Digital Disruption – Page 39 – Digital Finance Analytics (DFA) Blog

Bitcoin’s Bumpy Ride

Having reach a high against the US$ of more than $2,800, Bitcoin has now fallen substantially.

The virtual currency reacted to the news that India may be inclined to recognise Bitcoin as a currency, but then fell significantly. There are reasons why bitcoin could thrive in a country like India.

This article from Business Insider explains:

At 1.32 billion, India’s population may have already taken over China’s – making it the most populous country in the world. According to a study by PricewaterhouseCoopers’, at least a whopping 233 million Indians still don’t have bank accounts.

Although due to demonetization (a government’s move that got rid of 86% currency notes in circulation) and under Prime Minister’s Jan-dhan Yojna (an initiative to open bank accounts for every Indian household), a lot of people have managed to get their bank accounts, but that number is far from 200 million mark.

Ironically, India has one of the largest remittance markets in the world with a total value of close to $70 billion. On every transaction, an average user pays up to 15% in bank charges and conversion fees.

Bitcoin provides a solution to India’s underlying problems. The digital currency can be used to move money inexpensively across borders within a matter of minutes without ever having a bank account. It’s important to note that lately bitcoin adoption is taking over its network capacity, leading to delay in transactions and very high fees (more on this later).

How does it work?

Every transaction on the bitcoin network is recorded on a public ledger called blockchain . Each blockchain has three parts; its identifying address (of approximately 34 characters), the history of who has bought and sold it (the ledger) and the private key header log – where a sophisticated digital signature is captured to confirm every transaction for that particular Bitcoin file.

All the trades that happen on the bitcoin network are publicly disclosed, with each participant’s digital signature attached to the Bitcoin blockchain as a confirmation. These trades can be found at blockchain.info .

What this means is that bitcoin transactions are not completely anonymous. People can see history of your bitcoin wallet, which is great for transparency and security. It also helps deter people from using bitcoins for illegal purposes.

With each new ledger update, some new bitcoins are minted. The number of bitcoins created in each update are halved every 4 years. This will go on till 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million.

The block size controversy

The debate on whether or not to increase the block size has been going on for a few years now. It is clear that the bitcoin network is a bit clogged up at this point and something definitely needs to be done to scale the network in order reduce the transaction fees and time.

At present bitcoin network can achieve 7 transactions per second. To put this in context, Visa says its payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second if needed.

Every transaction on the blockchain is verified by miners who use computing power to solve increasingly complex mathematical equations, which comes in “blocks” and are mined about every 10 minutes. Since these blocks are capped at 1MB, they can record just seven transactions per second, at most.

The average time it takes for a bitcoin transaction to be verified is around 50 minutes, but some transactions can even take days. If you add a small fee to your transaction, it bumps that transaction up in the queue, meaning that those who didn’t pay such a fee may have to wait more.

This has led bitcoin supporters to split into two groups; Bitcoin core (aka the developers) and Bitcoin Unlimited (aka the miners). They both have different scaling proposals, BIP 148 and Segwit2x respectively.

On August 1, 2017 the fate of bitcoin will be decided. Bitcoin core is going to go ahead with its user-activated soft fork (UASF) that would seek to push SegWit (Segregated Witness) live without explicitly asking miners for their support in order to make the blocks more efficient without increasing their size.

Meanwhile, SegWit2x, plans to pair SegWit with a 2 MB block-size increase, boosting transaction capacity further by tweaking the bitcoin’s underlying rules.

If everything goes according to plan, users will be able to start running SegWit2x on 21st July. Similarly, BIP 148 will be triggered on 1st August. There are fears that this collision could possibly split bitcoin into two with entirely different networks.

In a nutshell, this is how it will go: if the users’ fork has below 50% of hashing power, then there will be two branches; a user’s fork and a miner’s fork. If at some point users’ fork gains more hashing power and has longer chain than the miners’ fork, this is where UASF as a soft fork comes into play. The miners’ fork is then completely wiped out – replacing all the blocks on the miners’ fork with users’ fork.

If majority of miners go with Bitcoin Unlimited and decide to mine blocks bigger than one megabyte, while some users stick to the current bitcoin protocol, the network and blockchain can split in two – resulting in two different types of bitcoin tokens: “BTC”, which follows the current protocol and “BTU”, which follows the new protocol.

Pro tip : Whichever way this goes, if you hold bitcoin, make sure you control your private keys and avoid any transactions shortly after the split.

