A speech by Greg Medcraft, ASIC Chairman, discusses some important issues around corporate culture. Culture matters. Culture is at the heart of how an organisation and its staff think and behave. From the behaviour of the board, through senior management to the front line, he argues that organisations without a customer centric culture are likely to lose out to those who do.
Culture is a set of shared values or assumptions. It can be described as the underlying mindset of an organisation. It shapes and influences people’s attitudes and behaviours towards, for example, customers and compliance.
It has been said that ‘culture is the new black’. It is on the minds of governments, regulators, boards, senior executives, and customers globally.
ASIC is concerned about culture because it is a key driver of conduct within the financial services industry. By focusing more on culture, we expect to get early warning signs where things might be going wrong to help us disrupt bad behaviour before it happens and catch misconduct early. We also think it will help us with identifying not just individual instances of misconduct, but broader, more pervasive problems.
Poor culture often leads to poor outcomes for investors and consumers, impacts on the integrity of the Australian financial markets, and can erode investor and financial consumer trust and confidence.
We are at an exciting time in history, when technological innovation is rewriting almost every industry including the financial services industry.
Very recently, Max Levchin, PayPal co-founder and former chief technology officer, said that his new fintech start-up, Affirm – which offers flexible and fast loans and is pitched as an alternative to a credit card – could challenge global financial institutions with a new model designed to better align with customer interests. Regardless of whether this particular vision succeeds, it is evident that new disruptors will continue to challenge incumbents.
In a new Telstra report, Millennials, mobiles and money, it was stated that, ‘millennials may be the first generation to live their lives never requiring nor engaging with a traditional institution and only ever associating the word “branch” with a tree’.
Social licence, social media and the 24-hour news cycle are also changing customer expectations and the way customers behave.
The Telstra report says that ‘the threat from fintech is significant’. It notes that two-thirds of millennials prefer to receive advice on financial products and services via a digital platform, and that automated robo-advice or digital advice is perceived to be more independent and preferred.
In this environment, building and maintaining a culture that your customer can believe in is imperative. There are more choices and information available to customers now than there has ever been before. Firms that do not have a good culture risk losing their customers to firms that do.
We recognise that culture is not something that can be regulated with black letter law. We know that it isn’t feasible to check over every company’s shoulder to test its culture, or dictate how a business should be run.It is an issue that companies themselves must address. Boards and senior management play an important role in setting the ‘tone from the top’ for an organisation. Culture requires senior leaders to think carefully about how their actions and behaviours support and advance the firm’s desired culture.
At the end of the day, you need to have a culture that your customers can believe in. If your culture genuinely reflects ‘doing the right thing’, this will be rewarded with longevity, customer loyalty and a sustainable business.
“Big data” is a catchall term for any data set of exceedingly large volume. It could be transaction information at a credit card company, invoice data at an online retailer, meteorological measurements from a weather station. All these data sets have unique characteristics that make it extremely difficult to use conventional computing technologies and techniques to store and process them for analysis. Their variety is daunting, and high velocity is required to handle them in a timely manner.
So who is going to store, manage and process all this information? Well, why not you? Companies are starved for people with this kind of expertise. Big data is a growth industry and people from a variety of academic backgrounds can find successful careers in this area.
But you didn’t major in “big data”? Don’t worry. Your academic background shouldn’t be an inhibiting factor when you start to contemplate becoming a big data professional.
People working in fields such as physics, bioinformatics, statistics, political science and psychology are already heavy users and analyzers of a large amount of data. Transition from these types of disciplines to big data analytics could be relatively smooth.
If your original education and training didn’t focus on data, that’s not necessarily a problem. Your own discipline-specific knowledge, insights and perspectives can be valuable when figuring out how to leverage big data in the most sensible way. The only catch is you need to be willing and able to acquire the technical skills necessary to either analyze or work with big data.
The most fundamental of these focus on data infrastructure – how the data is actually housed and accessed. These infrastructure jobs involve developing and maintaining the necessary hardware and software. A cloud computing environment is especially well equipped to handle big data due to its scalable nature.
Big data management professionals rely on the data infrastructure to actually populate it with data and manipulate them. Conventional database management workers are natural candidates who could be trained quickly to work as big data management experts. They already have general database management knowledge. But they need to get up to speed on dealing with big data. These can be much more unstructured than what you find in a traditional database, where each record conforms to a certain structure in the form of data fields and types. Imagine a student record, with discrete first name and last name fields. Big data often doesn’t have this kind of nice organization: It can be as unstructured as a bunch of Twitter feeds or Facebook postings by millions of users.
