Digital Disruption – Page 58 – Digital Finance Analytics (DFA) Blog

Will The Banking Revolution Will Kill Off Credit Cards and Internet Banking?

In the first episode of a three-part series on the future of fintech, Baker & McKenzie explores the vast number of fintech ventures that are innovating at a fast pace, often unencumbered by stringent banking regulations.

Appearing in Episode 1 of Baker & McKenzie’s The future of fintech video series, Rubik chief executive Iain Dunstan said that 60 cents in every dollar is now transacted on a phone or tablet.

“It wasn’t that long ago that phone banking was new. And that died when internet banking came along,” Mr Dunstan said.

Smartphones are likely to have the same effect on internet banking, he said – because that is the way that Generations X and Y want to transact, he said.

“Internet banking now is generally only done between 7pm and 10pm at night. Hardly at all during the day,” Mr Dunstan said.

Just as cheques have disappeared, so too will credit cards – and their demise will be much faster, he predicted.

Baker & McKenzie partner Astrid Raetze said many of the smaller fintech players will get “knocked out” over the next five years, leaving only the companies that provide a quality mobile customer experience.

“The ones who are going to be successful are going to be the ones who are marrying the perfect customer-tailored online experience with the excellent technology that achieves the customer’s purpose,” Ms Raetze said.

“It wouldn’t surprise me if in five years’ time you don’t have a wallet at all and instead everything’s on your mobile phone,” she said.

In the future, the big players in the fintech space could well be some of the major technology companies, said Ms Raetze.

“There are a lot of players who are afraid that if the technology companies get serious in this space, lots of customers are going to move to them because they already trust their relationship with Apple, with Amazon – it’s a good experience that they keep coming back for,” she said.

From FintechBusiness.

How Big Is The SME Fintech Unsecured Lending Market?

Given the rise in the number of Fintechs targetting the SME unsecured lending sector, it is timely to consider the potential addressable size of the market in Australia. To do that we have taken data from the Digital Finance Analytics SME survey of 26,000 businesses, and used this data to estimate the current size of the market. The latest data is from August 2016.

First, we need to focus in on smaller SME’s, so we set a turnover ceiling of $500k. In fact though there are more than 1 million businesses in this category, many SME’s have much smaller turnovers than that. Then we remove from the analysis secured loans (either against property or other assets), leases, factoring and credit card debt. This gives us a read of the level of unsecured debt. We also excluded businesses who prefer not to borrow at all.

So, we estimate that currently, the stock of unsecured loans to these small businesses is around $8.2 billion. Of this, $5.3 billion would show up as a business loan, either as an overdraft, structured loan or term loan in the RBA data. The rest is classified as personal debt, meaning it is a personal loan or overdraft, but it will still be used for business purposes. So, $2.9 billion relates to loans which would be classified as personal finance in the RBA data. This also highlights the significant “twilight zone” between business and personal finances.

Next, we need to estimate the annual flow of these loans, and also overlay those businesses with the potential to access a Fintech loan. At very least they need to be comfortable with using online services, and tools. So we excluded the “digital luddites” and those not tech savvy.

We estimate that $3.6 billion of unsecured lending was written by lenders, of all sorts, to our target businesses, in the past 12 months. Of this $2.1 billion was a business loan, and $1.5 billion was a personal loan. This includes refinancing of existing loans, and new loans.

Most Fintech SME lenders will only lend to a business, with an ABN. So, we should discount the $1.5 billion of personal loans. That leaves a current annual addressable market of around $2.1 billion. We also expect this to grow strongly in coming years.

We are already seeing a strong trend in the growing awareness of Fintech among businesses. The joint DFA and Moula Disruption Index is tracking this momentum.

Increased digital penetration, and greater awareness of Fintech alternatives will increase the addressable market quite considerably. In addition, new lenders may offer loans to businesses which today cannot obtain credit.

So, in conclusion, despite the relatively early history of the sector, there is an addressable market which is significant, and interesting and north of $2 billion annually. Whilst the market is small compared with the $40 billion consumer credit card industry or the $140 billion total consumer credit market, it is set to grow.

Finally, it is also worth considering our post from yesterday, which looked at some Fintechs charging very high rates of interest. Will increased competition drive rates lower and create a still larger market?

Quantimentals: mapping the rise of weird data

From The Conversation.

One of the lesser understood aspects of what you can do with massive stockpiles of data is the ability to use data that would traditionally have been overlooked or in some cases even considered rubbish.

This whole new category of data is known as “exhaust” data – data generated as a byproduct of some other process.

Much financial market data is a result of two parties agreeing on a price for the sale of an asset. The record of the price of the sale at that instant becomes a form of exhaust data. Not that long ago, this kind of data wasn’t of much interest, except to economic historians and regulators.