India’s take on bitcoin

On November 8, prime minister of India announced demonetization of Rs. 500 and Rs. 1000 rupee notes (86% of country’s currency notes in circulation). This move was not only to curb black money problems in the country, but also to push people to go digital and use online wallets instead of cash.

After demonetization India saw a rise in bitcoin demand like never before. For the first time premium on Indian exchanges crossed $300, leading to many arbitrage opportunities.

Hundreds of articles started pouring in claiming that the bitcoin price rally was fueled by demonetization, but Sandeep Goenka, founder of Zebpay, India’s largest bitcoin exchange, had later argued that there was no such link. He said, “This is because India has a negligible share in the bitcoin industry. For the international bitcoin community, demonetisation was yawn , a non-event”.

According to him the price rally that India saw was because of global bitcoin price touching an all time high, but people in India mistakenly related that to demonetization.

What about the premiums though? Why did they skyrocket?

Sandeep said, “Yes, in India the prices were at a premium above international prices but this is common. It happens all the time when the US$ price increases due to low liquidity in Indian markets. The premium on prices had increased sharply even in mid-June, which was the previous major bitcoin price rally.”

The Indian government is in the midst of deciding whether or not to regulate bitcoin. In the past, there have been multiple warning from the government and central bank asking people to stay cautious of virtual currencies, emphasizing they are not regulated by the RBI (Reserve Bank of India).

With the explosive growth that bitcoin has seen since the beginning of 2017, government seems to be reconsidering their stance on bitcoin. Earlier this year, India’s Ministry of Finance (FinMin) established an interdisciplinary committee to study the legal framework surrounding virtual currencies.

Recently FinMin also sought public opinion on virtual currencies after stating that ‘the circulation of Virtual Currencies which are also known as Digital/CryptoCurrencies has been a cause of concern’.

Local reports from India hint at government is already in the process of preparing norms for the regulation of virtual currencies. All signs point toward the government legalizing and taxing bitcoin and other virtual currencies. A ban on cryptocurrencies like bitcoin is highly unlikely and would be counter-productive to government’s own “go cashless” agenda.

While on one hand government is looking to regulate bitcoin, on the other it is actively keeping a close eye on businesses dealing with bitcoin and cracking down on illegal bitcoin activities .

Conclusion

In India bitcoin is far from mainstream. The daily volumes of local bitcoin exchanges are negligible as compared to exchanges in China and the US.

That being said, after demonetization, interest in bitcoin has definitely gone up. More people want to know about bitcoin. Young generation in particular is getting attracted towards the cryptocurrency.

Bitcoin has the potential to thrive in developing countries, but not if transaction fees are higher than the living wages. The whole point of having bitcoin in the first place is to transfer money quickly from one address to another with bare minimum fees.

If bitcoin manages to scale, keeping its core principles intact, there is nothing that can stop it from prospering in the developing world and beyond.

REA Group to acquire a majority stake in Smartline

From Australian Broker.

REA Group announced today that realestate.com.au has entered into an agreement to acquire a majority stake in mortgage broking franchise business, Smartline and has also entered into a strategic mortgage broking partnership with National Australia Bank (NAB).

Smartline is a leading Australian mortgage broking franchise group with over 300 advisers nationally, settling more than $6bn in loans annually with a total loan book of approximately $25bn. realestate.com.au will acquire an 80.3% stake in Smartline, with the remaining 19.7% shareholding to be retained by the existing management team. This team will continue to be led by executive director and co-founder Chris Acret and will operate under its current structure and brand.

The purchase consideration of $67m will be funded from existing cash reserves. The minority shareholders hold a put option to sell the remaining 19.7% of shares which can only be exercised after three years, at a price dependent on the financial performance of Smartline. If not exercised, REA will acquire the remaining shares at the end of four years. The transaction is expected to complete in late July 2017.

realestate.com.au and NAB have also agreed to build a mortgage broking solution which adds to the strategic partnership announced in December 2016 to create an Australian-first end-to-end digital property search and financing experience. To help achieve this, NAB will provide an opportunity for its Choice Home Loans brokers to join this new broking solution.

The strategic partnership with NAB enables REA to offer a realestate.com.au broking service at the launch of realestate.com.au Home Loans later this year. The acquisition of Smartline will give the REA Financial Services segment greater scale and capability for the long term.

With an average monthly audience of 5.9 million, realestate.com.au has the largest audience of property seekers in Australia. This investment and partnership further strengthens REA’s move into financing, an integral part of buying a property. The home loan market in Australia is worth approximately $400bn a year, of which more than 50% are obtained through mortgage brokers. The share of mortgages originated through broker channels continues to increase.

