Why an inflexible retirement awaits those in the ‘flexible’ gig economy

In Australia, mandatory payments by an employer of 9.5 percent of a staff member’s salary into a retirement fund has become so accepted by the vast majority of Australian workers, that many pay the scheme cursory, if any real attention at all. As a result of this steady flow of payments into the industry’s 500 or so funds, by the end of 2016, regulatory bodies claimed $2.2 trillion in superannuation assets had been accumulated, up 7.4 percent since the previous year.

Today the superannuation balance for those currently retiring is estimated to be $292,500 for men and $138,150 for women. While still considered inadequate for a comfortable retirement, as the system continues to mature then those retiring decades from today are expected to see their average balance lift considerably.

Or will they? They changing nature of work and the rise of the gig economy has many worried that the resulting shift away from permanent employment to contracting and freelancing arrangements is putting significant pressure on this stalwart of Australia’s retirement framework.

While a small number of people engage in the gig economy full time today, the number is growing. In 2015 the Grattan Institute estimated around 80,000 Australians found short-term employment via online peer-to-peer platforms. And while this number is still relatively inconsequential, the freelance economy is booming. According to a study by Upwork, an estimated 4.1 million Australians, roughly one third of the workforce, have done freelance work in the past year.

And while gig economy workers may complement their weekend odd-jobs with a 9-5 during the week, freelancers tend to rely more heavily on contract work. They are also responsible for making their own superannuation contributions – something that tends to come last in the list of financial priorities. And while some freelancers may be in a position to negotiate super contributions, for many this is not the case.

Freelancers, for the most part, can be considered self employed. And superannuation stats for self-employed workers are dire, with roughly half the amount available at retirement compared to corporate employees. The same fate seems to be awaiting those in the growing gig economy.

Regulators and industry bodies are taking note. Reports of exploitation of workers in this space are on the rise, with companies like Deliveroo and Uber under attack in a number of jurisdictions for creating contract like employment structures that remove the need for benefits, like superannuation, to be paid. With more and more younger workers moving into these ‘flexible’ roles, and with more and more traditional businesses copying gig economy models, the long term effect on retirement savings is shaping up to be profound.

These macro-economic forces present opportunities for financial product providers to solve real problems. Default retirement planning – which by and large has been successful in its current state in Australia for a workforce made up of permanent employees – will need to undergo a radical transformation. The good news is governments are starting to take notice of the changing workforce dynamics, and the impact this will have on their future budgets. As a fintech startup, being ahead of this curve ever so slightly and leveraging this national interest approach could be a powerful position to occupy. In the US, Intuit, who forecast 7.6 million American workers will operate in the on-demand economy by 2020, has done exactly this by anticipating this shift and adjusting its product to suit. There is no question other financial startups could ride this wave as well.

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.

Goldfields Money makes Australian BaaS play with Singapore’s Instarem

Listed Australian deposit taking institution Goldfields Money (ASX:GMY) looks to be making good on its intention to become a leading player in the digital banking product distribution and BaaS market in Australia, announcing last week that it had signed an MoU with Singapore headquartered remittance fintech Instarem.

Goldfields will be using a Temenos off the shelf core banking system as part of its refreshed BaaS offering.

What is interesting about the MoU is the intent to move beyond remittance towards a broader banking play for cross-border SMEs and products orientated towards visa holders visiting or living in Australia.

Given Instarem’s origin, there is no doubt the company is looking to capitalise on the ever-increasing influx of high net-worth immigrants from the Asia-Pacific region into Australia, many of whom may not be getting the best deal or banking experience from a local Australian provider. If you happen to be a migrant yourself, you’ll probably empathise with just how cumbersome and difficult it is to manage multiple banking and financial arrangements between two jurisdictions.

The two companies should have a healthy market ready to capitalise on. According to the Australian Bureau of Statistics, over the last 10 years the proportion of the Australian population born in China alone has increased from 1.2% to 2.2%, coming in just behind New Zealanders and British immigrants. Those born in India currently make up 1.9% of the population, while citizens from the Philippines, Vietnam and Malaysia collectively add up to further 2.7%.