A massive moment-by-moment archive of prices of shares and other securities sales prices is now key to many major banks and hedge funds as a “training ground” for their machine-learning algorithms. Their trading engines “learn” from that history and this learning now powers much of the world’s trading.

Traditional transactions such as house price sales history or share trading archives are one form of time-series data, but many other less conventional measures are being collected and traded too.

There are also other categories of unconventional data that are not time-series-based. For example, network data outlines relationships and other signals from social networks, geospatial data lends itself to mapping, and survey data concerns itself with people’s viewpoints. Time series or longitudinal data is, however, the most common form and the easiest to integrate with other time-series data.
Location data from mobile phones means many companies now have people-movement data. https://www.flickr.com/photos/bouldair
Consistent Longitudinal Unconventional Exhaust Data or CLUE data sets, as I’m calling them, are many, varied and growing. They include:

foot traffic data

consumer spending data

satellite imaging data

biometrics

ecommerce parcel flow data

technology usage data

employee satisfaction data.
Visualisation of footfall data from the past nine years at Glasgow’s Tramway arts venue. Kyle Macquarrie https://www.flickr.com/photos/53111802@N05/
Say, for example, you are interested in the seasonal profitability of supermarkets over time. Foot traffic data may not be the cause of profitability, as more store visitors doesn’t necessarily correlate directly to profit or even sales. But it may be statistically related to volume of sales and so may be one useful clue, just as body temperature is a good clue or one signal to a person’s overall well-being. And when combined with massive amounts of other signals using data analytics techniques, this can provide valuable new insights.

Rise of ‘Quantimental’ investment funds

Leading hedge fund Blackrock, for example, is using satellite images of China taken every five minutes to better understand industrial activity and to give it an independent reading on reported data.

Traditionally, there have been two main types of actors in the financial world – traders (including high-frequency traders), who look to make money from massive volumes on many small transactions, and investors, who look to make money from a smaller number of larger bets over a longer time. Investors tend to care more about the underlying assets involved. In the case of company stocks, that usually means trying to understand the underlying or fundamental value of the company and future prospects based on its sales, costs, assets and liabilities and so on.
Aerial photography from drones and new low-cost satellites are one key new source of unconventional data. https://www.flickr.com/photos/thisisinbalitimur/
A new type of fund is emerging that combines the speed and computational power of computer-based Quants with the fundamental analysis used by investors: Quantimental. These funds use advanced machine learning combined with a huge variety of conventional and unconventional data sources to predict the fundamental value of assets and mismatches in the market.

Some of these new style of funds, including TwoSigma in New York and Winton Capital in London, have been spectacularly successful. Winton was founded by David Harding, a physics graduate from Cambridge University in 1997. After less than two decades it ranks in the top ten hedge funds worldwide with US$33 billion in assets under advice and more than 400 people – many with PhDs in physics, maths and computer science. Not far behind and with US$30 billion in assets, TwoSigma also glistens with top tech talent.

New ones are emerging too, including Taaffeite Capital Management run by computational biology and University of Melbourne alumnus Professor Desmond Lun. Understanding the complex data dynamics of many areas of natural science, including biology and ecology, are turning out to be excellent training for understanding financial market dynamics.

Weird data for all

But it’s not only the world’s top hedge funds that can or are using alternative data. A number of startups are on a mission to democratise access to new sources. Michael Babineau, co-founder and CEO of Bay Area startup Second Measure, aims to offer a Bloomberg-terminal-like approach to consumer purchase data. This will transform massive amounts of inscrutable text in card statements into more structured data, thus making it accessible and useful to a wide business and investor audience.

Others companies, like Mattermark in San Francisco and CB Insights in New York, are intelligence services that provide fascinating and valuable data insights into company “signals”. These can be indicators and potential predictors of success — especially in the high-stakes game of technology venture capital investment.

Akin to Adrian Holovaty’s pioneering work a decade ago mapping crime and many other statistics in Chicago online, Microburbs in Sydney provides a granular array of detailed data points on residential locations around Australia. It allows potential residents and investors to compare schooling, restaurants and many other amenities in very specific neighbourhoods within suburbs.

We Feel, designed by CSIRO researcher Dr Cecile Paris, is an extraordinary data project that explores whether social media – specifically Twitter – can provide an accurate, real-time signal of the world’s emotional state.
WeFeel is a research tool that creates ‘signals’ data about the emotional mood of people around the world via their tweets. CSIRO
Weird small data has its benefits

More than simply pop-economics, Freakonomics (2005) showed how unusual yet good-quality data sources can be valuable in creating insights. Assiduous record-keeping of the accounts of an honesty system cookie jar in an office place revealed that people stole most during certain holidays (perhaps due to increased financial and mental stress at these times); access to drug gangster book-keeping accounts explained why many drug dealers live with their grandparents (they are too poor to move out); and massive public school records from Chicago showed parental attention to be a key factor in students’ academic success.

