up via lead scoring models.

If these small business focused debtor management tools enable a business to develop their own scoring mechanisms around good verses bad debtors, this could allow an individual business to then layer in their own credit assessment on top of official bureau data. While this would allow businesses to be more selective about who they offer their services to, on the flipside, having a reputation as a quick payer would be something a debtor could also leverage when looking for new service provider contracts, helping them secure better terms.

Of course, not all debtors are going to come to the on-time payment party. Some of the larger ones may rather like the fact they get a comfortable 30, 60 or even 90 to 120 days interest free credit on their purchases. But for small business to small business, creating a way to collect funds faster seems a no brainer, and most probably cheaper than borrowing money to fund business growth.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Fintech in action on stock exchanges of the “REST”

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Source: The money project (size accounts for all asset classes, not only stocks)

The Northern hemisphere clearly dominates in the world stock exchanges realm. This 35,000 feet perspective includes all the assets traded through these exchanges (fixed income and multiple derivatives) and of course, a slice of the private shares market. The best example to grasp this, is the Luxembourg stock exchange which is small on this global aggregation scale, but ranks on the top of the global scale with regards to international bond listings. BATs, also ranks on the top in ETF trading.

Roughly speaking, one third of the global trading volume going through exchanges, takes place in the “Rest” of the world and two thirds in the West (with the Americas seeing double the traffic than Europe).

In terms of tech innovations in the “Rest” of the exchanges, the Australian market steals the show and the explanation is not simply that it has been in the “developed” country club longer than the other Asian players (Japan is in the G7 group; Australia and Japan in the G20). Or that it is the only AAA rated country in the southern hemisphere and the “Rest” of the world.

Australia is a very unique financial ecosystem.

Australia is the only fully dematerialized equity market.

ASX owns the value chain of the post-trade business.

Both Europe and the US have broad and complex equity markets that are not 100% dematerialized (i.e. registered and transferred electronically). The DTCC still maintains a securities vault. Australian Stock Exchange (ASX) has a monopoly in the clearing business by owning a controlling stake in CHESS. This ownership will be soon challenged in order to promote competitiveness in the clearing business. This may not result in the creation of another clearing company but will at least, give access to other entities (like Chi-X that has entered the Australian market in 2011 and competes with ASX on the execution of equity shares) to the clearing and settlement services. Given the impeding reforms, ASX stated last month their intention to cut clearing costs by 10% and reiterated their blockchain work in progress as evidence of their digitization transformation. ASX also owns the settlement corporations. Lastly, but equally important is the fact that Australia is a rather small and contained market with only 2,200 entities listed companies.

ASX in partnership with DAH are developing the first national scale post-trade solution system for settling equity trades by using a distributed ledger technology. It is not clear yet whether the first version tested will be real-time settlement or a choice of same-day settlement (e.g. every 3 hours) that will reduce substantially the clearing-settlement fees currently charged by the ASX group. The latter or some such high frequency settlement procedure could also allow for short selling that is one main liquidity factor in mature markets. The Australian market is also idiosyncratic on the short selling front, since it allows very limited short selling capabilities to retail investors.

Ironically, the Kuwait stock exchange is one that is already functioning with real-time settlement. A stock exchange that is having troubles as a business because of low volume but operates on prepaid; and is now considering switching to T+2 settlement.

In the East, The Japanese exchange (JPX) is advancing to the second stage of POC with Nomura Research insititute (NRI) on use case of blockchain technology. SBI Securities and Mitsubishi UFJ Financial Group, are participating and the blockchain specialist is Currency Port who is focused on multi-currency payments. JPX is interested on applications for equities with low transaction volume and also on applications to prevent tampering with stock information. Nomura Research Institute (NRI), a leading provider of consulting services and system solutions, today announced the launch of the second phase of its Proof-of-Concept (PoC) to examine the applicability of blockchain technology for securities markets. This project will be done in collaboration with Asia’s leading exchange group, Japan Exchange Group, Inc. (JPX). Along with JPX, the PoC will be supported by Nomura Securities, SBI Securities, Mitsubishi UFJ Financial Group and others, to ensure the study is explored from various perspectives.

The JPX use case will run from April to June; the ASX will decide whether CHESS will be replaced by a blockchain based technology under development with DAH.This summer there is a funnel in Asia ready to generate a first important batch of POCs coming from the stock exchanges. Korea Stock exchange too is joining the gold rush with an intention to test in private shares, as announced this March. The platform will be first introduced for non-listed securities, which are widely exchanged directly between dealers.

Stock exchanges in Hong Kong and India are working on different issues. Hong Kong exchange (another exchange that owns the clearing house) is dealing more with the structural particularities of stock ownership, listing, and trading in China; and India is focused on synchronizing IT systems and catching up with a growing market.

Exchanges in the “Rest” of the world are also on our radar screen. Lots in the pipeline this summer.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.