The outflow of wealth from China, a large portion of which is making its way into the local Australian property market in Melbourne and Sydney via these immigrants, is also increasing the demand for financing solutions for those that have a mix of local and foreign income. This demand can only have increased since major retail banks tightened their requirements for offshore buyers, some refusing loan applications based solely on foreign income altogether. Recent reports suggest PE and debt firms may be looking to plug this gap. Instarem and Goldfields may or may not have aspirations here as well.

Migration isn’t going away. And the degree to which an individual’s assets are spread across countries is also on the increase thanks to globalization. Despite the protestations of certain populist politicians, it is hard to see cross-border trade regressing – economies just won’t survive under protectionism. All of which makes partnerships like these, those that remove frictions and enable business, all the more interesting to watch.

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.

How fintech startups are helping SMEs choose who they do business with

Deciding to supply services and goods to another business is probably one of the most difficult decisions for a small business owner. Without a prior relationship, it can be difficult to assess if a new supplier will pay on time.

And, as a recent survey from Xero has revealed, if they do get it wrong, it can have serious knock-on consequences.

According to Xero, 38 percent of small business owners indicate late payments cause them to delay payments to their suppliers, while 15 percent claim this often sees them delaying wage payments to staff, along with other benefits.

The stats on the effect of late or delayed payments on business longevity are also pretty dire.

62 percent of businesses would not survive more than three months if all invoices went unpaid, while nearly 25 percent wouldn’t last a month.

So it makes sense that finding ways to avoid late payment heartache before it becomes a problem is a good first step. Asking for references seems outdated in a data and API rich landscape, so therefore a data driven approach is exactly how a number of fintech startups and partnerships are looking to solve this problem.

Xero’s Live Contacts, a partnership with the local arm of credit bureau Equifax (formerly Veda) is one such data driven solution. As part of a paid-up Xero subscription, businesses can now see a credit risk indicator against a contact in their database, helping them to better assess whether to do business or not, or even risk adjust payment terms.

According to Equifax’s website the indicator represents an aggregation of data from multiple sources, including commercial credit accounts and other debts, public record information, court judgements and writs, directorship details, proprietorship details, bankruptcies, debt agreements and personal insolvency.

At the other end of the data spectrum, CreditMonk in India allows businesses to add a review of a creditor’s payment behaviour via its platform. Similar to other review based sites, a company’s profile page displays star ratings for various payment behaviour attributes and softer elements like ability to contact senior management, or the company’s ethics.

 

Obviously such databases are only useful when they are data rich – which will be the key focus for the business with its initial free offering. An article on Bloomberg Quint states the company is yet to decide how to monetise its platform, although it’s not hard to see how various revenue streams could open up in the future, should they build a robust database of reviews.

Quality control will also be an interesting one. How the platform moderates businesses solely out to skewer their competitors will be interesting. But a combination of a Xero Live Contacts and a Credit Monk like service would be interesting. Maybe we’ll see exactly that in the future. However if you know of someone doing it now, share your research in the comments below!

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.

Interview with Soul Htite of Dianrong to understand the intersection  of Supply Chain Finance and Blockchain

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Both subjects, Supply Chain Finance and Blockchain, get a lot of attention on Daily Fintech. So when we saw a solution combining them (called Chained Finance) we were intrigued. When we saw that the venture behind this initiative (Dianrong) is in China and that the Founder & CEO (Soul Htite) was a co-founder of Lending Club, we reached out to him to understand more.

I asked the questions that occurred to me. What questions should we have asked Soul? (tell us in comments).

 Soul please tell us about your professional journey and what Dianrong does?

As a technologist and entrepreneur, I’m constantly looking out for new opportunities to harness the potential of fintech to solve every day financial challenges.  This is what led me to co-found, firstly, Lending Club in the US and, more recently, Dianrong in China.