Many of the examples in Freakonomics were based on small quirky data samples. However, as many academics are aware, studies with small samples can present several problems. There’s the question of sampling — whether it’s large enough to represent a robust sample and whether it’s a random selection of the population the study aims to understand.

Then there’s the problem of errors. While one could expect errors to be smaller with smaller sample sizes, a recent meta-study of academic psychology papers found half the papers tested showed significant data inconsistencies and errors. In a small number of cases this may be due to authors fudging the results, whereas others may be due to transcription or other simple mistakes.

Weird data is getting easier to find

More and more large-scale unconventional data collections are becoming readily available. There are three blast furnaces driving its proliferation:

the interaction furnace: our own growing interactions with the web and web services (ecommerce, web mail, social media) etc

the transaction furnace: the increasingly online ledger of commerce

the automation furnace: an explosion of web-connected sensors.

While large data collections can’t help with avoiding fabrication, they can sometimes help with sample size and representation issues. When combined with machine learning they can:

provide accurate insights from incomplete, noisy and even partially erroneous data

offer associations, patterns and connections — blindly with no a priori assumptions

help eliminate bias — by invoking multiple perspectives.

What can we expect from more clues?

We may see unexpected results and be surprised about the degree to which many factors such as social and personal information are highly predictable using unexpected data signals. Michael Kosinski and his colleagues showed the predictive power of social media data in the analysis they published in PNAS in 2013. They demonstrated that highly personal traits such as religion, politics and even whether your parents were together when you were 21 were highly predictable using Facebook likes alone.

We will see a plethora of applications emerge that take advantage of processing unconventional data sources. One rich area is biometrics. Australian tech startup Brain Gauge has shown that people’s voices can be uses as signal for cognitive load and used for real-time detection of stress levels and reduced absenteeism in call-centre staff, for example.

We can also expect to see a lot more meta-analysis of communities, populations and industries. Increasingly ambitious studies are now possible that combine and link massive, often disparate data sets together to yield new insights into economics, law, health and many other areas of research. One example is the recent meta-study published in the Journal of the American Medical Association that combined nine other studies and found that walking speed in older adults is indeed a predictor of longevity.
Walking speed or gait has been confirmed as a good albeit unconventional data signal that is a predictor of longevity. https://www.flickr.com/photos/34536315@N04/

Author: Paul X. McCarthy, Adjunct Professor, UNSW Australia

Payment Fraud Up – APCA

The Australian Payments Clearing Association (APCA) have released their 2016 Payments Fraud Report. The rate of fraud across all Australian cheques and cards increased from 20.8 cents in 2014 to 24.5 cents in 2015.

In 2015, Australians spent $1.92 trillion using their cards and cheques; of this overall total, 0.025%, or $469 million, worth of transactions were fraudulent. While some areas of card fraud have declined, overall card fraud has risen due to a significant increase in CNP fraud. Card-not-present (CNP) fraud occurs when valid card details are stolen and then used to make purchases or other payments without the card, mainly online or by phone.

Australian payment cards fraud

Australians are spending more than ever on their cards and the rate of fraud is increasing. The total amount spent on cards in 2015 increased 5% to $689,470 million. The rate of card fraud increased to 66.8 cents per $1,000, up from 58.8 cents in 2014. This compares to the UK’s 2015 card fraud rate of 83 pence per £1000. CNP fraud increased to $363 million, with 62% or $226.3 million occurring overseas. Most of this fraud is likely due to sophisticated malware and phishing attacks and large-scale data breaches. It reflects the growth in cyber-crime generally.

Domestically, CNP fraud increased 38% to $136.7 million. This channel is increasingly attractive to criminals as Australians spend more online and as measures to tighten up card present channels, both in Australia and overseas, take positive effect.

As the US transitions to chip technology – the last significant economy to upgrade from magnetic stripe – criminals are increasing their focus to online domains. Similar to the cards of other jurisdictions such as the UK, this is impacting Australian cards, which are often captured by data breaches occurring in the US.3 Counterfeit / skimming fraud on Australian cards domestically dropped 10% to $22.9 million.

However, knowing the window of opportunity is closing, fraudsters are rushing to use fake cards at US merchants where the magnetic stripe is still accepted. This largely explains the 77% increase in counterfeit / skimming fraud on Australian cards overseas.