It is expected that REA’s entire Financial Services segment will contribute revenue, net of broker commissions, of between $26m to $30m and EBITDA between $7m to $11m in FY18.

REA group CEO Tracey Fellows commented: “Building a strong presence in the broker market channel is an important part of our financial services strategy. These investments allow us to enter a new market with two of the industry’s most trusted and successful mortgage broking operations.

“Providing a broker solution will complement the digital search and finance experience we are building in partnership with NAB on realestate.com.au. It’s about giving people greater choice when selecting the right home loan for them, ” said Fellows.

Smartline executive director and co-founder, Chris Acret commented: “This investment is a great strategic fit for both businesses. It’s born from a shared vision to build a market-leading home loan offering, marrying our trusted network of brokers with realestate.com.au’s leading digital capability.”

Fintech small business lenders support research survey

New research will aim to establish current trends and best practice in the growing fintech lending market to small and medium-size enterprises (SME).

Fintech small business lenders will be surveyed as part of a collaborative research project by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) with industry organisation FinTech Australia and independent SME finance expert Neil Slonim from theBankDoctor.org.

Fintech lenders are an emerging alternative to banks for small business loans, often through seamless and highly automated online application, assessment and decision processes.

Ombudsman Kate Carnell said fintech lenders have potential to fill the gap left by traditional bank lenders in the marketplace, particularly as awareness, trust and confidence in alternative lending grows.

Ms Carnell commended the sector for being proactive to ensure best practice and transparency.

“But with rapid growth in the number of lenders and the variation of fintech products, it becomes more difficult for SMEs to make informed decisions about which products and lenders best suit their circumstances,” Ms Carnell said.

“The survey will collect information from fintech lenders that can shed light on some of these issues.

“Results will be published in a report to identify industry best practice and help SMEs to better understand their fintech borrowing options.

“The survey results will also inform fintech lenders how they can help SMEs by improving the transparency of their lending products and by clearly communicating the rates, costs, terms and conditions of their products.”

FinTech Australia CEO Danielle Szetho said FinTech Australia was pleased to work with the ASBFEO and theBankDoctor.org.

“This work will help us to understand how the industry is currently servicing SMEs and steps we might take as an industry to improve the SME community’s awareness and understanding of alternative lending products,” she said.

“What is clear is that banks have not been adequately servicing the SME community’s needs and fintechs have stepped in with new loan products to help fill that gap.

“This is proving to be a very beneficial and cost-effective source of funding for SMEs. This research will help even more SMEs to invest in their growth and benefit from alternative lending products.”

Neil Slonim from theBankDoctor.org said “it is not easy for small business owners to assess whether borrowing from a fintech lender is the best option for them, and if so, which lender they should choose.

“There are around 30 fintech small business lenders now operating and their websites, through which they engage with their customers, all appear to be much the same.

“As a not-for-profit SME advocate we are pleased to be working with the ASBFEO and FinTech Australia to raise understanding and transparency in a sector which is becoming increasingly relevant to small business owners.”

Japan and Australia cooperate on fintech

The Japan Financial Services Agency (‘JFSA’) and Australian Securities and Investments Commission (‘ASIC’) today announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia.

This Co-operation Framework recognises the global nature of innovation in financial services. In this environment, this Framework enables the JFSA and ASIC to share information and support the entry of innovative fintech businesses into each other’s markets.

This Framework will help open up an important market for Australian fintechs. The Japanese economy is the third largest in the world, with services – including financial services – accounting for about three quarters of GDP.

In recent years, the JFSA has been actively involved in encouraging fintech through a range of measures including the modification of the legal system to enable financial groups to invest in finance-related IT companies more easily and establishing a legal framework for virtual currency and Open API. This Framework will encourage Japanese fintech start-ups to engage with innovative financial businesses globally.

ASIC Commissioner John Price said, ‘Japan has been a world leader in technology for a long time. As we move into a new era of financial regulation, we look forward to sharing experiences and insights with our colleagues at the JFSA.’

Shunsuke Shirakawa, JFSA Vice Commissioner for International Affairs, said, ‘We are delighted to establish this Co-operation Framework with ASIC. ASIC is one of the leading Fintech regulators that actively promote fintech by taking progressive actions including setup of the Innovation Hub.

‘We believe that this Framework further strengthens our relationship and facilitates our co-operation in further developing our respective markets.’