Statisticians are essential in the big data industry. They’re the number crunchers who specialize in analyzing and interpreting the data. There are many advanced techniques used by statisticians, which require years of training. They depend on the data infrastructure providers and data management workers to store and retrieve their source data for further processing.
Visualization specialists are also key in the big data industry. One of the most critical aspects of big data analytics is communicating the results of an analysis to decision-makers – and they often lack expertise in data interpretation or statistics. Visualization empowers a layperson to understand the significance and implication of the numbers produced by a big data analytics effort. Think about being presented with a large set of numbers that you’re told indicate a changing climate. It’s a lot easier to understand the data’s significance when shown a graph with a sharp turn upwards, implying exponential growth.
Finally, machine learning experts focus on automating the statistical and visual interpretations of big data. Automation is critical, especially when the amount of data to be analyzed is beyond human capabilities – as is the case in most big data scenarios. Machine learning is based on self-learning algorithms. These computer programs autonomously enhance their own performance and accuracy through trial and error.
Many curricula available today through universities provide foundational knowledge in all the technical areas of big data. Students can eventually pick their specialty, which can be further honed in a graduate program.
And the most successful big data worker isn’t just a numbers geek. People in this area also need to have a business mindset. Companies are always eager to leverage the information stemming from their big data analyses. They’re looking for people who naturally make connections between actionable information and what the companies are striving to accomplish in both the short and long term. If you aren’t interested in linking these two interests, your job security may eventually be at risk.
You could focus on any one of these areas of big data – data infrastructure, data management, statistics, visualization, machine learning – and become an expert. Another option is to become a generalist; you have exposure to all these technical requirements and as a project manager work with the specialist to solve any given problem.
As a university professor specializing in information sciences and technology, I encounter many students who figure out their true passion for big data only during their senior year while doing their job search; by then, they’ve missed a golden opportunity to prepare themselves academically for this thriving emerging profession. The earlier this epiphany comes before graduation, the better. But there’s nothing holding back grad students or adult learners from investing their time wisely and acquiring the necessary skills. This is especially true in the field of big data analytics due to the abundance of learning resources in the form of both self-learning and traditional education.
What are you waiting for? Start your journey today.
Author: Jungwoo Ryoo, Associate Professor of Information Sciences and Technology at Altoona campus, Pennsylvania State University
According to InvestorDaily, ASIC has signed an Innovation Functions Co-operation Agreement with the Monetary Authority of Singapore (MAS) aimed at “helping innovative businesses in Singapore and Australia in their foray to the respective markets”.
The agreement will enable fintech businesses in Australia and Singapore to “establish initial discussions in each other’s market faster and receive advice on required licences, thus helping to reduce regulatory uncertainty and time to market”, a statement by ASIC said.
To qualify for the support offered under the agreement, businesses need to meet the eligibility criteria of their ‘home’ regulator, the statement said.
“Once referred by the regulator, and ahead of applying for a licence to operate in the new market, a dedicated team or contact person will help them to understand the regulatory framework in the market they wish to join, and how it applies to them,” ASIC said.
MAS chief fintech officer Sopnendu Mohanty said the agreement would help start-ups from both countries grow and expand into each other’s countries.
“Singapore has a vibrant fintech ecosystem, reinforced by sound infrastructure and a growing talent pool, to support companies intending to use Singapore as a gateway to other markets in Asia,” Mr Mohanty said.
“MAS is also looking forward to partner ASIC in joint innovation projects on the application of key technologies such as digital and mobile payments, blockchain and distributed ledgers, big data, and Application Programming Interfaces (APIs),” he said.
ASIC chairman Greg Medcraft said the Australian regulator is committed to encouraging innovation “that has the potential to benefit financial consumers and investors”.
“Since ASIC launched its Innovation Hub last year, we have seen a surge in requests by FinTech start-ups seeking assistance about how to navigate the regulatory requirements,” Mr Medcraft said.
“In particular we have dealt with robo or digital advice, crowdsourced equity funding, payments, marketplace lending and blockchain business models.
“It is very exciting to observe, and clearly some business ideas will want to scale up internationally. We believe this agreement with the MAS will help break down barriers to entry both here and in Singapore,” he said.
A complacent government could easily adopt a wait-and-see approach when it comes to the effects of technology on our economy, but a report from the Productivity Commission advocates what governments need to do to confront digital disruption – get out of its way.
Nobody would mistake the Productivity Commission program for that of a central planner – and just as well. If today’s technologies do lead to a fourth industrial revolution as transformative as the steam, electric and information technology revolutions before it, much of the work will be done outside government.
