Category: Digital Disruption

Robo-advice is not disruptive: Reinventure

From Investor Daily.

Automated advice is not a disruptive innovation and will only sustain the existing business models of the major banks, according to venture capital firm Reinventure.

Reinventure general partner Kara Frederick says the Westpac-backed venture capital fund will not be investing in robo-advice any time soon.

Ms Frederick, who is a Silicon Valley ‘native’, joined Reinventure founders Danny Gilligan and Simon Cant in March to help them broaden the fund’s reach into the US.

Speaking to InvestorDaily, she distinguished “sustaining” innovation products – such as robo-advice – from truly disruptive fintech technology. Reinventure is backing the latter, rather than the former, she said.

The venture capital fund has $100 million in total to invest, with approximately $45 million already committed to a portfolio of 15 companies.

When it comes to developing innovative technologies, banks typically have three approaches available to them, which are “build, buy or partner”, Ms Frederick said.

“If a bank’s going to go out of its way to do an incremental build or an entire build, that’s probably not where Reinventure’s going to play at all,” she said.

“Because we see that as sustaining innovation and that’s where we see most of the robo-advice products.”

Reinventure is more interested in the technologies that banks will either buy or partner with.

“The reason [banks want to buy or partner] is because it’s either too far in the future – it’s a potential real disruption but it’s not one or two years’ away,” Ms Frederick said.

“When you think of fintech globally, [Reinventure] sits in more of the ‘buy and partner’ side whereas the ‘build’ is more intrinsic to the banks themselves.”

Ms Frederick helped Reinventure invest in SME debt management start-up InDebted on Monday, and she has taken up a position on the start-up’s board.

Banks and Fintech – Where Do They Fit?

US Fed Governor Lael Brainard spoke on “Where Do Banks Fit in the Fintech Stack?” at the Northwestern Kellogg Public-Private Interface Conference on “New Developments in Consumer Finance: Research & Practice”

In particular she explored different approaches to how banks are exposing their data in a fintech context and the regulatory implications. Smaller banks may be at a disadvantage.

Different Approaches to the Fintech Stack

Because of the high stakes, fintech firms, banks, data aggregators, consumer groups, and regulators are all still figuring out how best to do the connecting. There are a few alternative approaches in operation today, with various advantages and drawbacks.

A number of large banks have developed or are in the process of developing interfaces to allow outside developers access to their platforms under controlled conditions. Similar to Apple opening the APIs of its phones and operating systems, these financial companies are working to provide APIs to outside developers, who can then build new products on the banks’ platforms. It is worth highlighting that platform APIs generally vary in their degree of openness, even in the smartphone world. If a developer wants to use a Google Maps API to embed a map in her application, she first must create a developer account with Google, agreeing to Google’s terms and conditions. This means she will have entered a contract with the owner of the API, and the terms and conditions may differ depending on how sensitive the particular API is. Google may require only a minimum amount of information for a developer that wants to use an API to display a map. Google may, however, require more information about a developer that wants to use a different API to monitor the history of a consumer’s physical locations over the previous week. And in some cases, the competitive interests of Google and a third-party app developer may diverge over time, such that the original terms of access are no longer acceptable.

The fact that it is possible and indeed relatively common for the API provider–the platform–to require specific controls and protections over the use of that API raises complicated issues when imported to the banking world. As banks have considered how to facilitate connectivity, the considerations include not only technical issues and the associated investment, but also the important legal questions associated with operating in a highly regulated sector. The banks’ terms of access may be determined in third-party service provider agreements that may offer different degrees of access. These may affect not only what types of protections and vetting are appropriate for different types of access over consumers’ funds and data held at a bank in order to enable the bank to fulfill its obligations for data security and other consumer protections, but also the competitive position of the bank relative to third-party developers.

There is a second broad type of approach in which many banks have entered into agreements with specialized companies that essentially act as middlemen, frequently described as “data aggregators.” These banks may lack the budgets and expertise to create their own open APIs or may not see that as a key element in their business strategies. Data aggregators collect consumer financial account data from banks, on the one hand, and then provide access to that data to fintech developers, on the other hand. Data aggregators organize the data they collect from banks and other data sources and then offer their own suite of open APIs to outside developers. By partnering with data aggregators, banks can open their systems to thousands of developers, without having to invest in creating and maintaining their own open APIs. This also allows fintech developers to build their products around the APIs of two or three data aggregators, rather than 15,000 different banks and other data sources. And, if agreements between data aggregators and banks are structured as data aggregators performing outsourced services to banks, the bank should be able to conduct the appropriate due diligence of its vendors, whose services to those banks may be subject to examination by safety and soundness regulators.