The Co-operation Framework will enable the JFSA and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and the JFSA’s FinTech Support Desk.

It also provides a framework for information sharing between the two regulators. This will enable the JFSA and ASIC to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions, and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.

A formal ‘Exchange of Letters’ ceremony between Australian Ambassador to Japan, the Hon Richard Court AC and State Minister of Cabinet Office, Takao Ochi, took place in Tokyo today to seal the Framework.

This Co-operation Framework further underlines the strength and closeness of the broader Australia-Japan trade and investment relationship.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been made with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority, Ontario Securities Commission and Hong Kong’s Securities and Futures Commission. In addition, information-sharing agreements have been signed with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

Informally, ASIC has also met with numerous international fintech businesses referred to us by industry or trade bodies, including delegations from the United Kingdom and the United States.

Awareness Proving The Toughest Hurdle For Aussie Alt-Lenders

From Pymnts.com

Australia’s market for small- and medium-sized enterprises (SME) is by no means easy. The nation is grappling with a late supplier payments problem and with regulators looking to accelerate corporate payments to SMEs, though with limited expectation for the efforts to work.

But that presents an opportunity for alt lending, analysts say, as do tighter restrictions on traditional banks that may guide SMEs toward alt-fin, as they look to ease their cash crunches.

It seems an ideal climate for the alternative lending industry, but news of an analysis from Moula and Digital Finance Analytics this week finds awareness of these options is lacking among small business owners.

In their Disruption Index report, released quarterly, Moula and Digital Finance Analytics (DFA) scored Q1 2017 at 38.39, a 6.1 percent increase from Q1 2016. But the report said this represents only “gradual change” among small businesses in terms of their awareness of alternative lending options.

“There is still a certain air of skepticism about non-traditional forms of lending,” said DFA Principal Martin North in an interview with Australian Broker. “So SMEs who need to borrow tend to still go to the normal suspects. They’ll look to the banks or put it on their credit cards.”

He added that this means the alternative finance industry has to work harder to boost awareness and promote education.

“I think the FinTech sector has a terrific opportunity to lend to the SME sector, but they haven’t yet cracked the right level of brand awareness,” North continued. “Perhaps they need to think about how they use online tools, particularly advertising to re-energize the message that’s out there.”

There certainly is a market for alternative lenders to fill in the funding gap for small businesses.

Earlier this year, Australia’s Small Business and Family Enterprise Ombudsman Kate Carnell began naming some of the worse offenders of late supplier payments, including Kellogg’s and Mars, likening their delayed invoice payment practices to “extortion.” With the Council of Small Business Australia, regulators began to take a harsher stance on late payments, and in May, the voluntary Supplier Payment Code, which sees companies vowing to pay suppliers on time, came into effect.

As regulators consider whether to create fair supplier payment practice legislation, small businesses in the country continue to struggle: Research from American Express Australia and Xero released in April found nearly a third of the invoices in the cloud accounting platform can’t be reconciled every month because they’re waiting to be paid.

Meanwhile, Australian Broker reported, regulators are imposing stricter rules on traditional banks that may see them back even further away from small business borrowers. Plus, Moula and DFA’s report found, small business demands on their financial service providers are on the rise. According to their report, SMEs say a loan application should take, on average, less than five days to see final approval. Alternative lenders take an average of 36 hours, the report found.

The data suggests alt lending can meet some of the demands among SMEs for working capital and faster lending services.

“FinTechs like Moula are at the quick end, but a lot of the traditional lenders such as the major banks take a lot longer,” North continued. “What this is saying is that if the expectations of SMEs point to quick approval times and if the major players aren’t able to do that because of their internal systems and processes, then there is an interesting opportunity for the FinTechs who can do it quicker. They can actually disrupt [the industry].”

According to North in a statement found within the report itself, awareness levels among SMEs are gradually rising.

“In the last three months, we have seen a significant shift in attitudes among SMEs as they become more familiar with alternative credit options and migrate to digital channels,” he said. “The attraction of online application, swift assessment and credit availability for suitable businesses highlights the disruption which is underway. There is demand for new services and supply from new and emerging players to the SME sector.”

Indeed, while awareness is on the rise, it’s still relatively low. In Q4 of 2016, Moula found that just 14.1 percent of SMEs surveyed said they are familiar with their alternative finance options.

“So, what’s the barrier to growth?” North reflected to Australian Broker. “It’s not technology or demand from the SME sector. The barrier to growth is awareness and the willingness of SMEs to commit to this particular new business model.”