The report reviews how technology changes are affecting firms and markets, work and incomes. It contradicts some of the solutions already touted by politicians, such as the emphasis on STEM (science, technology, engineering and mathematics education) graduates and throwing lifelines to struggling firms or industries.
It argues that government should remove regulatory barriers to the spread of innovation. Its recommendations are generally sound, but it fails to provide solutions for privacy and ownership of data in the digital economy.
Technology disrupts but productivity growth isn’t following
Devices connected to industrial-strength “cloud” computing underpin today’s digital disruptions. But the revolution goes much deeper than just phones, sensors and robots.
The report finds that technology is blurring the lines between industries that make things and those that provide services. It is also shifting market power towards those who control data and host online transactions, and creating new business models such as the ‘sharing economy’.
Yet for all that, digital disruption has failed to reignite productivity growth from its decade-long slowdown. That might be because current innovations, impressive as they are, are not as transformative as those of previous revolutions. Perhaps their benefits are yet to be fully realised, or are not picked up in official measures.
The report turns to concerns of income distribution and unemployment produced by technology. As new technologies such as machine learning automate many tasks that white collar workers do today, some workers will struggle to adapt.
Technology changes in recent decades may also have helped to propel top earners forward faster than others. Yet the report points out that the last two centuries of technical change led not to mass unemployment but to huge and broad-based improvements in living standards.
What should governments do?
The report urges governments to remove barriers to the spread of innovation, deploy digital technologies to deliver services, and introduce new regulations only where there is strong evidence they are needed. The recommendations, though high-level, are sensible.
The Productivity Commission hews close to its standard line that governments often get in the way of innovation. It recommends that governments only regulate to reduce risks where the evidence supports it, and that they experiment with temporary regulations for innovative business models. The Australian Securities and Investment Commission is already doing this for financial firms.
It acknowledges competition regulators may ultimately need to impose access conditions for digital platforms with strong market power – as the ACCC did recently for a new taxi-booking app backed by incumbents.
On industry support, the report argues that governments should help displaced workers rather than propping up firms or industries. This is the right call: industry support too often throws good money after bad, and can lure new workers to industries that rely on subsidies to survive. One example is what has happened with the auto industry over many years.
The report notes that as the amount of data held on all of us has exploded, protecting privacy and preventing unlawful use has become critical. But there is disappointingly little discussion of control and ownership of data – the single biggest asset underpinning the digital revolution. The Commission must fully address what control consumers should have over their data in its current inquiry on data availability and use.
The report argues that with the gig economy, one reliant on workers taking short-term contracts rather than secure jobs, in its infancy and that it is too early to change labour regulations and the welfare system, which is also what other research has concluded.. It concedes changes may be needed as this form of work grows.
It argues correctly that there is no time to waste in the race between education and technology. Pointing out that STEM does not provide everything workers need to thrive (a finding others have made) in a changing labour market, the report urges instead that broader deficiencies in the quality of secondary and tertiary education be addressed. Governments should tackle these with a sense of urgency: Australia is already busy under-preparing the students who will be the mainstay of the mid-century workforce.
Finally, the report recommends that governments use new technologies to improve service delivery, provide more choices, better target services and cut costs. Governments can also use technology to help the community get the most out of infrastructure – with congestion pricing of roads, or in adapting roads for use by autonomous vehicles, for example. But to get there, governments will need to run trials, share data among agencies and with the public, and in other ways overcome their risk-averse culture.
Author: Jim Minifie, Productivity Growth Program Director, Grattan Institute
Many people will have heard of LinkedIn: the social networking site aimed at professionals looking for a platform for business networking. Many more will have found it irritating – jokes abound on the subject of how hard it is to get the site to stop sending you emails. To these people particularly, but not exclusively, it will seem incredible that Microsoft is buying LinkedIn for an eye-watering US$26 billion.
LinkedIn has found it hard to evolve and grow its profitability beyond its core activity of business-oriented social networking. Its membership base peaked at the beginning of 2013 and has been falling ever since. Even though revenues have grown 35% in recent years, the company’s lacklustre share price is indicative of one struggling to define a market beyond its social media roots. While Facebook has grown its advertising revenue strongly, LinkedIn has been stuck in its domain of job seekers and career planning.
Risky business
This problem has been long in the making, with stock analysts raising alarm bells over LinkedIn’s inability to develop its own new growth strategies which has seen the company’s revenues dwindling year-on-year. LinkedIn earns two-thirds of its income from its recruiting and job market platform services, with the remainder made up of marketing solutions and premium subscriptions.
