Gazing into the crystal ball of Australian fintech

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As I write this I’m working out of the Brinc co-working space in Hong Kong, in the heart of the trendy SoHo district. The guys very kindly offered me a hot desk for the day,

One side bonus is that when you work out of a hub there is no shortage of people to chat to.

This morning I met Antoine Cote, co-founder of Enuma Technologies, who showed me an early stage prototype for a credit card that could display your latest transactions via a small screen on the card itself.

The company is also working on an app based digital identity solution for consumers that allows users to only release the identity points they want to when requesting access to services.

Exciting and distracting stuff, and not helpful when I’m supposed to be putting the final touches on my presentation on Australian fintech for tomorrow’s Next Money event. In the final slides I’ve been asked to gaze into my crystal ball and try and envisage what the local market will look like in 2020. No pressure.

EY FinTech Australia Census 2016

While past performance is not indicative of future results (excuse the pun), there really is no better place to start than to recap where the local fintech scene has landed after an incredibly active few years. And the EY Fintech Australia Census 2016 is the perfect place to begin.

Late last year the FinTech Australia, the peak body established in 2015 canvassed the sector and compiled a number of great statistics and insights on the local fintech scene. The infographic below is perfect for a quick overview, otherwise you can read the full report here.

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Highlights/Lowlights

It’s heartening to see that out of the 57 percent of companies who claim they are post-revenue, 27 percent have a customer base larger than 500.

However only 9 percent of companies post-revenue generate over $1M per month. The majority, 41 percent to be exact, generate $50K or less on a monthly basis. And only 14 percent of fintech companies are profitable.

It’s interesting to note the average age of fintech founders is 41 – only 10 percent are under 30. Innovating in financial services is not for the faint of heart, and a deep, intuitive understanding of the complexity of the problems in finance, garnered from experiencing them first hand, is no doubt a huge advantage.

Where to next

37 percent of companies surveyed have less than a year to go until cash reserves dry up, so unless the money fairy visits them over the next 12 months, or they crack the biggest external problem listed by startups in the survey – customer acquisition – my crystal ball tells me, as it would most, a few will fold. However this is a short term prediction, and hardly that insightful.

However what could significantly shape the market over a 3 year horizon are a number of legislative and policy interventions by the Australian Government, who have already made a firm commitment to want to position the country as an APAC fintech leader.

Backing Australian Fintech

In what it claims to be a world first, the Australian Securities and Investments Commission (ASIC) announced in late December of last year that it would begin to exempt fintech businesses from requiring an Australian Financial Services Licence (AFSL) before launching their product. Fintech companies now have a grace period of 12 months and the ability to service up to 100 customers. This will go a long way to helping startups validate their business model before an inordinate amount of money is committed to an idea.

Just prior to this, in September the Australian Government also amended the Anti-Money Laundering and Counter-Terrorism Financing Rules to allow for reporting entities to now gather Know Your Customer (KYC) data on their customers rather than directly from. The distinction is significant, as sourcing information on is easier and cheaper than from, and can possibly be done relatively indirectly.

Finally the biggest event on the fintech horizon will be to what degree fintech companies can access an indviduals banking data. A draft report released by Australia’s Productivity Commission has recommended 3rd parties be given access to financial data, and that a future API framework be developed. If the government ultimately supports this recommendation then the game could significantly change.

My crystal ball is pretty clear – policy changes and government support are now required to really drive the fintech agenda forward. While inroads have been made, there is significant opportunity for improvement. Government procurement of fintech services is a great start, and something they have publicly committed to. But that’s a topic for another post altogether.

Next Money Fintech Finals 2017 – The Aussie Finalists

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Next week I’ll be in Hong Kong speaking at the Next Money Fintech Finals 2017. Sponsored by Visa and a host of other technology companies, the event slots in with Hong Kong’s StartmeupHK Festival and showcases the exciting developments happening in the Asia Pacific region.

Hong Kong is quickly turning into a vibrant hub for the fintech community down under. FinTech Hong Kong boasts just under 2000 active members while the SuperCharger FinTech Accelerator is now into its second year, helping launch businesses primarily (but not exclusively) who have an Asia bent.

During the conference 24 shortlisted fintech startups will compete via a six minute pitch for the coveted title of Next Money Fintech Finalist of the year. Three of these finalists herald from Australia – Tapview, Bugwolf and Boundlss.