Dianrong has quickly grown into a leader in online marketplace lending in China, originating more than $300 million in monthly assets for 3.7 million retail lenders. We offer individuals and small and medium sized enterprises a comprehensive, one-stop financial platform supported by industry-leading technology, compliance and transparency.

We developed a sophisticated and flexible infrastructure that enables us to design and customize lending and borrowing products and services, based on industry-specific data and insights, all supported by online risk-management and operation tools.  Dianrong’s specific offerings include loan originations, investment products and marketplace lending solutions.

 As I understand it, Chained Finance is designed to provide financing to the vendors who are further down the supply chain. Supply Chain Finance works well today for the vendors who supply to the corporates who are investment grade. As I understand it, Chained Finance will get financing to the vendors who sell to that vendor. Can you give us an illustration about how this will work?

The complexity and scale of supply chain finance has posed major challenges in ensuring adequate funding and efficient operations.  Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility of their suppliers and the many layers of finance embedded in the process.

 Is it only one link in the chain (i.e. vendor to vendor of investment grade corporate borrower) or multiple links in the chain?

Chained Finance’s ecosystem provides a better link between supply chain operators and their vast network of suppliers.  Additionally, new loan assets generated by Chained Finance will be available to Dianrong’s 3.7 million investors, expanding the company’s portfolio of diversified investment options.

How is the credit priced? Is it based on the buyer’s credit rating (as in traditional Supply Chain Finance)? Or is it based on the seller’s credit rating as in Factoring, Receivables Financing and other SME lending?

The Chained Finance pricing model is proprietary.

 What stage is Chained Finance? Have transactions already been completed. Can you share what sort of APR % the SME companies are getting and how this compares with other SME lending?

 Chained Finance successfully completed a successful six-month pilot with FnConn, which originated US$6.5 million (RMB45 million) in high-quality loans for supply chain operators, many of whom were unable to secure needed financing in the past.

The pilot was only recently completed, so it is premature to disclose representative APR data.

Please tell us why you use blockchain technology as opposed to some other distributed database technology and a bit about the technology?

 Blockchain technology allows both lenders and borrowers to gain unprecedented control and transparency of their records.

Lenders gain greater transparency of the financial history of borrowers, enabling them to make better lending decisions. This capability enables financial institutions to lower the risk of potential bad debts and problematic financial sources.

For borrowers, the technology provides a comprehensive track record of their financial history, which increases their creditability when applying for a loan. Borrowers also have greater control over who has access to their records, because borrower data can only be obtained with their approval.  That efficiently avoids borrowers’ personal information being abused by third parties, e.g. lead generation companies.

The primary benefit of blockchain is the transparency, and thus security, of the data transacted within the system.  At Dianrong, compliance and transparency are part of our DNA. This is why we are integrating blockchain technology across our entire platform.

Is this a permissioned or permissionless system?

Permissioned.

What blockchain technology do you use (e.g. Ethereum, Hyperledger). Please tell us why you chose this technology

Chained Finance was designed to be technologically (and geographically) agnostic.  That said, Dianrong is an active participant in the Hyperledger project.

 Soul, please give us your vision of where Chained Finance could go in the future.

By harnessing the power of blockchain, the Chained Finance platform is geographically agnostic. So, while Dianrong’s initial focus is on China, where 85% of SMEs have no effective access to funding, the potential for the platform goes far beyond China’s borders.

Blockchain for supply chain finance extends to any large company that has a complex supply chain and, as such, is enormous.  The electronics, garment and auto industries are a natural fit.

Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems.

Thank you, Soul

What questions should we have asked Soul? (please tell us in comments).

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Own the heart and you’ll fix for the head in SME financial decision making

Recently I came across an interesting piece of research out of Mexico that sought to uncover the impact of financial decisions and strategy on small business competitiveness.