Certainly LinkedIn can boast a substantial user base, with 106m active users from 433m registered accounts. But compared to 310m active users on Twitter, or the colossal 1.65 billion active users at Facebook, LinkedIn has never managed to grow its commercial services in what could have been an enormous enterprise market. Yet the company, founded in 2002, was one of the early starters in the social media revolution, long before Facebook (2004) and Twitter (2006) and grew its business social network niche market over several years before going public in 2011.
Against this backdrop – particularly the earnings outlook published in February that saw LinkedIn’s share price fall by more than 40% – stock analysts feel Microsoft overpaid at US$196 a share, but for cash-rich Microsoft it makes sense to connect what LinkedIn offers with Microsoft’s substantial enterprise cloud services, for example its Microsoft 360 online office package and Azure cloud storage. This makes LinkedIn a good acquisition for Microsoft to boost its online offerings beyond Windows and challenge others in the field, such as Salesforce.
What next?
The question is what Microsoft will do next. Will the software giant integrate LinkedIn into its Office products, or extend or integrate Yammer, the small business social network platform it bought in 2012? Will it integrate the internet video and voice call capability of Skype into the platform for a seamless contact experience? More likely is that LinkedIn’s social network will be integrated into Microsoft Dynamics CRM, bringing together social networking and customer relationship management into a single tool that runs on Windows and in the cloud. This is the approach that Salesforce has used to its advantage to extend its business enterprise reach.
We are now in an era of the “digital workforce”. The growing use of social media and digital tools are increasingly empowering human productivity – defined by always-connected employees and subcontractors with company and on-the-go services on mobile apps. The role of “talent management” is becoming increasingly critical to enterprises, and human resources platforms that can bridge the commercial world of work activities and the knowledge sharing and collaboration that defines modern digital economy will be key.
Author: Mark Skilton, Professor of Practice, University of Warwick
As hinted in earlier announcements by Shadow Communications Minister, Jason Clare, Labor’s much-anticipated policy for the National Broadband Network released Monday commits the party – if elected – to move away from the Coalition’s fibre to the node (FTTN) network and transition back to a roll-out of fibre to the premises (FTTP). This was the central pillar of Labor’s original NBN.
The FTTN roll-out will be phased out as soon as current design and construction contracts are completed.
This is a major shift away from the Coalition’s focus on FTTN technologies, which was a key part of their election platform in 2013. After a number of delays, FTTN equipment is now being rolled out around Australia.
Labor will continue with the Coalition’s plans to deliver NBN services on upgraded versions of Telstra and Optus’ hybrid fibre coax (HFC) infrastructure. No doubt Labor would like to move away from HFC, but the contracts for the HFC network are already signed, and it is probably too late to remove HFC from the NBN.
Apart from a commitment to deliver FTTP rather than satellite services to western Tasmania, there are no significant changes to the fixed wireless and satellite parts of the network.
Labor forecasts that its revamped NBN will be completed by June 2022, with FTTP being available to 2 million more homes and businesses than would have been the case under the Coalition’s current plans. At the completion of Labor’s NBN rollout, approximately 39% or around 5 million homes and businesses will have access to FTTP, compared to 20%, or 2.5 million, under the Coalition.
A 39% FTTP coverage is considerably less than the 93% target in Labor’s original NBN plan. But in a significant longer-term policy initiative, Labor has promised to commission Infrastructure Australia to develop a plan to upgrade the 2.5 million premises served by FTTN to FTTP. This will mean that all fixed-line connections in Australia will eventually be either FTTP or HFC.
Labor’s new policy recognises the possibility that new fibre-to-the-distribution-point (FTTdP) technologies might become attractive in the future, but has reserved judgement on FTTdP until the technology is more mature. NBN Co is already looking at this technology.
Significantly, FTTdP is compatible with FTTP and offers a straightforward upgrade path to FTTP.
Can NBN Co deliver Labor’s new network?
Labor has pointed out that NBN Co has an in-house FTTP design and construction capability as well as the IT systems necessary to manage FTTP. In addition, legal agreements in place with Telstra to provide access to Telstra’s ducts and pits.
In fact, in recent months, NBN Co has been rolling out FTTP (including fibre to the basement in multi-dwelling units) at a rate of about 10,000 premises per week. This has been underway at a time when NBN Co has been focusing on ramping up its FTTN and HFC rollout.
With a shift away from FTTN construction, and a shift of resources to FTTP design and installation, it is entirely feasible that NBN Co could double the rollout rate to around 20,000 premises per week. This would be more than enough to serve the 5 million premises targeted over the five-year time-frame of Labor’s roll-out plan.
Are Labor’s costings sound?