Fintech: Capturing the Benefits, Avoiding the Risks

The IMF have published a paper on Fintech. From artificial intelligence to cryptography, rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers, and regulators alike. This paper reviews developments in this new wave of technological innovations, often called “fintech,” and assesses their impact on an array of financial services. Given the IMF’s mandate to promote the stability of the international monetary system, it focuses on rapidly changing cross-border payments.

Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape. The key findings include the following:

Boundaries are blurring among intermediaries, markets, and new service providers.
Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition.
Trust remains essential, even as there is less reliance on traditional financial intermediaries, and more on networks and new types of service providers.
Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.

Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary. Policymaking will need to be nimble, experimental, and cooperative.

When you send an email, it takes one click of the mouse to deliver a message next door or across the planet. Gone are the days of special airmail stationery and colorful stamps to send letters abroad.

International payments are different. Destination still matters. You might use cash to pay for a cup of tea at a local shop, but not to order tea leaves from distant Sri Lanka. Depending on the carrier, the tea leaves might arrive before the seller can access the payment.

All of this may soon change. In a few years, cross-border payments and transactions could become as simple as sending an email.

Financial technology, or Fintech, is already touching consumers and businesses everywhere, from a local merchant seeking a loan, to the family planning for retirement, to the foreign worker sending remittances home.

But can we harness the potential while preparing for the changes? That is the purpose of the paper published today by IMF staff, Fintech and Financial Services: Initial Considerations.

The possibilities of Fintech

What is Fintech precisely? Put simply, it is the collection of new technologies whose applications may affect financial services, including artificial intelligence, big data, biometrics, and distributed ledger technologies such as blockchains.

While we encourage innovation, we also need to ensure new technologies do not become tools for fraud, money laundering and terrorist financing, and that they do not risk unsettling financial stability.

Although technological revolutions are unpredictable, there are steps we can take today to prepare.

The new IMF research looks at the potential impact of innovative technologies on the types of services that financial firms offer, on the structure and interaction among these firms, and on how regulators might respond.

As our paper shows, Fintech offers the promise of faster, cheaper, more transparent and more user-friendly financial services for millions around the world.

The possibilities are exciting.

Artificial intelligence combined with big data could automate credit scoring, so that consumers and businesses pay more competitive interest rates on loans.

“Smart contracts” could allow investors to sell certain assets when pre-defined market conditions are satisfied, enhancing market efficiency.

Armed with mobile phones and distributed ledger technology, individuals around the world could pay each other for goods and services, bypassing banks. Ordering tea leaves from abroad might become as easy as paying for a cup of tea next door.

These opportunities are likely to reshape the financial landscape to some degree but will also bring risks.

Intermediaries, so common to financial services—such as banks, firms specialized in messaging services, and correspondent banks clearing and settling transactions across borders—will face significant competition.

New technologies such as identity and account verification could lower transaction costs and make more information available on counterparties, making middlemen less relevant. Existing intermediaries may be pushed to specialize and outsource well-defined tasks to technology companies, possibly including customer due-diligence.

But we cannot ignore the potential advances in technology that might compromise consumer identities, or create new sources of instability in financial markets as services become increasingly automated.

Rules that will work effectively in this new environment might not look like today’s rules. So, our challenge is clear—how can we effectively build new regulations for a new system?

Regulating without stifling innovation

First, oversight needs to be reimagined. Regulators now focus largely on well-defined entities, such as banks, insurance companies and brokerage firms. They may have to complement this focus with more attention on specific services, regardless of which market participants offers them. Rules would be needed to ensure sufficient consumer safeguards, including privacy protection, and to guard against money laundering and terrorist financing.

Second, international cooperation will be critical, because advances in technology know no borders, and it will be important to keep networks from moving to less regulated jurisdictions. New rules will need to clarify the legal status and ownership of digital tokens and assets.

Finally, regulation should continue to function as an essential safeguard to build trust in the stability and security of the networks and algorithms.

The launch or our paper today is one of the steps in the process of preparing for this new digital revolution. As an organization with a fully global membership, the IMF is uniquely positioned to serve as a platform for discussions among the private and public sectors on the rapidly evolving topic of Fintech.
As our research shows, adapting is not only possible, but it is the only way to ensure that the promise of Fintech is enjoyed by everybody

Price hikes in Ether and Bitcoin aren’t the signs of a bubble

From The Conversation.

