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.

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.

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.

Why having no customers could be the best thing for your fintech startup

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In Malcolm Gladwell’s book “David and Goliath: Underdogs, Misfits, and the Art of Battling Giants”, Gladwell asks his readers to reframe the classic biblical battle of David and Goliath. Rather than say David won despite his disadvantages in height and size, he argues David’s disadvantages should rather be seen as direct advantages, they’re just not as obvious. He argues there is a fundamental psychological difference to viewing the world in this way that as humans and entrepreneurs, we shouldn’t ignore.

The ultimate purpose of Gladwell’s book is to parallel David and Goliath’s battle with that of entrepreneurship in the face of incumbents. No more so is this evident than in the realm of challenger banking.

So, taking Gladwell’s approach, if you were to start a challenger bank from scratch, what is one classic disadvantage that could be reframed into an advantage that in fact gave you more than a fighting chance?

An obvious one is that banks have customers while challenger banks and fintech startups have none

Many fintech startups consider partnering with banks as the swiftest route to market, mainly because of the existing customer base that can be tapped into. Given the option to become a bank or not themselves, this can be a big consideration to weigh up.

Of course there are plenty of other concerns, like compliance overheads and capital requirements – and these are not trivial by any means. But from a strategic go to market perspective, the opportunity to co-market and have your products pushed to new customers by a bank’s marketing and sales teams looks like a great deal – on paper.

To challenge this obvious advantage, my suggestion is to consider the following:

  • How energised and engaged is a banks customer base today and do they really trust the messenger?
  • Are banks effective at distributing the products they already have? And if not, what makes you think your product will fare better?
  • How many people, from how many different banking divisions are going to have to get into a room to agree on a distribution strategy for your product? And, if it eats away at their business line’s margin, how will you prevent them from sabotaging it?

Executive buy-in into fintech partnerships is one thing, mobilising a bank’s troops around a common goal is another. We’ve already seen this flounder massively in the push for banks to become more accountable through business lines when it comes to acting in a customer’s best interests from an ethical standpoint. Intent versus execution has been a gap you could drive a truck through. Wells Fargo is the latest to spring to mind.

Flipping this around as a challenger bank, it’s interesting to throw around how you could use your perceived disadvantage of not having customers to your advantage.

  • You can create energy and enthusiasm around your products and vision, rather than spend marketing efforts trying to re-energise a jaded customer base
  • Not having customers allows you to only choose profitable customers you want on your books, not those you don’t
  • You can have complete creative control over your distribution strategy, rather than be locked into some archaic commissions driven hierarchy within a bloated, unproductive sales team
  • If something isn’t working, you can move fast. I challenge any non-challenger bank to deliver on that one in a fintech partnership

There are stories of fintech startups who tried the challenger banking route and quasi-failed, like Tungsten in the UK. And these lessons should be learned from – Bernard covers some of them here in this post from 2015.

Having the ability to look through a disadvantage to see its possible advantage cuts across all aspects of building a successful fintech business. This includes product design, pricing, sales and marketing.

As Jack Ma, founder of Alibaba famously said when he decided to take on online shopping behemoth eBay, “eBay is a shark in the ocean. We are a crocodile in the Yangtze. If we fight in the ocean, we will lose. But if we fight in the river, we will win.”

And if Alibaba’s estimated market cap of $237 billion is anything to go by, let that be a lesson.

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.

Scaling a challenger bank from the back to the front

Challenger banks start from a pretty grim position – most of them don’t have any customers. So how are they scaling? Well, whatever they do, it’s important they consider the word scale from both a backend operational perspective and a frontend on-boarding perspective.

My view is the most brilliant challenger banks won’t look at either in isolation. In today’s world, scaling a challenger bank relies even more on the tech at the frontend working hand-in-hand with the tech at the backend. If they don’t, then what is promised won’t be delivered. And with switching bound to become easier and more prevalent amongst consumers and businesses, failing to execute here will be a challenger banking death knell.

Scaling the backend – the engineers view of the world

I’m not an engineer, but I’m around them enough at Tyro to know that a microservices approach is helping unlock scalability at the backend.

For the uninitiated, microservices allow companies to build software applications made up of many individually developed components. Proponents of the architecture point to the increased resilience of the overall application – should one component fail it can be replaced, without the need to redevelop the application as a whole.

Challenger bank Monzo (formerly known as Mondo) in the UK are fairly vocal about their use of microservices in the technology stack. Anyone interested in learning about their story should read Building a Modern Bank Backend.

Tyro in Australia are also big microservices advocates. Graham Lea talks about Tyro’s journey in Microservices at Tyro: An Evolutionary Tale.

Microservices champions also point to the fact they are truly reengineering the banking core, rather than prettying up the UX only. This is not a trivial matter, as only when you attack the core and its native extensibility can you actually build product that is truly disruptive and different.

A must read from Dave Tongue on this topic can be found on Medium. His article, ‘Why Mondo will blow Atom out of the water’, takes a look at the UX-ing banking approach verses the re-imagined backend approach when comparing these two challenger banks side by side.

The reality is, no one knows the future, or what services banks will need to build to remain relevant. So building what you think people will want in 5 – 10 years is redundant. Instead, you’re better off building a stack on which you can respond to what people want and need as it arises. Today microservices is one of the best shots you have of being able to achieve this.

Scaling the front end – the on-boarding approach

Scaling at the front end can’t ignore the unavoidable reality of banking – KYC and risk assessment. Today many banks are unprepared to do anything with a customer until they are fully KYC’d and they meet a minimum risk benchmark. This can create a high barrier to full product adoption and the banking equivalent of ‘cart abandonment’.

Smart challenger banks might look to offer lightweight versions of their services or products depending on the degree of KYC achieved and/or the customer’s risk profile. If the backend (which stores this information) is dynamic and in-sync with the front end (which on boards customers), then a truly reimagined banking experience can be delivered to a prospective customer.

Dreaming up fabulous marketing campaigns isn’t hard. On-boarding is. If challenger banks are weak here, then an on-boarding bottleneck will become the biggest throttle on growth.

For me the biggest ethos change that challenger banks will herald is that customers will come to expect banks to deliver products that truly serve their owners. Products that serve up helpful information in a timely manner, and that respond dynamically to economic environmental changes in a consumer or business owner’s life. But shifting market expectations means challenger banks need to scale fast in order to move the ethos needle and force the hand of incumbents to up their game. Not all challenger banks will win in this regard. But those with a laser like focus on making scale a core feature of all their systems will be in a good position to outrun their competitors.

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.