Fraud on Australian cards domestically

With chip technology providing strong protection against counterfeit cards in Australia, fraud is increasingly migrating online. Counterfeit / skimming fraud dropped 10% in 2015 to $22.9 million, down from $25.4 million in 2014. Card-not-present (CNP) fraud increased 38% to $136.7 million, up from $99 million in 2014.

Fraud on Australian cards overseas

Fraud on Australian cards is occurring in the US and other countries at terminals that haven’t yet been upgraded to chip technology. Counterfeit / skimming fraud increased 77% to $28.1 million, up from $15.8 million in 2014. Australian cards have been caught up in large scale data-breaches overseas. CNP fraud increased 13% to $226.3 million, up from $200.9 million in 2014.

Overseas payment cards used in Australia

Chip technology is protecting overseas cards used for card present transactions in Australia. Counterfeit / skimming fraud dropped 14% to $8 million, down from $9.3 million in 2014. However CNP fraud on overseas cards in Australia is increasing. CNP fraud increased 7% to $47.8 million, up from $44.7 million in 2014

Cheques used in Australia

Cheque use has dropped more than 70% in Australia over the past 10 years. The total rate of cheque fraud increased to 0.7 cents per $1,000 in 2015, up from 0.5 cents in 2014 – remaining under 1 cent per $1,000.

The rate of fraud increased to 66.8 cents per $1000 spent, up from 58.8 cents in 2014.

APCA is the self- regulatory body for Australia’s payments industry and has 100 members including Australia’s leading financial institutions, major retailers, payments system operators and other payments service providers.

Fintech lessons from the big four banks

From Fintech Business. Each of Australia’s four major banks has adopted a different approach to manage the challenges caused by fintech disruption, writes Finder.com.au’s Elizabeth Barry.

Since the beginning of the Australian fintech boom, headlines have proclaimed how Australia’s largest financial institutions should be running scared from startups.

Now the big four have had a chance to retaliate, what can their reaction tell us about how these stoic organisations deal with disruption?

Each of the big four has dealt with their fintech rivals in a very different way, and for some of them, the cracks are starting to show.

Speaking at an event in Sydney in June 2016, NAB chief executive Andrew Thorburn said the bank emulated the traits of its startup rivals.

“I actually think we are a fintech company ourselves. We have to have the mindset of a fintech company, and I actually think we’ve got a lot of the assets of a fintech company,” he said.

In that same month, NAB launched a product – the QuickBiz Loan – from its innovation hub “NAB Lab” on its own — that is, without partnering with a fintech startup.

At the time of the launch, Mr Thorburn said “There does remain a question mark around the credit capabilities around some of the fintechs.”

“We’ve watched developments in the space and been very determined…to make sure we have our own NAB-branded solution that we’ve built from scratch.”

A similar venture, this time jointly founded by NAB and Telstra, was small business marketplace ProQuo.

Despite the size of both corporations, ProQuo considers itself a startup and even housed itself next to startup accelerator Blue Chilli.

While NAB has gone its own way on several ventures, including those outlined above, it has pledged $50 million to invest in startups and develop partnerships with innovative companies through its NAB Ventures fund.

Commonwealth Bank has taken a very different approach than NAB. The bank partnered with payments startup Kounta earlier in the year, following that with a partnership with small business lender OnDeck.

The partnership with OnDeck saw it pick up the Fintech-Bank Collaboration of the Year at the Australian Fintech Awards in 2016.

While partnerships between financial institutions and startups have become common, it’s Commonwealth Bank’s attitude towards the fintech sector that also sets it apart.

Speaking at an Australian Information Industry Association lunch in Sydney, Commonwealth Bank’s chief information officer David Whiteing spoke of the need to embrace newer technologies and be ahead of the market.

“We should mirror the society in which we operate, so if we become really good at being inclusive we will be able to harvest the ideas and respond quickly,” he said.

“One of the things that my leadership team talks about quite a bit is that today we are a technology team in a bank that has a technology halo, tomorrow if we get this right, we will be a technology company that does banking services.”

The big four lender has already established an innovation lab in Hong Kong and begun experimenting with blockchain technology.

At 180 years old, ANZ is far beyond its startup years. Earlier this year, ANZ boss Shayne Elliot told a Melbourne fintech meetup he was ready to forge partnerships and invest in startups.

However, speaking with the Sydney Morning Herald, Elliot also outlined the bank’s challenges:

“Investing in startups is not hard for banks, we have lots of money to write cheques, the difficult thing is figuring out how we can internalise that intellectual capital,” he said.

Two key partnerships announced by the bank include York Butter Factory, a Melbourne incubator and co-working space; and Honcho, where customers are referred from its small-business banking websites to receive discounted business registration, marketing and data storage.

ANZ’s recent venture with Apple to offer phone users Apple Pay is also a mark of things to come for the bank, signalling its willingness to adopt technologies built elsewhere.