While the authors acknowledge weaknesses around financial data collection – a large degree of raw inputs are qualitative and survey based – the results tend to skew towards a conclusion most of us would readily come by anecdotally;

  • Companies that efficiently manage their short-term assets and liabilities are more competitive (when competitiveness is measured as time in market)
  • SMEs show little to no alignment between business strategies and financial decision making

Financial decision-making is a wide-ranging topic, but can generally be considered as being comprised of three core building blocks: working capital needs, funding options and then investment decisions. Helping a business owner make better financial decisions, especially around working capital, should be the primary concern, as according to the study (and general business wisdom) this is what leads to operational longevity.

We all know small business owners typically lack the sophisticated financial analysis techniques commonplace in larger businesses that support good decision-making on working capital allocation. Which means up until now, the obvious technology led approach to solve for this has been to somehow distil these techniques into accounting platform add-ons and apps, which automate cash flow predictions and forecasting.

And while they’re good at shining a light on the business’s cash flow problem, most tools lack the confidence and intelligence to equip them with the teeth required to make a recommendation on what decision to make next. They’re like a bridge you can only cross if you’re willing to pay an additional advisory toll.

Many of these platforms still require heavy lifting on the part of the business owner from a ‘background theory’ perspective. Which to me means there is still something relatively inelegant from a product perspective when it comes to solving for improved decision-making using these crash-course models.

Instead, could we achieve the same outcome – better decisions – by solving for other decision-making weaknesses that are indirectly related? Theory is only one part of making great decisions. Emotions play a large role as well.

A growing body of research in the behavioural sciences field suggests a number of emotional states negatively affect our decision-making ability. Financial decisions are not exclusively impacted, but they do have far reaching ramifications if we get them wrong.

So if we were to attack poor financial decision making at a micro level, by helping to create positive decision making emotional states, could we impact macro level decisions like the ones mentioned earlier? Almost certainly. Behavioural science tactics could be the path of least resistance to creating systemic changes to an SMEs financial decision making patterns.

Whether we like to admit it or not, as humans we are programmable. Not only do we have an inbuilt survival manual hard coded into our DNA, but our behaviour can also be modified by external nudges. It can be adapted to the extent that our core programming can be significantly changed – even late into our adult life. Emerging research into adult brain plasticity is proving old dogs can in fact learn new tricks.

I don’t have an answer (yet) as to how this could be realised in practical terms for SMEs, but it’s heartening to see a number of startups in the personal finance space starting to take a behavioural framework approach to core product design. The Common Cents Lab at the Center for Advance Hindsight lists a number that are worth checking out.

Most of us are familiar with our heart interrupting our head when it comes to making decisions in our personal lives. So why would it be any different in business? To put it another way, ‘Most of our mistakes, the big ones at least, are the result of allowing emotion to overrule logic. We knew the right choice but didn’t obey.’ Fix for that and maybe you’ll solve for the far bigger and messier problem in the end anyway. I’m all for the fastest and simplest way to achieve the best outcome, and, something tells me small business owners are as well.

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.

Interview with Peter Vessenes, Founder & CEO of ProfitSee

Fiscal management is one of those phrases which, as someone who does not have formal financial training, I would have once found myself nodding my head to in conversation without really understanding what it entailed. I feel OK about that, because I’m sure if I had of said the phrase ‘single-electron transfer living radical polymerisation’, the topic of my honours thesis, most people would have done the same. So quid pro quo.

However last year I did get interested in fiscal management after meeting Peter Vessenes, founder and CEO of ProfitSee, at XeroCon in Brisbane. Peter, you see, is on a mission to make fiscal management accessible and understandable to small enterprises. Using smart algorithms and AI, he and the ProfitSee team want to serve up financial insights that help drive better decision making. The types of insights once only accessible to Fortune 100 companies.

And he certainly has the pedigree to play in the space. Since 1983 he’s worked as a turn-around specialist, assisting corporates and multi-nationals with their fiscal management. Alongside that he’s also contributed to policy development in Washington and somehow managed to learn to code and author a number of books along the way.