Labor has not published a detailed budget for its NBN plan. But the total estimated cost ($49 billion to $57 billion compared to the Coalition’s budget of $46 billion to $56 billion) appears to be plausible.
There are a few key factors that support this:
The cost of installing FTTP has decreased significantly over recent years, aided by new efficient construction techniques and new fibre cables with smaller diameter.
The ongoing operational expenditure needed to keep an FTTP running is considerably lower than for FTTN.
As the demand for higher-speed services over FTTP grows, NBN Co will receive higher revenues from its FTTP network than its FTTN network. Labor claims this will increase the rate of return on the NBN investment from 2.7% under the Coalition to 3.9% under Labor.
The pace of FTTP roll-outs around the globe is increasing as other countries recognise the critical importance of super-fast broadband to economic growth.
AT&T, a major United States telco has essentially stopped constructing FTTN networks, and has announced a major increase in FTTP deployments in response to customer demands for higher speed.
In Australia, the Coalition’s FTTN exacerbates the “digital divide”, the gap between broadband haves and have-nots. Here’s how.
Those homes and businesses lucky enough to be served by FTTP can access very-high-speed internet now and even higher speeds in the future. Meanwhile, those premises stuck with FTTN will struggle with lower speeds and find that their connection is obsolete within a few years.
For those customers with FTTN connections, the speed of their service will be affected by their distance from the node. The greater the distance, the lower the speed.
The Coalition’s technology choice program enables FTTN customers to pay for an upgrade to FTTP, but at a cost depending on the distance from the node. A business that needs FTTP and is some distance from the node may have to pay $5,000 or more for an upgrade, while another business close to the node would pay considerably less.
The NBN has been a key issue in the past two elections, so will Labor’s new policy be a vote winner? The policy to move back to FTTP provides a clear differentiation from the Coalition’s FTTN-centric strategy.
Many Australians recognise the importance of super-fast broadband as a driver of innovation in the digital economy, and will no doubt think of this on July 2.
Author: Rod Tucker, Laureate Emeritus Professor, University of Melbourne
The USO was formulated in a different age when the internet was in its infancy. Today, its requirement to provide access to standard telephone services and payphones to all Australians is akin to mandating the availability of horse and buggies by carmakers operating in the age of the Tesla.
The issue is shaping up as a sleeper in the current federal election, especially in the bush. During Tuesday night’s episode of Q&A, telecast from regional Tamworth (400 km north of Sydney), the issue featured prominently. Tony Windsor, who is running as an independent candidate against deputy prime minister Barnaby Joyce in the seat of New England, received the biggest cheer of the night when he said of telecommunications infrastructure: “do it once, do it right and do it with fibre”.
City dwellers might be forgiven for thinking that this is the latest, high-tech version of the “whingeing farmer” syndrome. They would be wrong. Rural Australia has very real and legitimate concerns regarding the growth and probable permanency of the digital divide.
For many years regional Australians have had to contend with demonstrably inferior internet speed and reliability than their fellow Australians. This problem is compounded by the fact that their need for broadband services is greater than their urban cousins due to the importance of broadband for education, healthcare and business.
These additional connectivity requirements are increasing exponentially as technologies like Smart Farming, remote sensing and genomics create vast amounts of data. These are agricultural examples of the Internet of Things – an emerging paradigm that promises huge improvements in agricultural efficiency and environmental management, but requires constant and unconstrained internet access.
Like most public policy dilemmas, it’s all about money. Labor’s initial policy was full Fibre to the Premises (FTTP – the Rolls Royce option) but its policy these days is looking increasingly similar to the Coalition’s – with both looking quite different from Tony Windsor’s “do it with fibre” admonishment.
It has been estimated that the full FTTP option to all (or the vast majority) of Australian homes and businesses would cost an additional $30 billion. In the context of Australia’s current and likely future fiscal situation, this has been seen in Canberra as too much to spend.
The reality on the ground (or in fact in orbit) is the NBN’s Sky Muster satellite (launched in 2013 and switched on this month, with another launch soon to follow). According to an NBN spokesperson, there are 600 technicians connecting homes as fast as they can and by mid-year 2017 around 85,000 premises will be connected.
This multi-billion dollar investment certainly improves internet access for rural and remote Australians but it also sets a constraint as to what regional Australians should expect in the future.
Sky Muster is decidedly akin to a Holden Commodore (but at least not a Kingswood) in comparison to the FTTP’s Rolls Royce. It’s fair to say rural users are generally much happier with these new services than the historical interim arrangements. However it is also clear that what Sky Muster offers will be inferior to what is being offered in the cities, potentially cementing for the foreseeable future regional Australia’s “second class” status.