“The days of a bank needing to own every piece of technology are gone,” ANZ managing director for pensions and investment Peter Mullins noted recently.

“We believe we can achieve better outcomes for our customers by partnering with a specialist provider committed to the technology investment and product innovation needed to provide a world-class offering.”

Westpac is arguably the big four bank that is furthest along the fintech curve. Reinventure Fund, of which Westpac is the largest funder, has invested in a huge number of fintech startups.

Through Reinventure $50 million will be invested in Australian technology startups such as Society One, Valiant Finance and Coinbase. Outside of the fund, Westpac has also partnered with SME lender Prospa.

Speaking at the 2016 Banking and Wealth Summit, Westpac CIO David Curan spoke about the new technology ecosystem he sees developing between banks and fintechs.

“My guess is we will continue to see more collaboration in financial services, and that will start with more partnerships between banks and startups – because that’s what we’re used to – just a few people and easy to define contracts,” he said.

“Over time we’ll move to more of an ecosystem model, where more and more people will be working together, with new inter-relationships that aren’t that clear. That starts with more partnerships and moving into new ecosystems, the technology is taking us there whether we like it or not.”

So, what can the big four teach us about fintech?

The banks that are not going to lose at fintech are going to find the best tools at their disposal and admit when they don’t have them; thus the partnerships.

The banks that are becoming the best innovators are working with fintech, not against it. They are admitting that while they are market-leading, a startup may be worth listening to.

While there is no clear answer whether partnerships are the best strategy for every company, any answer that best drives innovation for a fintech company (bank or otherwise) should be what’s adopted.

ACCC continues its review of banks’ application for authorisation to collectively bargain with Apple

The Australian Competition and Consumer Commission says it is continuing to assess the applications for authorisation by the Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank, and Bendigo and Adelaide Bank after deciding not to grant the banks’ request for interim authorisation at this early stage of its assessment process.

The banks wish to engage in collective negotiation and boycott activities with Apple in relation to its e-commerce Apple Pay platform and with other third party wallet providers in Australia.

“The ACCC has considered interim authorisation within a short timeframe at the request of the applicants. However, given the complexity of the issues and the limited time available, the ACCC has decided not to grant interim authorisation at this time. The ACCC requires more time to consult and consider the views of industry, consumers, and other interested parties,” ACCC Chairman Rod Sims said.

In deciding not to grant interim authorisation, the ACCC took into account the potential for continuing effects on competition in the market, the extent of urgency for the request, any possible harm to the applicants or other parties if interim authorisation is granted or denied, and possible public benefits and detriments.

“The entire ACCC authorisation process usually takes up to six months, including the release of a draft decision for consultation before making a final decision. We expect to release a draft decision in October 2016. The ACCC’s decision not to grant interim authorisation at this time is not indicative of whether or not a draft or final authorisation will be granted,” Mr Sims said.

The banks, together with other participating card issuers, are seeking authorisation to collectively negotiate and boycott on a range of issues. One of these issues relates to the banks’ ability to utilise Near Field Communication hardware on Apple devices to enable contactless payments to be made through the banks’ own digital wallets.

A digital wallet is an application that can allow consumers to tap and pay using their phone and can store other information, such as loyalty or membership cards. Other issues for collective negotiations include appropriate industry standards for digital wallets and the banks’ ability to pass on any fees charged by a third party digital wallet provider.

Background

On 26 July 2016, the applicants sought authorisation on behalf of themselves and potentially other credit and debit card issuers to engage in limited collective negotiation with Apple and other providers of third-party mobile wallet services.

The applicants also sought authorisation to enter into a limited form of collective boycott in relation to a third-party mobile wallet provider while collective negotiations with that provider are ongoing.

The applicants sought a decision on interim authorisation within 28 days of lodging their application.

Notes to editors

Authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010 (Cth). Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit resulting from the conduct outweighs any public detriment.

About the authorisation process

Where urgent interim authorisation has been requested, the ACCC aims to make a decision on it within 28 days. When granted, the applicants can engage in the conduct while the substantive application is considered by the ACCC.

Generally, the ACCC can grant authorisation if it is satisfied that the public benefit from the conduct outweighs any public detriment, including any lessening of competition.

The statutory period for the assessment of an authorisation is six months (unless extended by a maximum of an additional six months).

The ACCC is required to publish a draft decision (‘determination’) in relation to an application. This is usually 3-4 months after receiving an application.

The ACCC will conduct public consultation with interested parties both before and after a draft determination.

Applicants or interested parties may call a ‘conference’ following a draft determination which is an opportunity for applicants and interested parties to make oral submissions to the ACCC about the draft decision.

The ACCC will generally release its final decision (‘determination’) 5-6 months after receiving an application.