Some banks have opted for a more “closed” approach to fintech developers by entering into individual agreements with specific technology providers or data aggregators. These agreements often impose specific requirements rather than simply facilitating structured data feeds. These banks negotiate for greater control over their systems by limiting who is accessing their data–often to a specific third party’s suite of products. Likewise, many banks use these agreements to limit what types of data will be shared. For instance, banks may share information about the balances in consumers’ accounts but decline to share information about fees or other pricing. While recognizing the legitimate need for vetting of third parties for purposes of the banks fulfilling their responsibilities, including for data privacy and security, some consumer groups have suggested that the standards for vetting should be commonly agreed to and transparent to ensure that banks do not restrict access for competitive reasons and that consumers should be able to decide what data to make available to third-party fintech applications.

A third set of banks may be unable or unwilling to provide permissioned access, for reasons ranging from fears about increased competition to concerns about the cost and complexity of ensuring compliance with underlying laws and regulations. At the very least, banks may have reasonable concerns about being able to see, if not control, which third-party developers will have access to the banking data that is provided by the data aggregators. Accordingly, even banks that have previously provided structured data feeds to data aggregators may decide to limit or block access. In such cases, however, data aggregators can still move forward to collect consumer data for use by fintech developers without the permission or even potentially without the knowledge of the bank. Instead, data aggregators and fintech developers directly ask consumers to give them their online banking logins and passwords. Then, in a process commonly called “screen scraping,” data aggregators log onto banks’ online consumer websites, as if they were the actual consumers, and extract information. Some banks report that as much as 20 to 40 percent of online banking logins is attributable to data aggregators. They even assert that they have trouble distinguishing whether a computer system that is logging in multiple times a day is a consumer, a data aggregator, or a cyber attack.

For community banks with limited resources, the necessary investments in API technology and in negotiating and overseeing data-sharing agreements with data aggregators and third-party providers may be beyond their reach, especially as they usually rely on service providers for their core technology. Some fintech firms argue that screen scraping–which has drawn the most complaints about data security–may be the most effective tool for the customers of small community banks to access the financial apps they prefer–and thereby necessary to remain competitive until more effective broader industry solutions are developed.

Clearly, getting these connectivity questions right, including the need to manage the consumer protection risks, is critically important. It could make the difference between a world in which the fintech wave helps community banks become the platforms of the future, on the one hand, or, on the other hand, a world in which fintech instead further widens the gulf between community banks and the largest banks.

 

How far away is the paperless mortgage really?

From Mortgage Professional Australia.

More data and end-to-end systems are pushing us ever closer to the paperless mortgage and point-of-sale approvals but predicting the future of technology is a risky business.


From the millennium bug to Google Glass, we’ve seen plenty of ‘game changers’ which were no such thing. Rather than take an impossibly broad view of the future, we asked our industry leaders to explain what brokers should expect over the next few years, starting with the paperless mortgage.

Glenn Lees, CEO of Connective, says the entirely paperless mortgage is “closer than ever … I think what’s driving it now is lenders understand what a competitive advantage it can be”. The barriers are simply “institutional inertia”, he says, with lenders’ risk and compliance teams “understandably nervous” about changing the application process.

NextGen.Net sales director Tony Carn is less optimistic; he believes the paperless mortgage will take some time to come about due to the current focus on credit risk. However, he says the technology is there, and mortgages are already becoming increasingly electronic thanks to e-conveyancing platform PEXA and increasing use of electronic verification by lenders.

At AFG, CIO Jaime Vogel believes that “we will end up with a significant number of applications being digital end-to-end”. The process will be similar to the gradual take-up of ApplyOnline. “As lenders understand the benefits of that innovation it’ll progressively change and we’ll find the vast majority will be digital end-to-end,” Vogel says. “We feel the technology would be relatively easily implemented in the broker process.”

Verifying with video at HashChing 

Identifying borrowers, under the Know Your Customer (KYC) guidelines, has long been a time-consuming part of the application process. It was a particular problem for online marketplace HashChing, CEO Mandeep Sodhi recalls. “The broker was seeing ‘the consumer is in Cairns, but I’ve got this great deal and I’m in Sydney’.” For brokers there was an additional problem: having to visit a bank or Australia Post outlet to get identified was causing many customers to walk away from a deal.

HashChing’s virtual online identification (VOI) technology uses a video call to compare the borrower to a photo on their Australian passport or driver’s licence, giving the broker a percentage of how much they match. It also does a behind-the-scenes DBS check and tells the broker the borrower’s current location, and the video is stored for seven years in case of an enquiry from ASIC. The system is currently being trialled by 150 brokers, saving them eight hours on average, with a full rollout scheduled for 1 March.