The essential problem with Sky Muster and similar satellites are their innate physical limitations. While this is true of all network technologies, there is real concern that user demand, especially at peak times, will quickly overwhelm the satellites’ capacities creating the need for ISPs to shape user download speeds.
One consequence of this will be downtime for important synchronous activities like e-conferencing and the like, but also a lack of functionality in the emerging IOT systems that require an unconstrained, always-connected network state.
Another problem relates to cost. Urban consumers are used to paying around $100 per month for unlimited and relatively reliable broadband complementing fast 4G cellular when they are away from home. Early Sky Muster plans are slower and offer far less data, especially during peak times when people are actually awake.
Rural communities are rightly concerned that the launch of Sky Muster may well be as good as it gets. While this is clearly better than what the country people have had, the divide between the bush and the cities in this and other areas is seemingly becoming wider and more permanent.
So, as the Productivity Commission grapples with the question of what the USO should look like in 2016 it will really need to consider what it should look like in a decade or two. This question will challenge the Commission’s rationalist economic predilections.
The answer relates not so much to the current and future economics of accessing the internet but more so the nature of fairness in Australia. The key question is how willing we are as a nation to see rural Australia fall further behind the cities in this fundamental aspect of our national infrastructure.
Authors: John Rice, Professor of Management, University of New England; Nigel Martin, Lecturer, College of Business and Economics, Australian National University
The idea of separating out the arms of the “Big Four” banks like insurance and superannuation from their core banking business is gaining traction in Australia. It featured in the Greens’ banking and finance election policy. However this is not a new idea; Australia is just catching up to banking reforms already made by the UK.
The proposals by the Greens are, in international terms, actually quite tame. The Greens talk about “looking at breaking up the banks,” rather than actually breaking them up. They also suggest applying a “tax deductible levy of 0.20% on the asset base of institutions worth greater than $100 billion” on the “too big to fail” Big Four.
Other jurisdictions have gone much further than the Green’s proposals. For example, following the recommendations of the Vickers’ Inquiry into the UK banking system, banks with assets over £25 billion, will be required from 2017 to split off their retail banking activities into separately managed entities that can be floated off, if the holding company goes belly up. Similar rules are also to be enacted throughout the European Union.
Far from local banks being well-regulated, the latest research on managing systemic risk by the Bank of England shows that Australian banks are simultaneously extreme outliers, in regards to size relative to GDP, yet among the lowest of their peers as regards capital requirements. This is extremely risky, especially given the banks’ exposure to the Australian housing market.
The Australian taxpayer is providing a guarantee for such risky behaviour which the Reserve Bank estimates to be worth some $3.5 billion per year to the big four banks.
One of the Green’s proposed considerations is to investigate:
“The nature of vertically integrated business models, including: i. the integration of everyday banking, financial planning, wealth management and insurance within a single entity; ii. whether the incentives provided encourage illegal or unethical conduct; and iii. whether the incentives provided are aligned with the duty of care to customers.”
This term “vertical integration” is a classic illustration of the problems that arise in so-called Universal Banking. The concept of Universal Banking, sometimes called a “financial supermarket”, in which many financial services are sold under the one roof, goes back to the 19th century in Germany.
This is where German banks not only took deposits and made loans, but also funded and even made equity investments in companies. This one-stop shop was credited with helping to make Germany an industrial superpower in the late 19th century.
On the other hand in the UK and USA, there was strict separation of retail banks and so-called investment (or merchant) banks. In the USA, this separation was enshrined in the famous/infamous Glass Steagall Act of 1933 which was an outcome of the Pecora Commission into the Wall Street Crash of 1929.
In the UK, a strict separation lasted until 1984, when the Thatcher government implemented the so-called Big Bang, which broke down the barriers between commercial and merchant banks. Subsequently, there was a massive consolidation of banks, merchant banks and eventually building societies.
US banks, such as Citicorp and JPMorgan, joined in the takeovers of UK firms even though technically it was still forbidden in the USA. However in 1999, after pressure in the industry and with almost unanimous congressional support, the Glass Steagall Act was repealed and the concept of a one-stop shop for financial products became the accepted business model around the world.
In Australia in the year 2000, NAB acquired MLC Life Limited, which was the insurance and investment arm of Lend Lease. Soon afterwards the other big three Australian banks followed suit, acquiring investment firms and insurance companies. For example, Colonial Mutual insurance was acquired by the Commonwealth Bank to become its scandal-ridden CommInsure subsidiary.
The prevailing model of Universal Banking in Australia is barely 15 years old.