With ProfitSee having expanded into over 6 markets globally, the big accounting firms are now coming knocking on Peter’s door in their desire to find value and returns in the SME advisory space. ProfitSee’s white label approach makes it a potential weapon in these sorts of strategies.

But the real magic is hearing Peter talk about what he does and, more importantly, why he does it. His global perspective on the SME advisory space is something no aspiring B2B fintech startup or investor should miss. So when he was in town this week, I made sure to lock him down for an interview, which you can listen to below.

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.

Interview with Tom Dunn of Orbian about the past present and future of Supply Chain Finance

 

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There are some people who do more than they tell. Tom Dunn, the Chairman of Orbian, is one of them. He has quietly built a big and profitable Fintech business that is delivering low interest finance to SMEs and better risk adjusted returns to investors. I have witnessed Tom building this business for many years, having first met him in 2013, before I started Daily Fintech. It was great to sit down with him and get his take on this interesting but often misunderstood segment of Fintech.

Fintech before it was called Fintech.

Orbian is no overnight sensation. Orbian began as a joint venture between SAP and Citibank in 1999. In short, Orbian is the offspring of Fin and Tech parents. In 2003, Orbian became an independent company through a buyout led by a group of private investors. Between 2003 and 2006, Orbian focused on being a white label provider to Citibank. In 2007, just as the financial crisis was getting started, Orbian started developing its own financing capabilities and separated itself from Citibank.

Sumitomo Bank bought a 15% stake in 2014 and offers services based on Orbian on a white label basis.

Growth as an independent business got going after the Global Financial Crisis. Orbian is another example of businesses that get their major traction in tough times.

Orbian currently operates in 60 countries (while keeping operating overheads very low because they are not having to assess credit risk) and has 73 buyer programs. Orbian targets investment grade or other corporates with high quality financials. This is not a business that aims to get financing for troubled companies.

Orbian provides supply chain finance (SCF) working capital services. They focus on the largest corporate buyers and their most important strategic vendors – what Tom calls the big intersections. They focus on a wide range from $50k pa in spend to their largest to date at around $1.1 billion pa in spend. The financing model is bank agnostic (ie anybody can be a lender).

SCF works on a simple and elegant principal. The credit is based on the Payable (not the Receivable) of the Corporate buyer (not the SME seller). Let’s say the Buyer is a AAA rated Corporate (Orbian will go as far as BBB) and an approved invoice from a Seller is being financed for 3 months. What is the risk that a AAA to BBB rated Corporate will not pay an invoice that they have approved? The risk is comparable to developed country sovereign debt, but with a much better risk-adjusted return on capital. So it works for investors, particularly in a world starved for yield for investors who don’t want to pile on the risk in the hunt for yield.

Tom pegs the SCF market today as about $50 to $70 billion pa of assets.

The results, for SMEs who have corporate customers, speak for themselves. They get an APR that is LIBOR + 1.5% for a BBB rated buyer (about 2.5% with LIBOR at 1%). Contrast that with alternatives such as Receivables Financing, or term loans through Banks or AltFi. Even better for the SME is that the lender has no recourse on the SME. That is because the investor is NOT lending to an SME. Also the seller/borrower gets 99% of the receivable amount (vs around 70-80% for factoring).

To understand how that works, one needs to dive a bit deeper into how Orbian does it. They buy the confirmed Receivable (aka Approved Payable as seen from the Buyer side) on a “true sale” basis. Orbian is not a marketplace that matches on a best efforts basis. Yet Orbian is not taking credit risk. Orbian buys the confirmed Receivable asset and send the money; financing is assured. Orbian then sells Notes secured against that payable into the Capital Markets. Investors never have to look at the SME. Investors simply look at the credit rating of the Corporate Buyer and the length of the loan and price it accordingly.