There’s no legal barrier to video identification; the challenge is persuading lenders to accept it. While HashChing has an exclusive partnership with the South African developer of the software, E4, it is encouraging lenders to work with E4 to use VOI technology. Combined with online document collection, VOI can free brokers from the tyranny of distance, Sodhi believes. “With this technology the broker can be anywhere in Australia and the consumer can be anywhere in Australia … the geographic barrier is gone.”

Using data

In March 2016 Siobhan Hayden, then-CEO of the MFAA, predicted the next evolution in mortgage broking would be driven by data scraping. Data scraping is extracting data from documents, web pages and storage vaults, which can then be put to use in a number of ways: automatically filling in forms, reducing the need to ask borrowers for documentation, and more informed decisions by lenders.

Data is already changing the mortgage application process. Electronic mortgages through Bank Australia and conditional approvals via the CommBank Property app are available to customers of these banks, as the banks already have the relevant data. Data scraping across institutions is in its early stages, warns AFG’s Vogel. “There’s certainly not enough data available to make a complete and proper assessment, but we’re trying to make the best of the data which is available to use.”

Other professions are further ahead in data scraping. Next.Gen.Net’s Carn points out that accountants can already access information on their clients held by the ATO; giving brokers the same access would be a “very simple technology solution, but there [needs to be] a risk appetite to allow that to happen”.

At Rubik Group a current project is looking at using wealth management to provide solutions for property investors. “One of the top unmet needs is around investment property,” head of product Emily Chen says. “It’s almost personal financial management: how do I budget? How do I know when I’m ready to buy that next property?”

Already some banks offer digital ‘dashboards’ that show customers the funds available in their current, savings and super accounts. Chen suggests that property could be added to this mix, bringing in external data on property values on fixed loan terms, creating “a total wealth view for the customer”.

What’s holding back data scraping – and by consequence paperless mortgages – is concerns around security. Computer hacking has become international news, and 71% of Australians are concerned about having their information stolen, according to Veda’s 2016 Cybercrime and Fraud Report, with older Australians more concerned.

“A lot of brokers are not aware of how much is invested in secure data processing,” argues Carn. However, he warns that vulnerabilities remain: “We’re operating in a market that’s heavily regulated, and everyone’s aware of data security, yet we still see a lot of emailing of personal customer information, which I think is quite horrifying.”

Vogel believes younger borrowers are more accepting of their data being used. “If there is value for the customer and the opportunity to get a reduced interest rate then I’d certainly expect that a high percentage of customers would be willing to provide that information.” That is conditional, however, on those customers trusting that brokers can keep their data secure, which is why AFG is investing heavily in data security.

The experts agree, Turnbull’s NBN is ‘a national tragedy’

From The NewDaily.

The disastrous rollout of Australia’s NBN is a national tragedy, according to new research by one of the country’s most respected engineers.

Professor Rodney Tucker, of Melbourne University, argues that Prime Minister Malcolm Turnbull’s fateful decision as Communications Minister to opt for Fibre to the Node (FTTN), has been an extremely costly disaster.

 

While the rest of the world is opting for Fibre to the Premises (FTTP), Australia is embracing an obsolete technology.

Professor Tucker’s paper, The Tragedy of Australia’s National Broadband Network, just published in the Australian Journal of Telecommunications and Digital Technology, argues that a worldwide tipping point has been reached.

Globally, the majority of connections are now through FTTP. Australia is one of the very few countries using mass deployment of FTTN, with poor results.

Professor Tucker concludes: “This situation is nothing short of a national tragedy and a classic example of failed infrastructure policy that will have long-term ramifications for Australia’s digital economy.”

The news comes after reports that Australia has slower internet speeds than Kenya or Latvia – and is continuing to sink dramatically down the world rankings.

America now has 250 “gigabit” cities using FTTP, proving a boon for local economies. Australia has none.

Professor Tucker told The New Daily: “The NBN is a great loss of opportunity. We are becoming a broadband backwater. It will have profound effects.”

Associate Professor Mark Gregory, of RMIT University in Melbourne, was equally scathing when he spoke to The New Daily.

“Every Australian expert could see what was happening with technology,” he said. “The economic case used by the Coalition government was nonsense from the outset.

“This is the largest single waste of public funds in Australia’s history. Turnbull must take ownership of this mess. The cost to the taxpayer is currently at $49.5 billion and there is every indication the government will have to tip in another $5-10 billion.”

Paddy Manning, author of the Turnbull biography Born to Rule, told The New Daily that Malcolm Turnbull had been sceptical of the NBN from day one.