Tapview

Based in Sydney, Tapview technology allows online media platforms to charge readers on a pay per article basis, circumventing the traditional monthly subscription. Having already landed a partnership with Fairfax Media, one of Australasia’s biggest media empires, the startup is surely a strong contender for the FF17 title.

Boundlss

An insurtech startup based out of Perth in Western Australia, Boundlss is positioning itself as the employers ‘go to’ for staff wellness programs. The app claims its ‘secret sauce’ is its AI powered chatbot come personal coach Loyd, who can recommend handy stretches to alleviate back pain, diet suggestions and workout plans. The platform connects to over 150 wearables and apps already tracking health metrics for a user, which it no doubt leverages to makes its custom suggestions.

Health insurers are making serious inroads into the wellness space, as they look to find ways to reduce future claims. Australian insurer Medibank has partnered with loyalty program flybuys, offering bonus points for fruit and vegetable purchases. In addition bonus points can also be accrued for every 10,000 steps made a day, measured by linking up your Fitbit device.

The insurer has also partnered with local gyms via its GymBetter program, offering a pay as you go model via the app.

Airline Qantas has also made a foray into the health insurance space with Qantas Assure, white labeling an insurance product from NIB. The service allows customer to access bonus Qantas airpoints for switching and additional points for linking health data.

Bugwolf

The third Australian finalist is Bugwolf. The platform allows software developers to access a vetted marketplace of testers and managed tests. Alternatively they can use the platform to bring together testing communities made up of employees and customers. It sounds a little like a more specialised version of Amazon’s Mechanical Turk or Upwork.

Banks and fintech companies, like other tech companies have to test their products – which costs money – so one imagines being able to deliver a high quality testing platform for less will be an element of the company’s pitch.

If you’re in Hong Kong next week and are keen to catch up for a coffee, drink or just a chat – either email me or connect with me on Twitter. Would be great to meet in person!

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.

Amazon Go and the unstoppable automation train

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My mother likes to tell me a story about how when she finished school, the sum total of her mother’s aspirations was for my mother to get a job in the local can factory.

As a post WWII baby, a woman, and one of nine children from a working class Catholic family, a respectable and dependable job in a can factory was solidly within the boundaries of her mother’s expectations.

Sadly for my grandmother, her aspirations were never fulfilled. Instead my mother took herself off to university, gained a science degree and then completed teachers college. She was the first in her family to gain a degree, benefitting from a period of New Zealand history during which the government subsidized tertiary education for those who gained university entrance.

Of course life could have been considerably different for my mother (and her subsequent three offspring) had she not had the gumption to attend university. Had she taken that can factory job then right she would no doubt be suffering from severe automation anxiety, nervously waiting, like millions of manufacturing and unskilled workers, for the day her job became obsolete, to be replaced by a robot. That day, many would argue, has already arrived.

Robots aren’t the only actor in the automation story. Fintech advancements are also key. In early 2017 Amazon will publicly launch Amazon Go, a grocery store in Seattle that will showcase its pioneering Walk Out Technology. Shoppers will simply take items from the shelves and walk out of the store, their Amazon account pinged in the process. There is no questioning that this is the frictionless payment experience we have all been waiting for.

As is often the case with the Yin and Yang of technological advancement, consumers will win while blue-collar workers will lose. Should this sort of technology become widespread across the US retail landscape – which is highly probable – some 3.4 million cashiers stand to lose their jobs.

If being a cashier or a can factory worker is all you have ever known, then these sorts of developments must be pretty frightening. And society (as yet) doesn’t seem to have a reasonable countermeasure for these job losses other than the dubious idea of universal basic income.

While the unskilled workers of my mother’s generation may just be able to eke out their days on production lines, in bank teller jobs, or at supermarket check outs, their children and children’s children won’t.

The finance industry won’t be spared from automation either – the robots have been after brokers and financial analysts for some time now. Kensho is one of the poster children of the ‘dehumanization’ of Wall Street. Automation, as many have realised, is a problem no social class other than possibly the 1% are immune to.

There is no simple or elegant answer to the social problems facing the world as a result of mass unemployment. But I can’t help but wonder if we ought to press harder for the Amazons and Ubers of this world to explain how they will contribute to ameliorate the problems they are leaving in their profit-generating wake.

Fifty years ago it was unthinkable that mining companies in western nations like Australia would need to consider, and make financial provision for, the environmental damage caused by extraction.