When there is a rapid growth in any of the crypto-currencies and assets such as Bitcoin, Ether, Zcash and others, many will call it out as a bubble. Indeed, on a relatively short time scale it clearly looks like a bubble.

The entire crypto-currency market capitalisation currently stands at around US$100 billion; it was US$60 billion one month ago. But Bitcoin was worth 1/100 of a US cent in June of 2009, 7 cents in June 2010, and US$7 in June of 2012.

Recently all eyes were on Ether. Over a 90 day period, Ether appreciated twice as quickly as Bitcoin did in late 2013, when Bitcoin crashed to around 35% of it’s highest value. Aside from the 2013 crash, Bitcoin has experienced smaller crashes many times since, but is now worth double its 2013 high.

In the longer term, these are fluctuations around a strong growth trend. Crashes will cause some to abandon the field. But signals of longer term growth in these crypto-currencies and assets point to a possible emergence of a new type of market, through the building of a new economic infrastructure.

Ether is the token of the Ethereum blockchain, a platform that runs “smart contracts” through a distributed online ledger that records transactions. It’s second only to the crypto-currency Bitcoin in price. Some believe it will one day overtake Bitcoin (a process dubbed “The Flippening”).

Price hikes not the sign of a bubble

Fundamental aspects of the technology that underpins crypto-currencies and assets are causing people to re-imagine, and then enact, new ways of creating and exchanging value online.

The key difference between Bitcoin and Ethereum is that you can use Bitcoin for payments, but you can use Ether to automate any number of processes using smart contracts.

While many use cases for Ethereum are still at the proof-of-concept stage, it is now attracting the attention of major banks, businesses and governments, all interested in the potential of the technology to provide greater efficiency and transparency in transactions. That normalisation has collapsed the implicit risk premium attached to this technology.

Venture capitalist Albert Wenger describes the current activity in crypto-currencies and assets as “fat protocol investing”. To explain what this is, take the example of the underlying internet and web protocols (TCPI/IP and HTTP), used to build and run websites. These are not able to store value – therefore they are “thin protocols” in Wenger’s terminology. So instead, people invest in companies that make software (applications) and hardware that rely on these protocols.

Companies such as Google and Facebook made a fortune by collecting and storing data generated by users through their online interactions. Meanwhile, users, and the developers who created internet and web protocol, received nothing in return. Blockchain is a “fat protocol” because it can be monetised, including incentives for developers but also for users. For example, the creator of JavaScript and co-founder of Mozilla Brendan Eich, recently released an Ethereum-based web browser through which users can be paid for the attention they give to advertisements.

What is making crypto-assets and currencies appear bubbly is the way in which many of these new platforms and applications have raised money through what are called initial coin offerings. An initial coin offering (a word play on ‘initial public offering’) is a mechanism by which developers sell the tokens associated with their platform to the public. Depending on the structure of the offering, buyers can usually then trade the tokens, creating secondary markets. As the founder of Ethereum, Vitalik Buterin, has noted, no-one has figured out the right model for these offerings.

This could be due to the immaturity of the Ethereum platform and ecosystem (which started development in 2013 and went live only in 2015). What we’re observing here is a new economic infrastructure being built and coming online. In tweets on Tuesday, Buterin distanced himself from initial coin offerings, stating he would no longer agree to be an advisor.

So while the current speculation in crypto-assets should make us pause, this is not speculative like tulips, or gold mining stocks. It is speculative like building a new city, in that infrastructure needs to be developed first before you get to see who moves there.

A further point to note is that investment bubbles are actually useful and important mechanisms for building new technologies because of the way they concentrate speculative resources on a new technology to facilitate exploration.

There is an enormous effort proceeding to building new crypto businesses and infrastructure on the Ethereum platform. If this platform does indeed begin to carry large parts of the global economy as predicted by Deloitte, a business consultancy, then it’s still massively undervalued.

These comments should not be construed as offering personal financial advice.

Authors: Jason Potts, Professor of Economics, RMIT University; Ellie Rennie, Principal Research Fellow, RMIT University

Awareness key barrier to SME lending growth

From Australian Broker.

While tighter banking restrictions have forced more small and medium enterprise (SME) borrowers towards non-bank lenders, a lack of awareness is still hindering real growth within the sector.

The Disruption Index, which has been jointly developed by small business lender Moula and research and consulting firm Digital Finance Analytics (DFA), puts the score for Q1 2017 at 38.39, which is 6.1% higher than the score of 36.18 recorded in the same time period a year ago.