A tangle of copper wires in a puddle of stagnant water sums up the NBN, experts say A tangle of copper wires in a puddle of stagnant water sums up the NBN, experts say.

“In the 1990s Turnbull made a fortune from the internet, more than $40 million,” Mr Manning said. “Unfortunately he drew the wrong lessons from his experience. He thought there would not be enough demand for superfast broadband.

“There was also a knee-jerk ideological wariness of government enterprise and an unwillingness to embark on genuine long term nation building infrastructure projects.

“The Coalition has to shoulder the blame for FTTN. It is a mistake. It will prove an even bigger mistake when we have to find an untold amount of money to upgrade it.”

Chief Executive of Internet Australia Annie Hurley told The New Daily the government urgently needed to rethink the failed NBN. She advocated a bipartisan approach, bringing together the finest engineering minds in the country, including Professor Tucker, to plan a way forward.

“We have turned a vision into a quagmire,” she said. “There is sufficient evidence from around the globe that FTTN is an obsolete technology, yet it continues to be rolled out. We are throwing all this money at it, and we are going to have to come around and do it all again. That is the tragedy.”

Andrew Johnson, chief executive of professional association the Australian Computer Society told The New Daily: “We further reiterate that the reach, speed and quality of an NBN is critical to Australia’s future economic prosperity.”

A spokeswoman for the NBN did not respond to Professor Tucker’s criticisms.

How the blockchain will transform housing markets

From The Conversation.

An emerging technology, blockchain, could transform the way we buy and sell real estate by doing away with the hidden costs and inefficiencies of our housing markets.

Blockchain is an online ledger that records transactions. It’s capable of recording the movement of any kind of asset from one owner to the next.

It’s public and isn’t owned by any one corporation, there are no charges to record transactions. Its openness ensures the integrity of transactions and ownership, as everyone involved has a stake in keeping it honest.

This means there are fewer intermediaries; less middle-men who increase the costs and time to complete a transaction.

There are risks associated with the system as it’s only as strong as the code that supports it, which has come under attack in the past. Despite this, examples from overseas show it is possible to apply this technology successfully to our housing market.

Problems in how the property market is run

For buyers able to find the right property, secure a mortgage and save a deposit, they must also pay for a range of so-called “hidden costs”. These are additional payments associated with the transaction over the cost of the home itself. Many legal and title-related costs would become near-obsolete in a blockchain system.

The combined costs of title registration, title insurance, and legal fees associated with register the property transfer approach A$1,000 on the average Australian house. Costs continue to rise as the prudent buyer undertakes further due diligence, through building inspection documentation, previous sales records and so forth.

On top of the financial cost, it then typically takes over a month to settle a real estate transaction in Australia. The blockchain system can speed things up, as currently tedious checks undertaken by hand, move to an automated system overseen and approved by the relevant stakeholders.

There is also the risk that land titles offices with a single database simply get things wrong too. In 2016 it was reported that 300 incorrect certificates had been issued in NSW, with 140 of those being recent property buyers affected by government plans for major motorways in Sydney’s west.

There are now concerns that the system’s quality could be compromised in several states, including NSW and South Australia, as land titles offices become privatised.

A blockchain real estate market

If blockchain were applied to the property market in Australia, every property would be encoded with a unique identifier. Property IDs already exist in most land registry systems, so these would need to be migrated to a blockchain.

Next, the blockchain ecosystem then needs to have defined who the people behind the transaction are, those stakeholders that include the owner, lender, and government.

Transactions of property are conducted via “smart contracts” – digital rules in the blockchain that process the agreement and any specified conditions. Buying and selling could still take place via agents, or the smart contract can be advanced to incorporate the sale rules and make this decision automatically. The blockchain for each property grows as transactions are added to the ledger.

A housing market without agents, conveyancers and a land-titles office may seem decades away, but a handful of countries have already piloted blockchain land registration system.

In Australia, our current land titles system is among the world’s best, but it is not infallible. A range of hidden taxes and transaction costs increase market inefficiencies.

And while the electronic system Property Exchange Australia or PEXA, has brought us to the point of a near paperless property market, it’s still an intermediary between the parties and the record of the transfer in the Torrens system – our current land title system.

The added advantage of a blockchain system is in eliminating risks, in particular the risk of records being accessed fraudulently and altered or deleted because it is a permanent and immutable record. This means that a huge amount of computing power would be required, probably along with some collusion, and the alteration is easily detected across the ledger. That’s not to say the blockchain system is perfect.

Blockchain’s advantage in restricting any changes to historical records becomes a disadvantage when incorrect or fraudulent entries are added. Digital currency managers, Ether and Bitfinex, learned this the hard way through cyber attacks.

