This post is inspired from a hot of the press Fintech innovation in Fixed Income coming from the Rest!
Kenya, made headlines at last albeit a 2yr delay, by issuing the first Mobile-only Government bonds targeting retail!
In this pos,t I will start by looking back at the state of innovation in the Fixed Income market and the stumbling blocks over the past two years. All this is happening in the West.
Fixed Income Fintech in the West
Innovation in the Fixed income part of the Capital structure of corporations and in Government and Agency Debt instruments, has proven tough. Algomi, the UK based Fintech player focused on adding value in
”How bonds are traded”
has been stubbornly working at it and continues to do so despite a couple of setbacks. I wrote about Algomi in the early days of my Fintech expert journey – see Algomi Connecting Fixed Income Buy and Sell side by enhancing distribution. In Spring 2015, in Technologies for the storm in fixed-income I covered all ventures coming from Fintechs or incumbents.
Bondcube was included (a very early stage Fintech at that time) who unfortunately, filed for liquidation last summer. Their transparent platform was focused on large orders, taking anonymous indications of interest from asset managers and investors, as well as banks and brokers, matching them and then executing. Asset managers who constitute the majority of bond holders, were uncomfortable being price makers rather than price takers. Being a liquidity provider is not in their culture. So, in the end, they preferred to call a dealer. Bondcube’s failure on the last step (execution) shows again that Institutional Culture is hard to change (more details here).
Late 2015, I profiled Origin Markets: A Fintech for Corporate P2P Borrowing and Lending (very early stage at the time) who has a laser focus on adding value in
“How bonds are Issued”
Origin is digitizing the MTN (Medium Term Note) market which works through a shelf of private placements (more than $1trillion market). Six investment banks, BNP Paribas, Bank of America Merrill Lynch, Societe Generale and Credit Suisse, have already partnered with Origin.
From the original landscape coverage, OpenBondX out of the US recently joined forces with DirectMatch. OpenBondX has been focused on secondary market trading of US Treasuries (UST) and corporates bonds, whereas Direct Match focuses only on the USTs. The latter is obviously one of the most liquid bond subsectors, but yet on any given day no more than 13% of outstanding Treasuries trade.
The other recent “unification” in this subsector, is Trumid acquiring Electonifie. Trumid was backed earlier by Soros and Peter Thiel and recently received funding also from Credit Ease; and can thus embark on a buying spree. Electronfie, launced in 2015, had been looking to raise capital over the past six months or find a partner.
Canada has seeded Overbond, which claims to be positioned in the “How bonds are Issued” segment by digitizing the primary issuance process. For now, it seems to be a platform that aggregates Bond information, and data. We will be watching their positioning evolve.
All of the aforementioned ventures, are solving problems of the Fixed Income market at the wholesale level, i.e. asset managers, deals etc. At the retail level, investing or trading in single bonds remains an over-the-counter market with lots of inefficiencies. Saxo Bank announced last Fall the launch of a retail bond trading platform for their SaxoGo Trader clients. More info here. However, the word on the Street is that it is not that alive yet.
Fixed Income Fintech in Africa
Kenya is in the spotlight.
Did you know that there are 38 Fintechs out of Kenya, as we speak? Check here.
Kenya has a country rating B+ (as Sri Lanka, Nicaragua etc).
The 10yr government bond offers a 14% yield. Bank deposits are at 7%.
- The M-Akiba (Swahili translation of “savings”) Mobile-Only bond is a 3yr bond. It offers a tax free 10% semi-annul coupon. The coupon will be paid twice a year to MPESA or Airtel Money.
- The M-Akiba proceeds are going to be used in infrastructure projects in Kenya. The bonds are un-collateralized lending to the government.
- The current issue size is 5 billion Kenyan shillings Ksh. ($47.7 million). The government plans to issue up to $48mil in the summer.
- The minimum purchase order is 3,000 (around $30) much lower than previous levels (Ksh. 50,000 = $480). The bonds can be traded through brokers.
This is a pilot project that the world should watch for a couple of reasons. We are seeing a pilot case of crowdfunding government infrastructure projects by borrowing directly from the same people that will be the workers in these infrastructure projects.
We are seeing the government competing directly with the consumer banking market – i.e. banks – by offering Higher tax-free rates and liquidity. Typically, governments borrow at lower rates even on an un-collateralized basis.
We are seeing an alternative way of educating the people towards increasing their savings.
We will be monitoring the success of this direct retail placement from a government and the upcoming larger issue.
Will we soon be seeing the launch of mobile apps from the US Treasury, the Japanese government, or the Indian government? Stay tuned.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.