While still not a perfect mechanism, these measures have gone someway to protecting our natural capital. More importantly, they have become the social norm. Externalising costs to the environment now come, for the most part, with a price tag.

Should we expect technology companies to make similar provisions for the impacts their innovations have on the labour force at large? Perhaps a tripartite solution involving government, educational bodies and the technology industry is the only way to solve this sort of messy, complex problem.

We are possibly witnessing the first time in history when the number of jobs we are destroying through innovation will not be replaced by new ones. While some of those jobs perhaps ought to be destroyed, we should try not to destroy the lives of the people that hold them in the process.

Indifi & the rise of the Indian SME lending matchmaker

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As someone who has been in the B2B lending game for just on a year, there is one thing that has become evident to me. It’s not the lending that’s hard, it’s the deciding whether to lend or not that creates the biggest headaches.

For those of you who are a bit longer in the credit assessment tooth than me, this wide-eyed observation will hardly come as a surprise. It’s why fintech startups are so keen to impress on the sophisticated investor the ‘dynamic credit assessment technology’, ‘data driven underwriting model’, and ‘automated decision making’ features of their businesses.

Assessing a SME online and in just a few minutes – the new attention span of would be borrowers thanks to companies like Iwoca and PayPal – compounds the challenge of lending to the small business sector even further. It’s possible to do but also complicated, potentially expensive and high risk. And with margins already slim, wouldn’t it be great to outsource that to someone who can do it better, and for less?

Indifi, one of the latest lending matchmakers to emerge out of the Indian subcontinent, seems to want to help lenders to do exactly that. And it was that promise that looks to have helped the company recently raise $10 million, with former ebay founder Pierre Omidyar a notable backer of the startup.

By partnering with supply chain businesses in the travel, ecommerce and hospitality sector, Indifi allows SMEs affiliated with those chains to apply for working capital loans of between 1 lakh rupees and 50 lakh rupees (~US$1500 to US$70,000).

To assess the business, Indifi accesses proprietary SME data from supply chain platforms, which it then uses to assess and match the business to one of its partner lenders. The startup’s recent tie up with hotel booking platform Djubo is an example of the model in action.

Companies like Indifi herald a new way for businesses to be ‘understood’ by would be lenders. Instead of being put through a rudimentary matching wizard online (like many online brokers are guilty of doing), Inidfi can use the right data to make the right lending decision, delivering insights about complex business models to lenders and reducing the risk all round. The ‘trust me, we know what a healthy hospitality business looks like’ is a strong draw card for a lender looking to diversify its lending book in a safe way, without building in-house knowledge.

Business models are changing far more rapidly than what they did ten, even five years ago. Banks are struggling to keep up while basic fintech lenders who take the one-size fits all approach will no doubt find themselves in a similar position soon.

My bet is that companies like Indifi, or ApplePie Capital, who offer franchise financing, will establish foot holds in quality, well understood niche markets. The learnings they establish here will help underpin expansion.

The only question left is the ethical one. Can a business with no direct exposure to a loan create problems in a lending ecosystem? One would hope the symbiotic nature of the partnerships created would mean the answer to this one is a no. But we are in new territory every month in the world of alternative finance, and anything could happen. And that is, after all, what makes the fintech sector so fascinating.

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.

2017’s small business banking trends

French futurist and industrialist Gaston Berger said the purpose of looking at the future was to disrupt the present. So for what it’s worth, here are our thoughts – in no particular order – on small business banking trends in 2017.

Banks will bite back

Globally, banks spent a good deal of 2016 consolidating their financial influence over the small business fintech sector under the banner of collaboration and partnership. This was done either through direct investment into start-ups or at arms-length via their VC arms. The Tradeshift/Santander as Innoventure deal typifies this. Down under Westpac took a stake in online small business lending broker Valiant via its VC conduit Reinventure. There are countless other examples of banks stepping into this space.

Bank sponsored funding of fintech startups to cement new distribution channels for either their existing bank products or to simply clip the ticket will continue in 2017. My prediction is that emboldened by their ‘behind the scenes’ fintech learnings, some banks will move out from behind the curtains to reclaim the entire value chain once more. NAB QuickBiz is one example.

While a Business Insider report suggests 54 per cent of incumbents have seen fintech partnerships boost revenue, no one seems to be able to satisfactorily answer the question as to whether these same partnerships are proving beneficial for small businesses. What is the fintech metric of success?