Investors can be anybody who wants high credit quality, short term self-liquidating assets priced at LIBOR Plus. Typical investors are Banks and Corporates. Orbian does not run auction processes. They experimented with that but found that it was better to manage it on a relationship basis so that investors can be confident of getting enough volume on a consistent basis. This is a market where the supply of borrowers is more of a constraint than the supply of capital.

Orbian view themselves as a financing company enabled by technology rather than a technology company with application in finance. It is a subtle difference as both models tend to converge on the same end result.

What will drive future growth?

SCF clearly works. It has been around since 1999. What I wanted to know was what will drive future growth? Tom uses one word to describe this, which is “execution”. The SCF concept is simple to understand and the technology is no longer leading edge. There are almost no barriers to entry. That has brought in many market entrants who have confused the market. What matters is:

  • Confidence from Buyers, Sellers and Lenders that they will be paid correctly.
  • Ability to onboard new Buyers quickly (a few man days max).
  • Ability to onboard new Sellers quickly (software as a service via a secure portal).

The last two points are why a third party such as Orbian does well. Many banks offer SCF and the payment part can be licensed on a white label basis. However, the last two points are about customer service and that is where banks have usually struggled. Customer service is that intricate balance of people, process and technology that Tom sums up as “execution”. It is easy to say, but hard to do.

That is why growth is now coming from corporates who have long understood the conceptual value of SCF but have struggled to realize the benefits due to weak execution.

What about Blockchain and SCF?

Tom’s team at Orbian has spent time and resources looking at Blockchain and how it could apply to SCF. There are some interesting similarities on an abstract level.  SCF and especially Orbian’s offering rely on a collaborative effort between the participants of every SCF programme they offer.  In a similar way, distributed ledger technologies rely on collaboration between participants to reach a mutually beneficial result.

Tom understands how Blockchain works and what it could do. He can see the potential application to physical supply chain and therefore to Trade Finance. However for Orbian’s business, Blockchain is not a game-changer. The SCF model does not rely on knowledge of where something is in the supply chain. The Corporate Buyer needs to worry about that, but Orbian gets involved at the point in time when Corporate Buyer has approved an invoice. By that time the Corporate Buyer must know where goods are in the supply chain.

It is theoretically possible to envisage a decentralized market without any intermediary, however there are more obviously broken markets to go after. The relative efficiency of SCF evidenced by the 150 bp spread over LIBOR means it fails the Jeff Bezos test (“your fat margin is my opportunity”).The main parties of the SCF model (the buyer, the supplier and the funders) need  Orbian to play an intermediary role. Without it, the efficient aggregation and dissemination of necessary receivable information would be impossible.

Distributed ledgers, irrespective of their permission type, rely on a network effect to both be able to reach transaction validation consensus, secure the immutability of the platform and protect it against malicious attackers.  Although some new organisation can very well develop the next Blockchain platform, if social consensus does not enable it to be adopted by the intended users, it will not succeed.

Some parts of the capital markets are hyper efficient but rely on certain constraints – such as regulation, legal jurisdiction. It is unclear that Blockchain brings a lot of value in return for all that risk.  Code-is law is an interesting concept but big hyper efficient markets don’t like experimenting with interesting concepts (translation = “unknown outcome”).

Or, as Tom Dunn puts it, execution matters.

Orbian is not following the Bank’s lead in spending $ millions on Proof Of Concept projects. They prefer to analyse the risk/reward on a fundamental basis and for them today Blockchain falls into the watch and wait category.

What markets have been early adopters of SCF?

Markets that are active include:

  • Industrial Manufacturing
  • Transportation
  • Food
  • Renewable Energy

Markets that are less active than anticipated are Services and Government Sectors.

What global corridors are the most active in SCF?

The biggest market today is US domestic i.e. US to US trade. While there is a lot of attention on cross border trade, the market today is primarily domestic and follows GDP – so after America come markets such as Germany, UK and China. While supply chains are global, the last link to an investment grade corporate buyer, is more often domestic.

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