Last year these attacks siphoned off over US$50 million in ether tokens from The DAO, the largest crowdfunded venture capital fund. This breach led to a controversial split of Ether into two separate active digital currencies.

Only months later, Hong Kong-based crytocurrency trading firm, Bitfinex, had the equivalent of US$68 million stolen by hackers in a security breach reminiscent of the hack that bought down Mt Gox in 2014. It is little comfort to cautious market regulators that the thieves behind these attacks can not spend it without revealing their identity on the blockchain.

These hacks demonstrate that blockchain systems are only as secure as the code which supports them. As a nascent technology, its cracks are detected only when they are exposed.

Where blockchain has worked before

Sweden became the first western country to explore the use of blockchain for real estate in July last year. At the time, the Swedish Land Registry partnered with blockchain startup ChromaWay to test how parties to a real estate transaction – the buyer, seller, lender, government – could track the deal’s progress on a blockchain.

Other countries at the forefront of blockchain for real estate include The Republic of Georgia, Honduras, and Brazil which announced a pilot program earlier this month. While this might seem like a disparate list, it’s in these countries where the long-term potential of a blockchain for real estate are most significant.

Systemic corruption and insecure database management in these countries, and many other emerging economies, is seen as a major constraint on growth and prosperity. Why would you invest in a house, or any other asset, if there is a distinct possibility that the record of your ownership could simply disappear?

With ever increasing demands for improvements to transaction efficiency and local real estate industry giants like CoreLogic appointing research teams dedicated to new technology applications, it might not be long before we see a real estate blockchain system in Australia.

Author: Danika Wright, Lecturer in Finance, University of Sydney

Building the Infrastructure to Realise FinTech’s Promise

An excellent speech by Mark Carney, Governor of the Bank of England which paints some useful pictures about the future of Fintech and the need to break the mould.

To its advocates, FinTech will democratise financial services. Consumers will get more choice and keener pricing. SMEs will get access to new credit. Banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience. Financial services will be more inclusive; with people better connected, more informed and increasingly empowered. And tantalisingly, FinTech could help make the system itself more resilient with greater diversity, redundancy and depth.

These possibilities are why the Bank has already taken a number of steps to encourage FinTech’s development. The PRA and the FCA have changed their authorisation processes to support new business models. The New Bank Start-Up Unit, created in 2016, works closely with firms seeking to become banks. Already, four new ‘mobile’ banks have been authorised.

The Bank also established a FinTech Accelerator last year. Since then, we have worked with a number of firms on proofs of concept ranging from strengthening our cyber security to using AI for regulatory data, and improving our understanding of distributed ledgers.

Today we are opening our 4th round of applications to the Accelerator. We are looking to work on new proofs of concept on maintaining privacy in a distributed ledger and applying a range of big data tools to support the Bank’s analysis.

More broadly, the Bank is working to ensure that this time the right hard and soft infrastructure are in place to allow innovation to thrive while keeping the system safe.

Let me expand briefly with three examples.

The Right Soft Infrastructure

First, with respect to soft infrastructure, the Bank is assessing how FinTech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.

We are disciplined. Just because something is new doesn’t mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t mean it needs to be brought inside. We apply consistent approaches to activities that give rise to the same risks regardless of whether those are undertaken by old regulated or new FinTech firms.

Some of the most important questions we are considering include:

  • Which FinTech activities constitute traditional banking activities by another name and should be regulated as such?
  • How could developments change the safety and soundness of existing regulated firms
  • How could developments change potential macroeconomic and macrofinancial dynamics including disruptions to systemically important markets? And
  • What could be the implications for the level of cyber and operational risks faced by regulated firms and the financial system as a whole?

To illustrate some of the issues, consider how FinTech is affecting the financial services value chain (Figure 1).

At present, the most significant changes are taking place at the front-end, where innovative payment service providers (PSPs) are providing new user interfaces for domestic retail and cross-border payment services through digital wallets or pre-funded eMoney.Other aspects of the customer relationships are being opened up. For example, aggregators are providing customers with ready access to price comparison and switching services. This will increase further when aggregators gain access to banks’ Application Programme Interfaces (APIs).These new entrants are capturing potentially invaluable customer data which can be used to target non-bank products and services.

In their current form, these innovations are simply a new front-end to the banking system where FinTech providers take a slice of customer revenue and loyalty but none of the associated risks.They have generally avoided undertaking traditional banking activities. So for now, absent a substantive change in business models or scale of activities, the FPC is unlikely to want to bring these firms into the regulatory perimeter.The changes to customer relationships resulting from FinTech competition could, however, reduce customer loyalty and the stability of funding of incumbent banks. If this happens, the Bank of England would need to ensure prudential standards and resolution regimes for the affected banks are sufficiently robust to these risks.