Why did Universal Banking become the accepted model around the world?
There are two arguments usually put forward for Universal Banking: economies of “scale” and economies of “scope.” The argument for scale is, the bigger a bank is, the better it can leverage its resources, especially expensive technology. The more depositors a bank has the more money it can lend and in a sort of virtuous circle, the more depositors the bank can attract, always provided that the banks treat their depositors fairly, of course.
Scale is important. For comparison, the largest retail bank in the world by market capitalisation is the US based Wells Fargo bank which has some 70 million customers worldwide, mainly in the USA. That is about three times the population of Australia.
Last financial year, Wells declared net income of around A$30 billion (US$ 22.9 billion) which is almost identical to the total declared by the Big Four banks. On a per customer basis then, Wells appears not to be as efficient as Australian banks, or just possibly Australian customers may be getting a very raw deal from their banks.
Economies of scope means that a bank, using its presence in the market, can expand the products it sells to existing and new customers. This so-called cross-selling is infuriatingly obvious in Australian banks.
Under a universal banking system banks are offering customers other types of products, they may or may not want.Alan Clark/Flickr, CC BY-ND
An example of this is a consumer, when attempting merely to pay in a cheque, can be bombarded with questions about whether they would like insurance with that. It is a form of diversification, expanding and hopefully stabilising sources of income.
In pursuit of scope, the largest Australian banks have all acquired investment management and insurance companies, bundling these acquisitions up into fashionable “Wealth Management” units. According to KPMG, these units provided a 25% of the Big Four’s profits in 2015. The problem is that the Big Four banks have proved to be not very good at “wealth management.”
The original reason for diving into the wealth management business was the pot of gold that is Australian superannuation, which is growing year on year through mandatory contributions and today sits at just over A$2 trillion – who could lose? Certainly not the superannuation funds managers.
But could they outperform others? Unfortunately not, as the largest bank-owned retail funds consistently underperform not-for profit industry funds – not really surprising as industry funds operate on a not-for-profit basis.
And all the while, people are deserting the retail sector in droves to run their own Self-Managed Superannuation Funds (SMSFs). In 2016, self-managed assets total some A$592 billion or 30% of the total super pot of just over A$2 trillion, exceeding the retail sector and growing each month.
If the prospect was only ever little more than a pipe-dream, it became a nightmare as pensioners lost their savings in the GFC, created incidentally by banks. And today the prospect of even the middle class living in poverty in retirement has become a reality. In Australia, with the average super balance for men at retirement being just less than $300,000 (much less for women), ASFA, the industry body for super funds, concludes that” many recent retirees will need to substantially rely on the Age Pension in their retirement”.
Is the rationale for seeking economies of scope still valid?
Technology has changed everything. In the 20th century, people still went into banks to withdraw or deposit money, to make payments, to ask for a mortgage or to talk about investments.
It was quite possible then for the banks to catch customers at the counter and sell them something they may not want or need but nonetheless may be good for them, like an insurance policy.
They visit websites or mortgage brokers when they are looking for a mortgage. They search websites that compare deposit and investments offers, and there are a myriad of ways that people can pay bills or make payments for online goods.
People are deserting bank branches for the internet and the importance of face-to face contact and opportunities to cross-sell have diminished.
If there is no pot of gold at the end of the Wealth Management rainbow for banks nor their customers, then the boards of Australian banks must look to strategies other than Universal Banking.
Unfortunately, the subject of banking reform was not addressed fully by the Financial Systems Inquiry, headed as it was by the architect of CommBank’s vertical integration strategy, and the subject has since become a political football.
The Green’s policy would be seen as a minimum and meek in most other jurisdictions, while the industry’s response is shortsighted and defensive. The subject is too important to be trapped in this stalemate.
Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University
National Australia Bank has entered the online SME lending market with the launch of the NAB QuickBiz Loan, which that allows customers to borrow up to $50,000 in unsecured funding via a new online application process.
Developed by NAB’s in-house innovation hub, NAB Labs, the online platform uses financial technology to assist with the loan application process and states that customers will have money in their account within three days of NAB receiving their signed loan document.
The QuickBiz Loan carries a fixed interest rate of 13.85% for terms of either one or two years. The loan is repaid by monthly principal and interest payments and there are no application or ongoing fees.
According to Angela Mentis, NAB group executive for business banking, “in the early days of business ownership, small businesses often only require small amounts of funding – and many owners don’t have a property or other significant assets to secure a loan against. We’re responding to these customer needs, placing more emphasis on the strength of the business rather than traditional physical bricks and mortar security.”
Jonathan Davey, executive general manager of NAB Labs added the NAB QuickBiz Loan is “another example of the bank’s agile approach to meet customer needs”.
Meanwhile, Canstar’s research manager Mitchell Watson says “from NAB’s point of view this is a move to help stem any loss of low-risk customers to smaller, more agile competitors.”
According to Watson, “the advertised 13.85 percent does seem to be a fair interest rate”, given it is lower than the 16% being charged by the Commonwealth Bank’s Simple Business Overdraft. However, it should be noted that an overdraft is a more flexible and expensive loan product than a principal and interest loan.
What this means for your business
QuickBiz Loans are unsecured, although borrowers should enquire about whether personal guarantees are required. They should also check to ensure the 13.85% rate is based on the outstanding balance rather than the original limit. Any discrepancy would have been evident had the NAB website quoted the interest rate on an APR (annualised percentage rate) basis. Borrowers should also be aware that they could be up for costs if for whatever reason they terminate the loan before the expiry date.
An interest rate of 13.85% is at the lower end of the rates charged by the new breed of online lenders. Banks will always be able to offer cheaper loans to customers because of their lower cost of funds but while it is important, price is not the only factor SMEs consider when it comes to borrowing.
The biggest attraction of the online lenders is the ease of doing business and although there is little doubt that banks can develop software and systems at least as good as the online SME lenders, none of them will survive in this increasingly crowded marketplace if they fail to deliver on the commitments made on their website.
NAB says the QuickBiz loan product is launching in early June, although the website has already been up for several days. In fact, four days ago I applied for a QuickBiz Loan and the experience has been insightful in that the process is not automated, as it is with true online lenders where your application is made totally online. Rather this was an online enquiry. In addition it has not been quick. Having submitted answers to several basic questions about my identity and existing relationship with NAB, I then received the following message in an automatically generated email:
“Thank you for your enquiry regarding the NAB QuickBiz Loan.
“We are currently reviewing the information you provided us and we’ll be in touch shortly to discuss your application further.”
Four days later there has been no response. Of course there are always teething problems in implementing new ways of doing business but this experience re-enforces the importance of good execution. Banks have lots of great products and ideas but too often their execution lets them down.
If the big banks really get their act together with online SME lending, it’s going to be tough for the new little guys to compete. But this remains a big “if” and in the meantime the new players are backing their ability to do better on product and service delivery.
However this unfolds, we are finally starting to see genuine competition in the SME lending market and that’s a great thing for those SMEs who for years have been missing out.
Author: Neil Slonim who is the founder of theBankDoctor.org, a not-for-profit online resource centre that helps business owners deal with the challenges of funding their business. Reproduced from SmartCompany with permission.
Small businesses around Australia will soon be able to develop and grow through a new digital marketplace called Proquo; a start-up joint venture between NAB and Telstra.
Proquo will offer more than two million Australian small businesses an online platform to network, trade or swap services with each other.
Small businesses will be able source a range of services from other providers, create briefs for the work they need, exchange quotes, manage payments and publish reviews all on the one simple platform.
Proquo is a modern interpretation of the phrase quid pro quo (meaning ‘this for that’) and offers users the unique ability to swap or exchange their skills or services in addition to traditional monetary payments.
Proquo was developed by NAB’s innovation hub, NAB Labs and Telstra’s Gurrowa Innovation Lab. While it is a 50/50 joint venture, it will operate as an independent entity.
NAB Executive General Manager Micro and Small Business Leigh O’Neill said NAB was continually looking at ways to support Australian businesses and to make it easier for them to build their business.
“Small business is the backbone of the Australian economy; around 97% of all Australian businesses are small businesses and they provide a huge economic contribution to Australia’s current and future prosperity,” Ms O’Neill said.
“Small business owners tell us they are continually looking for new ways to do business and we think Proquo will provide them with a unique way to network and grow their business.
“Strategic partnerships like this one with Telstra, to combine the capabilities of two of Australia’s biggest companies, creates a really innovative business option for the small business community,” Ms O’Neill said.
Telstra Group Managing Director Telstra Business, Andy Ellis said Telstra supports more than 1 million businesses across the country with technology solutions so they can focus on running their business; and believes Proquo will offer them a new and innovative way to network and help their business thrive.
“Small businesses often struggle to get off the ground and our research shows that the exchanging of services will be a great advantage to many start-ups.
“We’re excited and proud to partner with NAB to offer this unique digital platform. This joint venture further highlights our commitment to small business so they can run, develop and grow their business,” said Mr Ellis.
Proquo will begin a pilot phase in June, with a full launch expected in July 2016.