Despite this, only gradual change has been made to grow awareness amongst SMEs about these alternatives. Looking at evidence on small business knowledge about non-bank lending – such as payments received to non-bank lenders, credit enquiries at credit bureaus, etc – 11% of all data sets reviewed showed use of these lending options. This is the first time the level has risen above 10% since the index was started.

“There is still a certain air of scepticism about non-traditional forms of lending, Martin North, principal of DFA, told Australian Broker. “So SMEs who need to borrow tend to still go to the normal suspects. They’ll look to the banks or put it on their credit cards.”

Because of this, the fintech sector still has a significant job to do in raising awareness about different viable alternative funding options that exist especially since this is a fairly new sector, he said.

“It’s a new type of lender so it takes time to build brand awareness. The other thing is that the approach of applying online and fulfilling online for the SME sector is also quite new and different.”

“I think the fintech sector has a terrific opportunity to lend to the SME sector but they haven’t yet cracked the right level of brand awareness. Perhaps they need to think about how they use online tools particularly advertising to re-energise the message that’s out there.”

The data also showed SMEs are becoming more demanding of the financial services providers, with the expectation that loan applications should take an average of 4.8 days to the final approval.

It seems fintechs are coping with this added demand however, with the Index recording an average loan time of 36 hours. This is slightly longer than the previous quarter’s findings due to added public holidays and school holidays in April.

“Fintechs like Moula are at the quick end but a lot of the traditional lenders such as the major banks take a lot longer,” North said. “What this is saying is that if the expectations of SMEs point to quick approval times and if the major players aren’t able to do that because of their internal systems and processes, then there is an interesting opportunity for the fintechs who can do it quicker. They can actually disrupt.”

Maintaining the status quo was not an option for the major financial institutions because of this added expectation, he added.

“SMEs are looking for quicker, faster responses and there are players out there who can actually deliver.”

“So what’s the barrier to growth? It’s not technology or demand from the SME sector. The barrier to growth is awareness and the willingness of SMEs to commit to this particular new business model.”

The Disruption Index itself examines a number of elements, some of which come from DFA’s survey data of SMEs and others which come from Moula’s analysis of their own experience lending to the small business sector.

“We score each of those elements and essentially we run an algorithm. Each of them has a score between the various elements that’s not weighted individually. We then add them up and that give us a total score. What this is trying to do is put a finger on the pulse of what SMEs are up to and to what extent SMEs are actually aware of fintechs as an alternative funding source,” North said.

Fintech Disruption of SME Continues

The latest edition of the Disruption Index which tracks change in the small business lending sector, and more generally, across financial services has been released. The latest score is 38.39%

The Financial Services Disruption Index has been jointly developed by Moula, the lender to the small business sector; and research and consulting firm Digital Finance Analytics (DFA).

Knowledge of Non-bank Financial Providers

Further to the Business Data observation, we are seeing actual evidence of SME awareness of alternate financial offerings through data (eg. evidence of payments received from and made to alternative lenders; credit enquiries at the credit bureaus). At 11% of all data sets reviewed this quarter (above 10% for the first time), this appears to be forming a continuing, upwards trend.

Service Expectation

SMEs are becoming more demanding of their financial service providers, as we continue to see a collapse in their expectation of how long it should take for a loan application through to a decision. The latest data shows this number is below 5 days for the first time… at 4.8 days.

Business data in the cloud

SME’s continue to show a willingness to provide electronic data access in return for access to credit, with this quarter’s % of SME’s increasing to 16.2% from last quarter. It feels we are almost now at a tipping point, where businesses are moving into the ‘comfortable’ range in permissioning data, especially if there is economic and ease-of-process upside from doing so.

Loan Processing Speed

Time taken to execute loans was impacted by April’s 3 x 4 day weeks (school and public holidays), which slowed down the pace at which SMEs completed their loan applications and pushed out average total loan time elapsed to 36 hours… still well inside the Service Expectation measure observed (ie. fintech is doing its bit to meet and drive service expectation).

Smart Devices

The proportion of SMEs with smart devices has risen – now well over half of all SMEs at 54%

Westpac Rated Best in Mobile Banking Functionality

From IT Wire.

The Commonwealth narrowly pipped Westpac as Australia’s top bank due to the usability of its mobile and digital services, but Westpac was deemed to be the bank with the highest score in mobile banking functionality, according to a newly published study. However, apart from CommBank and Westpac, the other Australian banks still have a way to go when it comes to money movement, service features, cross-channel guidance, and marketing and sales.