The Right Hard Infrastructure

A second, related example is how the Bank is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe.Specifically, the Bank is widening access to some of its systems to include PSPs in order to boost both competition and system resilience.

The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.That’s important because the Bank operates the UK’s high-value payment system ’RTGS’ which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.

Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.

The Bank has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks. The Bank of England is now working with the FCA and HMT to make this a reality, and we will issue our new blueprint for RTGS in early May.

Coordinated Developments in Hard and Soft Infrastructure

My third example of the Bank’s efforts to realise FinTech’s promise is our work with industry to help coordinate advances in hard and soft infrastructure.New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.

Securities settlement seems particularly ripe for innovation. A typical settlement chain involves many intermediaries, making it comparatively slow and keeping operational risks high. Industry has begun to work together to determine how distributed ledger technologies could be used to solve these issues at scale.The Bank is participating in several related initiatives. To help distinguish distributed ledger’s potential from its hype, we have completed our own Proof of Concept. We are a member of Hyperledger along with private market participants and tech firms. And we will make our next generation RTGS compatible with settlement in a distributed ledger.

It is not clear, however, that that the only challenges are technological. Indeed, the FCA highlighted earlier this week that settlement times could also be cut using existing technologies. This requires market participants to change their collective practices as it takes more than one intermediary in a chain to compress settlement times.

Conclusion

FinTech’s promise springs from its potential to unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital.

This possibility is being realised by new entrants – payment service providers, aggregators and robo advisors, peer-to-peer lenders, and innovative trading platforms. And it is being influenced by incumbents who are adopting new technologies to reinforce the economies of scale and scope of their business models.

FinTech could deliver significant benefits to households and businesses across this country and across the world. FinTech can widen access to financial services and bring new sources of credit. It can connect customers better with their finances and empower them more in the process. And new technologies can deliver faster service, greater choice and keener pricing.

As it does, risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning.

At the same time, the resilience of the system could also be built, through greater diversity in provision of financial services as well as increased redundancy. A host of applications could reduce costs, improve capital efficiency and strengthen operational resilience.

The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society.

We are ideally positioned to realise FinTech’s promise in the UK.The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions.

Will Apple Pay Win The Contactless Payment Wars?

New research suggests that Apple will dominate the OEM-Pay market over the next 4 years, leading Samsung, Google, and Others.

Data from fintech analysts, Juniper Research, estimates that the number of OEM-Pay contactless users, including Apple Pay, Samsung Pay, and Android Pay, will exceed 100 million for the first time during H1-2017, before surpassing 150 million by the end of this year.

According to the new research – Contactless Payments: NFC Handsets, Wearables & Payment Cards 2017-2021 – the combined market share of Apple, Samsung, and Google (via Android Pay), increased from 20% in 2015 to 41% in 2016, as a proportion of total mobile contactless payment users. Juniper forecasts that this will rise to 56% by 2021, as the trio’s combined user base exceeds 500 million.

 

Apple Pay & the US Wallet Opportunity

The research found that Apple Pay, and the alternative wallets that have followed in its wake, are set to establish themselves as the primary contactless mechanisms of choice in the US. However, the challenge facing Apple and its rivals is to ensure that the infrastructure is in place for consumers to make in-store payments.

“We believe that as contactless usage gains traction and consumers/merchants recognise the speed and convenience it offers, then, as in European markets, there will be a further and significant increase in availability at the point-of-sale”, added research author Nitin Bhas. Indeed, according to Apple, the proportion of US retailers supporting Apple Pay rose from 4% in 2014 to 35% in late 2016.

HCE Adoption to Rise 5-Fold Over the Next 4 Years

The research found that 2015/16 were watershed years for HCE (Host Card Emulation) in terms of commercial service rollouts. Juniper estimates that at least 194 banks had introduced such services by the end of 2016. Juniper expect PayPal, already near ubiquitous in the online space, to rapidly deploy a portfolio of contactless payment and loyalty solutions that will allow it to compete effectively for market share.

Analytics in banking: Time to realize the value

An excellent article from McKinsey (I may be biased, but analytics used right are very very powerful!).

More than 90 percent of the top 50 banks around the world are using advanced analytics. Most are having one-off successes but can’t scale up. Nonetheless, some leaders are emerging. Such banks invest in talent through graduate programs. They partner with firms that specialize in analytics and have committed themselves to making strategic investments to bolster their analytics capabilities. Within a couple of years, these leaders may be able develop a critical advantage. Where they go, others must follow—and the sooner the better because success will come, more than anything else, from real-world experience.