Further information about the applications for authorisation is available on the authorisations register: Bendigo and Adelaide Bank & Ors – Authorisation – A91546 & A91547

ASX FY16 Result Strong, Blockchain Experiments Progress

The ASX released their results for FY16, with revenue of $746.3m, up 6.5%, and Net Profit of $426.2m, up 5.7%.

Mr Rick Holliday-Smith, ASX Chairman, said: “ASX delivered strong financial results in FY16, with growth in all key business areas, supported by higher market activity. This was driven by a rise in secondary capital raisings within the financial sector and increased trading activity due to heightened volatility, particularly in the second half of the year, culminating in the surprise of Brexit. Revenue was up 6.5% to $746.3 million and profit after tax rose 5.7% to $426.2 million.

“ASX continued to invest in the infrastructure critical to Australia’s financial markets throughout the period. This included successfully introducing T+2 settlement, significant progress on the delivery of a new futures trading platform, and the assessment of distributed ledger technology or ‘blockchain’ as a potential post-trade solution for the equity market. These initiatives aim to improve market efficiency and reduce risk and complexity for investors, intermediaries and other market stakeholders. They help keep Australia at the forefront globally of innovative market developments”.

ComputerWorld reported on the Blockchain initiatives.

ASX has completed the first phase of work on a potential blockchain-based replacement for its CHESS system, which providers clearing and settlement services.

The operator of the Australian Securities Exchange announced earlier this year that taken a stake in US company Digital Asset Holdings with an eye to potentially developing technology inspired by the distributed ledger that underpins the Bitcoin cryptocurrency.

“We’ve completed our initial analysis of the technology and have begun work on the next stage of this journey,” ASX CEO Dominic Stevens said today during a full year results presentation.

“We’ve made good progress” in exploring the use of distributed ledger technology over the past year, said deputy CEO Peter Hiom.

“The initial phase of development has been completed,” Hiom said. “We’ve increased our investment in Digital Asset Holdings and we have commenced the next development phase. Over the next 18 months ASX and Digital Asset Holdings will build an industrial strength platform that could be used as the basis to replace CHESS over the longer term.

“ASX is now commencing engagement with customers and stakeholders on the requirements for that platform, with a final decision by ASX on whether to use the technology being made later in FY18.”

Hiom said that there were some key differences between the “permissioned disturbed ledger technology” ASX is experimenting with and the public blockchains employed by cryptocurrencies.

“The main difference I want to highlight is public blockchains are operated largely in unregulated marketplaces where anyone can join and access those markets anonymously via a public, or unpermissioned, network,” he said.

“Network security is public to scrutiny and if compromised it could allow someone to anonymously and unilaterally transfer cryptocurrency on the public network. This is clearly unacceptable in the types of highly regulated markets within which the ASX operates.”

“Not withstanding this, the underlying blockchain technology has inspired new applications that can be tailored for use in highly regulated markets such as those operated by ASX,” he added. “It is the database architecture, or distributed ledger technology, which interests us.”

He said that ASX didn’t seek to change the existing regulatory framework it operates in.

“What we do change is the way that data is authenticated, authorised, accessed and stored,” Hiom said. “It is this that creates the single source of truth that could remove complexity and deliver significant benefits to the industry.”

The deputy CEO said that there had so far been no “red flags” around scalability or performance.
Read more: Blockchain is useful for a lot more than just Bitcoin

ASX reported growth in its operating expenses for FY16 of 6.5 per cent to $170.6 million, which the company attributed in part to investment in its technology transformation program.

“We’re in the midst of a major transformation,” Stevens said. “Specifically we’re replacing or upgrading our trading, monitoring, risk and clearing systems, exploring post-trade innovation through the use of distributed ledger technology, [and] improving connectivity for our customers, here and abroad.”

Xero Team With PayPal To Ease SME Cashflow

From the Xero Blog.

Xero is making huge strides towards a great online revolution in small business: to build a financial web that connects small businesses, banks, accountants and bookkeepers, and online software, that really allows businesses to grow by zeroing in on what they do best — building their own business.

But it’s hard for businesses to do that when they’re spending their time doing important yet time-sucking tasks like chasing payments, instead of innovating and growing. For example, we’ve found that Xero customers have sent almost 9.5 million invoices over the last 30 days alone. That’s a sure sign of healthy small businesses. Yet based on our current data, over 60% of those invoices will be paid late.

Xero + PayPal

With unpaid invoices causing a major headache for small business owners, we are pleased to announce at Xerocon San Francisco a slick new integration with PayPal, which is due to be released later this month.