The study of Australia’s large retail banks by global research firm Forrester found that digital banking teams have improved transactional features like mobile bill payment and point-of-sale payments – but few banks help customers manage their money better, make relevant product offers, or provide much help through mobile banking.

Forrester surveyed five large retail banks in Australia. As well as the Commonwealth and Westpac, it surveyed ANZ Bank, Macquarie Bank and National Australia Bank (NAB).

But, in naming CommBank the best of the big banks, Forrester said it emerged on top with “impressive usability”.

“CommBank ranks as one of the top banks globally in usability in our benchmark. The bank stood out with impressive usability, specifically in making search and navigation clearly visible and easy to understand at all stages of the key tasks that the persona is looking to achieve,” said Forrester’s report author Zhi Ying Ng.

“The bank also offers strong mobile functionality, provides the widest range of touchpoints for customers, and makes login convenient.”

Forrester also found that CommBank earned the highest score in money movement.

“It not only lets customers make basic internal and external money transfers, but also supports more sophisticated features, such as letting customers use their phone’s camera to pay someone or pay bills,” Forrester notes.

Forrester says Westpac excels at functionality.

“Westpac received the highest overall functionality score and emerged second overall in our review, delivering services that are both useful and usable,” Ng said.

“The bank earned full marks for login, letting customers view balances conveniently and offering useful product research and financial tools prior to login. Westpac stood out in marketing and sales; the bank offers relevant products and services to customers based on their immediate needs and information that the bank knows about them.

“It’s also the only bank in Australia that gives customers product comparison tools within mobile banking.”

And, according to Forrester, many Australian banks provide strong login features, giving customers the ability to see the balances without logging in and to use fingerprint biometrics or a quick PIN to log in.

But on a negative note, Forrester also says many banks are weak on service and sales.

“Few banks help customers manage their money better, make relevant product offers, or provide much help through mobile banking,” Forrester says.

It says it also reviewed the mobile services of other leading retail banks worldwide and is publishing these results in separate reports.

Forrester conducted the 2017 Australian Mobile Banking Benchmark between 21 February and 13 March and says the Australian banks it reviewed achieved an average functionality score of 64 out of 100, an average usability score of +6 (on a scale from –30 to +30) – and the individual category scores reveal the differences between the banks’ mobile banking services.

Forrester says some banks are stronger in functionality or usability, while others excel in both areas.

“The other Australian banks have work to do to match the leaders,” Forrester says.

“Most large Australian banks offer a sturdy foundation for mobile banking that meets customers’ basic mobile needs and expectations.

“But apart from CommBank and Westpac, the other Australian banks still have a way to go when it comes to money movement, service features, cross-channel guidance, and marketing and sales.

“Australian banks should give customers the flexibility to schedule future-dated or recurring transfers and to view and search for transactions easily. They should also provide value-added contextualised products and services that help to improve customers’ financial well-being.”

And, according to Forrester, many banks can improve service features and money management.

“None of the Australian banks we reviewed let customers contact the bank via secure messaging or chat to request help. Few banks send customers mobile alerts to warn them of potential security issues.

“Some Australian banks offer basic digital money management, such as setting up a simple savings goal, but the majority does not offer personalised financial guidance or planning tools to help customers achieve their financial goals.”

Forrester says that the most successful banks share a common, iterative approach to mobile.

“Digital teams at leading banks have built strong relationships between their digital business strategy and technology management teams, which work together on a joint business technology agenda.

“They have adopted an iterative test-and-learn process. Cross-functional teams and an agile approach of experimentation, measurement, and quick adjustment have helped drive success at leading banks.

“Westpac uses an Agile framework where digital banking execs, CX pros, product managers, designers, and solution architects work in sprints to develop and test mobile banking products and services.

“Our research is intended to provide a benchmark for the current state of retail mobile banking in Australia and uncover good practices from the banks we assessed. We found best-in-class examples from many of the firms we reviewed. These range from relatively simple features like money transfer options to more advanced capabilities, such as personalised financial guidance and planning tools.”

Forrester says most banks let customers bank through a wide range of mobile touchpoints and, to serve customers in their “mobile moments”, banks have to develop services and design experiences for many different touchpoints, operating systems, and device types, “not to mention mobile browsers and third-party messaging apps”.

“This fractured landscape has driven many firms to adopt approaches like responsive design. CommBank and Westpac support customers on the widest range of devices,” Forrester concludes