By establishing analytics as a true business discipline, banks can grasp the enormous potential. Consider three recent examples of the power of analytics in banking:

  • To counter a shrinking customer base, a European bank tried a number of retention techniques focusing on inactive customers, but without significant results. Then it turned to machine-learning algorithms that predict which currently active customers are likely to reduce their business with the bank. This new understanding gave rise to a targeted campaign that reduced churn by 15 percent.
  • A US bank used machine learning to study the discounts its private bankers were offering to customers. Bankers claimed that they offered them only to valuable ones and more than made up for them with other, high-margin business. The analytics showed something different: patterns of unnecessary discounts that could easily be corrected. After the unit adopted the changes, revenues rose by 8 percent within a few months.
  • A top consumer bank in Asia enjoyed a large market share but lagged behind its competitors in products per customer. It used advanced analytics to explore several sets of big data: customer demographics and key characteristics, products held, credit-card statements, transaction and point-of-sale data, online and mobile transfers and payments, and credit-bureau data. The bank discovered unsuspected similarities that allowed it to define 15,000 microsegments in its customer base. It then built a next-product-to-buy model that increased the likelihood to buy three times over.

Three ways advanced analytics can generate an increase in profits.

Results like these are the good news about analytics. But they are also the bad news. While many such projects generate eye-popping returns on investment, banks find it difficult to scale them up; the financial impact from even several great analytics efforts is often insignificant for the enterprise P&L. Some executives are even concluding that while analytics may be a welcome addition to certain activities, the difficulties in scaling it up mean that, at best, it will be only a sideline to the traditional businesses of financing, investments, and transactions and payments.

In our view, that’s shortsighted. Analytics can involve much more than just a set of discrete projects. If banks put their considerable strategic and organizational muscle into analytics, it can and should become a true business discipline. Business leaders today may only faintly remember what banking was like before marketing and sales, for example, became a business discipline, sometime in the 1970s. They can more easily recall the days when information technology was just six guys in the basement with an IBM mainframe. A look around banks today—at all the businesses and processes powered by extraordinary IT—is a strong reminder of the way a new discipline can radically reshape the old patterns of work. Analytics has that potential.

Tactically, we see banks making unforced errors such as these:

  • not quantifying the potential of analytics at a detailed level
  • not engaging business leaders early and to develop models that really solve their problems and that they trust and will use—not a “black box”
  • falling into the “pilot trap”: continually trying new experiments but not following through by fully industrializing and adopting them
  • investing too much up front in data infrastructure and data quality, without a clear view of the planned use or the expected returns
  • not seeking cooperation from businesses that protect rather than share their data
  • undershooting the potential—some banks just put a technical infrastructure in place and hire some data scientists, and then execute analytics on a project-by-project basis
  • not asking the right questions, so algorithms don’t deliver actionable insights

Westpac Now Offers Samsung Pay

From Gizmodo.

In the eternal war between Apple Pay, Android Pay and Samsung Pay, the world’s largest smartphone maker just scored another — minor — victory. Millions of customers from Australia’s second largest bank can now use Samsung’s phones and smartwatches instead of their credit and debit cards to pay at almost any NFC payment terminal around the country.

Although for the average user there’s not a great deal of difference, Samsung Pay is technically superior to Apple Pay or Android Pay in that — because it only works on a certain number of Samsung phones and Samsung’s Gear S2 and Gear S3 smartwatches — it can also emulate the MST magnetic strip on physical cards, which can be useful for payment terminals that don’t have NFC support already.

It’s also a convenient time for Samsung to switch on its newest feature — a NFC provisioning feature, which lets customers add cards into Samsung Pay by tapping them on the back of the phone, rather than taking a photo of the card itself with the phone or by — ugh — entering details manually.

Samsung already has Citibank’s Mastercard and Visa credit card holders on board, as well as American Express, so Westpac’s various debit and credit cards will massively bolster the roster of Samsung Pay payment methods available. Westpac customers will be able to add their cards to Samsung Pay from 8AM on Tuesday morning.

Westpac says:

You’re even more unstoppable with Westpac when you tap and pay using your Samsung Galaxy S7, S7 Edge, S6, S6 Edge, S6 Edge+, S5, S5 Mini, S4, Note 5, Note 4 Edge, Note 4, Note 3 or Alpha.

To start paying for everyday purchases with your smartphone, simply download the Westpac Mobile Banking app and choose which Westpac eligible credit and debit cards you’d like to use for mobile payments.

Apple Pay may have won the battle but it may not win the war

From The Conversation.