This update will deliver a seamless new checkout experience for customers that will make it easy for invoices to get paid as soon as they are received, using Xero’s online invoices and PayPal Express Checkout. In addition to a fast payment experience, Xero users will now be able to see real-time status updates on outstanding invoices. Payment reconciliation will also be a breeze, with Xero doing all the heavy-lifting for you by auto-matching payments and fees.

I’m excited to have PayPal join us on our journey to rewire the small business economy. As small businesses move to simple, easy-to-use online tools like this latest integration in our ecosystem/App Marketplace, financial institutions and large enterprises are being made aware of the fundamental architectural shift. They’re connecting to these new platforms and as a result, the financial web is evolving quickly, especially where shared transactional services have become the expectation, shifting the focus on to revenue, opportunity, compliance, and risk management.

PayPal are a major online player. They’re providing an open and secure payments ecosystem across more than 188 million active accounts using 100+ currencies in over 200 countries.

Paypal Express Checkout offers a quicker, easier payment experience meaning customers can complete a payment in just 3 clicks once they receive an online invoice, removing the barriers of completing payment.

Identifying Blockchain Opportunities

Juniper Research has released a brief report on where Blockchain might be leveraged.

The emergence of Bitcoin and an array of alternative cryptocurrencies (‘altcoins’) has been a true phenomenon of the past 7 years or so. In that time, billions of dollars’ worth of these currencies has been traded on the dedicated exchanges that have sprung up to support them, while a number of merchants now support Bitcoin as a payment option.

However, with only a small, dedicated base of users, attention is turning away from their usage as an alternative to fiat currencies and to the wider potential of the blockchain technology that underpins them.

Numerous banks are now trialling the technology as a means of reducing settlement costs, while a host of other use cases, eg smart contracts and ID verification, are also seeing their first deployments.

Selected Blockchain Opportunities

Settlement & Remittance
It is increasingly envisaged that blockchain technology will have a significant role to play in the future evolution of transaction settlement solutions. Many clearing houses processes tens, or even hundreds, of millions of financial and commodities derivatives and securities transactions per annum. At present, the clearing firms involved in the transaction have independent processing systems; the introduction of a blockchain-based system would substantially reduce the risk of error and indeed the time taken for error checking.

Cross-border remittance in particular is viewed as an area where blockchain technology could have a profound impact. The total value of official cross-border remittance in 2015 (latest World Bank data) was $582 billion, of which $436 billion was sent to emerging or developing economies.

However, a substantial amount is additionally sent through unofficial channels, chiefly in the form of cash in envelopes. One reason for this is the high cost of remitting through the most popular official channels. The average cost of sending $200 via MTOs (Money Transfer Operators) was 6.6% in October 2015; via banks, this rose to 11%. Furthermore, several leading remittance corridors charge rates significantly higher than these average figures, in some cases up to 25%.

With blockchain technology able to significantly reduce the costs to the remitting organisations, the hope is that the savings enabled by this will be passed on to consumers and enable average prices at or below the 3% average price which the World Bank is targeting. The hope is that not only will it then result in more ‘grey’ remittance transferring to official channels, but also in a net increase in remittance flows, helping to boost economies which are in part dependent upon remittances from migrant workers.

Smart Legal Contracts: Current & Future Use Cases

While there are a number of definitions for ‘smart contacts’ per se, smart legal contracts may be defined as:

Contracts in the form of computer protocols with the ability to verify their own conditions, emulating the logic of contractual clauses.

Smart contracts can self-execute by, for example, triggering the release of payment when certain conditions are fulfilled. These contracts run on networks beyond the control of the contract’s participants, thereby providing a record of the terms of the contract and ensuring its fulfillment. Furthermore, smart contracts can offer an array of additional benefits to participants, including:

Reduced cost – less human intervention in the procedure implies a lower resource cost;

Real-time updates – as the contract exists on the blockchain, tasks, including transaction fulfillment, are automated and can occur instantaneously.

Smart contracts could be particularly useful for governments in that they automate manual processes which are time-consuming and expensive.

i. Real Estate
In June 2016, Lantmäteriat (the Swedish National Land Survey) confirmed that it was working with the blockchain start-up ChromaWay, the consultancy firm Kairos Future and fixed/mobile network operator Telia to consider how blockchain technology ‘could reduce the risk of manual errors while creating more secure processes for transferring documents.

Several other agencies are understood to be working on PoCs (Proofs of Concept) in this field, including the Republic of Georgia’s National Agency of Public Registry (with BitFury as its blockchain partner).

ii. Internet of Things
The ‘Internet of Things’ represents the combination of devices and software systems, connected via the Internet, that produce, receive and analyse data with the aim of transcending traditional siloed ecosystems of electronic information to improve quality of life, efficiency, create value and reduce cost.

It may be possible to integrate blockchain technology in an M2M (Machine-To-Machine) environment, to provide real-time data and authorise access. Given that one of the blockchain’s capabilities is to allow Event Y to occur Given that Condition X is fulfilled, it could also lead to equipment which needs data to fulfil a task being able to locate and self-order that data.

Fintechs for SMEs are here to stay

From FinTech Business. Despite the success of fintech companies the world over, many still underestimate their importance, but when it comes to peer-to-peer lending, the market potential can’t be ignored, writes FundX’s David Jackson.

History is brimming with examples of our limited ability to think beyond the current status quo.

In 1977, Ken Olsen, co-founder of Digital Equipment Corporation, famously stated, “There is no reason for any individual to have a computer in his home.”

In 2007, then-Microsoft CEO Steve Ballmer predicted, “There’s no chance that the iPhone is going to get any significant market share.”

And even Microsoft co-founder Bill Gates displayed surprising short-sightedness when he announced, “We will never make a 32-bit operating system”, taking into consideration the 32-bit Windows NT 3.1 was launched just four years later and a 64-bit system is now on offer.

It can be easy to look back with the wisdom of hindsight and wonder how these statements were ever made. However, despite evidence of fintech’s increasing pervasiveness, we still seem to be making our own version of these statements now.

Below are several reasons why fintech for SMEs may be here to stay.

1. Pent-up demand in the SME debt market is a massive opportunity for fintechs

According to Reserve Bank data, there are around 100,000 SME loan applications made in Australia each month.

Of these, approximately 25,000 loans worth around $20 billion are approved and written by the banks. Another 50,000 loans worth around $40 billion aren’t approved or written, and rightly so, because the applicants aren’t requesting realistic amounts of credit given their capacity to repay.

This leaves another 25,000 loans worth $20 billion dollars that aren’t being written, not because the applicant isn’t creditworthy, but because banks often take an overly conservative approach when it comes to business lending.

Or, to put it another way, a $240 billion yearly opportunity for Australian fintechs.

2. It isn’t profitable for banks to lend to SMEs

Findings of the recent Financial Systems Inquiry suggest that traditional lenders struggle to finance SMEs for a number of reasons.

An inability to price risk in this segment leads many lenders to waste time and resources completing manual credit assessment processes that include physical handling of paperwork.

This can be particularly challenging where an SME is in its early stages and there isn’t a long history of credit activity or financial performance of the SME or owner.

Banks and other traditional lenders can deal with this by placing a costly “uncertainty premium” on business lending. However, this is an expense SMEs are not well-placed to absorb into their expenses.

Sometimes lenders go one step further and err on the side of caution by not lending to a business at all, as demonstrated by the $20 billion worth of loans not being funded each month.

Onerous capital requirements can also drive traditional lenders to make higher provisions for loan losses to reflect the higher expected losses on SME loans.

3. It isn’t convenient for SMEs to borrow from banks

To account for the higher cost and risks born by banks lending to SMEs, traditional lenders are also more likely to require security in the form of property or another asset.

This is undesirable for an SME owner who may wish to create as large a divide between their business finances and their personal finances as possible.

The manual application process of traditional lenders can often also be overly onerous for SME owners, whose time is already likely to be stretched quite thin.

Finally, SME owners looking to shore up cash flow rapidly may struggle to find a fast solution from any traditional lenders.

The time taken from application through to funds in the bank can sometimes stretch out to weeks or months, during which time staff and suppliers will require payment for the business to continue operating.

4. The low-interest environment is driving the search for yield.

Low interest rates across the globe have spurred innovators to search for yield opportunities in niche opportunity sectors such as the SME debt market.

This is affecting two groups of players in the market. On one hand, the search for yield is driving institutional, sophisticated and everyday investors to seek out new ways to make a higher return on investment.

On the other hand, fintech innovators are meeting this demand for new asset classes by creating new avenues for investors to achieve this yield.

As an example, marketplace and peer-to-peer platforms for SMEs are providing lucrative new investment opportunities.

Because these platforms cut out the middleman, investors are thought to receive higher rates and borrowers supposedly pay less, which may explain why Morgan Stanley has gone so far as to predict that P2P fintechs have the potential to take A$27 billion from the banking industry’s revenue moving forward.

And while the low-interest rate environment may not last forever, the rapid evolution that will occur while it does last is unlikely to be unwound if rates begin to rise.

5. The big banks are joining in.

In-house incubator hubs, accelerator programs, chief innovation officers, fintech acquisitions … as much as the big four and other major financial players try to deny the threat of fintech, their actions speak louder than their words.

As major banks the world over are (grudgingly) joining the fintech revolution, the question might be asked – are you coming along for the ride too?

David Jackson is the founder and chief executive of FundX