The cloud accounting war will heat up

Xero has dominated the cloud accounting conversation for some time, however industry commentators are have noted the likes of Intuit and Sage are waking up to the threat. Intuit in particular is responding to the rise of the gig economy, which is transforming the way accounting software is consumed and expanding the addressable market beyond pure small business owners. Companies like Intuit are recognising 9 to 5ers who also drive Ubers in the weekend or pick up odd jobs on Air Tasker have very different needs to full time business owners.

Cloud accounting expert Sholto Macpherson noted the shifting dynamic in a recent article:

“Intuit’s a big ship and it takes a long time to turn around. In 2016, it’s clear that not only has CEO Brad Smith turned the ship around, it is picking up speed. And in answer to the most important question: Can Intuit move as fast as Xero on the dev side? For the first time, the answer is unequivocally yes. Intuit is in fact moving faster, in some areas.”

For those of you who are keen for more insights into the cloud accounting space, also check out cloud accounting and futurist Matt Paff’s 2016 review.

Chatbots will drive the personalisation of small business banking

Personalised banking services and financial advice for small businesses will be delivered at scale via chatbots. Most will emerge/pivot out of the PFM sector, which is already over serviced by non-differentiated startups. Sage launched Pegg in 2016, while Xero previewed its chatbot at Xerocon.

However the juicy stuff will be when chatbots don’t just surface account information but can actively transact on your behalf. Fintech startups are eager to play in this space but for the most part continue to be blocked by banks and access to data.

Mobile payments will become a business mainstay

In its last earnings call Apple announced YoY growth in Apple Pay transactions of 500 percent, with global penetration of Apple Pay acceptance in store slowly increasing. While they’re unlikely to have an overnight Pokemon Go moment, mobile payments will move from being a fringe payment method to edging on mainstream by the end of 2017. Businesses will need to adapt and upgrade tech infrastructure to cope, or risk being left behind.

Dave Birch’s cardmegeddon is still a while off though.

Techfin tsunami will continue to show no mercy

The subtle yet significant shift in the bargaining power of banks verses tech giants was nowhere better exemplified in Australia, where the local competition authority denied the incumbents request to collectively bargain against Apple to improve deal terms and gain NFC access.

Small business owners will increasingly turn to tech providers who can enable them to accept payments via new payment methods – Alipay and WeChat being the most obvious. This will further fragment the banking relationship for business owners, as retailers look at banking from a payment perspective first, rather than deposits and lending. More innovation continues to happen on the payments front than on the deposits and lending side, thus is a strong driver in purchasing behaviour.

Governments will wake up to social impact of enabling small business finance and banking

The growing wave of populism and main street revolt is underpinned by the financialisation of economies worldwide and the stagnation of growth in the small business engine room of the economy. This is probably a super optimistic prediction, but it would be heartening to see governments connect these dots better than they do today, and stand up to vested interests more strongly. If they don’t do it, chances are the voters will do it for them.

For a radical approach to how this could be actioned, economist and policy advisor Nicholas Gruen offers a blueprint for central banking disruption here.

API access to banks will be more common place

The movement for open data is gaining traction and more and more banks will start to provide basic API interfaces. More API first banks like Cross River will also start to emerge as they attempt to make the platform banking play ahead of the heavy footed incumbents.

Innovation around digital identity will accelerate

Without a commitment for a shared KYC platform between regulated entities, innovation in digital identity will separate the banking haves from the have-nots. Fintech startups like Hashching who embrace new digital ways to KYC new customers and find clever ways to strongly and securely authenticate customers will slash their acquisition and compliance costs, giving them a competitive edge.

Where’s the Watson of credit risk?

If the number of memes on Facebook are anything to go by, most of us are hanging out for 2016 to be over. It’s been a chaotic year across the globe – we’ve seen political upheaval in two of the world’s biggest economies, lamented the deaths of creative geniuses David Bowie and Leonard Cohen and witnessed mass displacement of civilians as a result of escalating conflict in the middle east.

As if that wasn’t enough, it hasn’t been a great year for small business online lenders either, or their backers. LendingClub’s stock is down 51 percent on the year, while On Deck Capital has fallen nearly 60 percent since January. Prominent merchant cash advance provider CAN Capital was also reported to have run into trouble with its repayment collections process, as growth in originations outstripped the ability for internal processes to keep up.

In other news, reports are surfacing that mid-prime lender DealStruck has potentially closed its doors on new business.  Crowdfund Insider reported the closure followed a failed acquisition by an unnamed ‘Utah based bank’. Ex Chief Strategy Officer Candace Klein provides an interesting autopsy here on some of the possible industry drivers for the closure, touching on the increasing competition amongst new lenders and banks for prime and super-prime borrowers, leaving the ‘too hard basket’ of the mid-prime borrowers out in the cold.

While I’m not privy to the inner workings of DealStruck, or necessarily why they decided to shut up shop, I can’t help but wonder if, like the famous Greek Sirens, the lure of lending to the underserved mid-prime business market is a shortcut to shipwreck for many? It seems even the biggest non-bank lenders with arguably the deepest pockets are still struggling to develop scalable, repeatable and dependable credit risk models that can help them scale safely and price effectively. Maybe it really isn’t as easy as everyone had hoped to turn shades of grey into black and white decisions, without human input.

Can the art of credit ever be turned into a science? Scores of fintech lenders depend on the answer to this question being an emphatic yes. But this relies on credit risk models being able to learn more adaptively, as humans would. Finding the sweet spot between the push and pull of quantitative computerised models and qualitative human based decision making is the nut that many online lenders are yet to adequately crack. We need a machine learning approach here, that moves beyond a reliance on inputs only, but learns from the mistakes and the successes to build lookalike credit decisions.

Supposedly many online lenders use machine learning today.  I’m sure there are also a large number that still rely on classical, human driven decision making, hidden beneath a slick mobile interface. While poorly executed machine learning could be worse than human driven decision making, well executed machine learning is certainly a winner on the scalability front – and that is the prize in mid-prime lending.

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.

Banking on a virtual and augmented future

This week I attended a talk by Robert Scoble and Shel Israel, the authors of The Fourth Transformation. Their latest book charts the rise of virtual and augmented reality (VR & AR), haptic technology, and the devices that will transform our experience of the world we know, not to mention those worlds we are yet to discover…

Of course, it’s hard not to put your banking and fintech hat on (or should we say techfin now, thanks to Jack Ma) and consider what viable applications of the technology would be in this space. Especially use cases that move beyond pure gimmick and add real value to everyday people like you and me.

Investment banks are dipping their toes into VR and AR as we speak. Fidelity Labs have developed StockCity, possibly the first investment app for Oculus Rift.  The app allows investors to visualise their investment portfolio as a collection of buildings. Red or green roofs indicate if stocks are down or up for the day’s trade. This video is a handy demo.

In other news, The Wall Street Journal has released a VR app on Google Daydream that allows users to visualise live market trends. While First Gulf Bank in the UAE has launched what it is claiming to be the first virtual bank branch in the world.

But where could we really go with VR and AR applications if you were trying to help consumers and business owners make better financial decisions?

Make wealth tangible for savers

One of the things that makes saving difficult is how intangible a number on a statement is. Wouldn’t it be great if you could walk into your own personal money vault and see your investments in the coin or paper denomination of your choice? With haptic technology, you could even touch and feel them!

Help people visualise the effects of wealth (or lack thereof)

While some of us have vivid and rich imaginations, for many it’s hard to understand what a future state looks and feels like. This can leave people trapped in the hamster wheel of today’s financial behaviour. Immersive experiences that help an individual experience what life would be like in various future financial positions could help someone to take action now rather than later. In the spirit of Christmas, I’m naming this the ‘Scrooge Effect’.

Getting more personal

Chatbots are great, but what about a personal banker who can visit you in your living room? Someone who remembers the last conversation you had and is on hand for a chat whenever you need it?

Benchmarking your financial health

Today it’s hard to know how you stand compared to your peers when it comes to wealth. Tangible assets like owning a house tend to be the easiest but possibly most misleading physical sign of wealth. Visualising how you stack up against your peers could help you either feel more comfortable about your progress, or could give you the insights you need to see how you are falling behind.

Banking is prime ground for VR and AR. Why? Because it’s complex, intangible, messy and difficult to navigate. So the more tools we have like these, the sooner we’ll be able to help everyday people make sense of it all. So my question is this – will the bank of the future lure new customers away from the incumbents with Oculus Rift headsets? Very possibly, and it may not be a bad acquisition strategy at all. Follow the conversation here on the Fintech Genome.

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.