The Australian Competition and Consumer Commission’s (ACCC) decision to deny some of Australia’s major banks the ability to collectively bargain with Apple and boycott Apple Pay, might have opened a whole new door for digital wallets in Australia.

The banks wanted to bargain with Apple for access to the Near-Field Communication controller in iPhones, enabling them to offer their own integrated digital wallets to iPhone customers. This would have been in competition with Apple’s digital wallet, but without using Apple Pay.

A digital wallet is essentially an app on a mobile phone that can provide some of the same functions as a physical purse or wallet. This includes making payments in-store and storing information such as loyalty program points.

In the example of Apple Pay, it used a digital wallet to allow customers to use their phones like “tap-and-go” bank cards. Mobile payments can also be made via wearable devices, such as the Apple Watch and various fitness devices.

Part of the ACCC’s rationale in deciding on the banks/Apple case was that, “digital wallets and mobile payments are in their infancy and subject to rapid change”. So the ACCC is uncertain as to how competition will develop in this space.

The Australian market for digital wallets

Recent research from the Reserve Bank of Australia (RBA) confirmed the use of mobile payments accounted for only around 1% of the number of point-of-sale transactions over the week of the survey, which was conducted in November 2016. By contrast, the same research revealed that the share of the number of payments made using credit and debit cards had increased to 52%, driven by the use of these payments cards for lower value transactions.

This has been facilitated by the rapid adoption of contactless payments by both consumers and merchants and according to the RBA’s research, in 2016 around one-third of all point-of-sale transactions were conducted using contactless cards.

According to the Australian Payments Clearing Association by 2016, 77% of Australians owned a smartphone and yet mobile payments at the point-of-sale remain relatively rare.

The very success of contactless payment cards in Australia means that consumers do not see what extra advantage there is in mobile payments. Tap-and-go is increasingly available for even relatively low value transactions at the point-of-sale. Financial institutions have been speedy to issue such cards to their customers and this is matched by merchant’s adoption of the terminals to facilitate these payments.

For mobile payments to become significantly more attractive than contactless card payments, it would require the wallets to have additional functionality to appeal to consumers. Examples of this include: the ability to use mobile payment devices on mass transit journeys, to hold loyalty program points, to verify identity and enabling person-to-person transactions.

This breakthrough in functionality for digital wallets could come from another direction, other than the current mobile payments options of Apple Pay, Android Pay and Samsung Pay. Indeed, China provides an alternative example of how digital wallets can be developed, that will in retrospect make the ACCC’s decision on Apple Pay, rather passe.

Tap-and-go payments are popular in Australia so digital wallets will have to offer more than contactless payments. David Crosling

Digital wallet companies expanding from China

According to Chinese government statistics, about 750 million Chinese had moved online by 2016, with 95% of them accessing the internet via their smartphones. China’s digital payments market was by then nearly 50 times greater than that in the United States.

This is partly explained by the lack of other viable alternatives in China for non-cash payments. Credit card penetration is low compared to other developed markets, debit cards are not contactless and hence require authentication at the point-of-sale.

China appears to have jumped directly from cash to mobile payments and hence missed the step into payment cards, particularly credit cards, to which the Chinese consumers appear to have a cultural aversion.

The use of digital wallets in China is being driven by the success of the so-called financial technology firms in China, particularly Alibaba and Tencent. These companies have a vast and protected domestic market at their disposal and an almost complete absence of data regulations.

These companies have been able to move on from offering just instant messaging platforms, to being payment providers via Alipay and WeChatPay, respectively. These apps on a smartphone allows consumers to scan a QR code from a merchants point-of-sale terminal or smartphone, to complete a transaction.

Person-to-person transfers can also be done through these apps. Chinese company Tencent’s WeChat was originally a social media platform, but it has now expanded to include payments services, music streaming, taxi booking, photo sharing and a news service, to name only a few functions.

Its over 800 million worldwide active users now have fewer and fewer reasons to leave its integrated full platform of services. WeChatPay is also increasingly accepted by bricks and mortar merchants in China.

And now WeChat is planning to expand its services into the UK and Europe and is also looking to enter markets in the United States and Southeast Asia. Part of the company’s planned expansion is driven by the ever-increasing flow of Chinese overseas tourists.

This flow was 120 million in 2015 and forecast to be 220 million by 2025. Australia is already a popular destination for Chinese tourists, many of whom will be users of WeChatPay.

Who is to say that Facebook and/or Amazon will not follow Tencent’s path into digital wallets? While Apple Pay may have won the battle against some of Australia’s banks, it may lose the war against the providers of digital wallets, such as Tencent and Alibaba.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology