Fintech Spotlight – Digital Disruption of Trade Receivables

In the latest in our occasional series on digitally disruptive innovators, we look at Tradeplus24.

Note DFA is not paid for this article. Our sole focus is to share insights into the disruption which is occurring across the Finance Sector. Trade Receivables in no exception.

I caught up with ex-Nab exec Adam Lane, Managing Director of Tradeplus24 Australia, who is leading the charge into Australia of the Credit Suisse-backed alternative lending start-up. Headquartered in Switzerland, this is a first step in its international expansion plans after raising 120 million Swiss francs (AUD173.6 million) in debt and equity in February.  Tradeplus24 was founded in 2016.

(Left To Right Kelvin Rossely, CRO, Adam Lane MD Australia)

Adam explained that Australia was an excellent jumping-off point because it parallels British regulation, and the necessary data is available, thanks to the early adoption of cloud-based accounting services here. There is a clear need to offer credit to the SME sector, and he believes the regulatory and political environment is right to launch. The fact that commercial brokers already operate here, and Adam’s experience via NAB completed the deal.

The start-up will target SME’s with a turnover of $3-50 million annually, and a flow of account receivables. They will offer variable credit lines range between $500,000 and $10 million.

We know from our DFA SME surveys that many businesses are finding it too difficult to get finance to support their business, and often a bank will require property as collateral which means firms are locked into relationships which are far from perfect. In addition, traditional lenders are struggling to structure cash-flow finance smaller than $5 million, and alternative lenders typically not providing loans above $250,000, so there is a niche to exploit.

Tradeplus24 does not require property as collateral, rather it collateralises the trade receivables, and relies on its digital platform to asses new business and manage existing firms. Thus, while its credit limits may be comparative with significant lenders like Scottish Pacific, Tradeplus24’s automated credit technology assesses SME supply chain data and calculates risk down to individual invoices in real time, making it as fast, agile, and accurate as tech-based alternative lenders.

They are targeting sectors including manufacturing and supply chain, labour hire, etc, any with a large receivables book. They are avoiding the construction sector.

Facilities are offered on a 12-month term, but experience shows that typically firms require help over 3-5 years to take their business to the next level. An application fee is charged at 1% of the facility and 1% ongoing fee annually, and the typical interest rate is in the range of 7-9%. They structure transactions by harnessing insurance to underwrite the account receivables of SME’s, which removes risk for funders and enables Tradeplus24 to offer more competitive rates.

It is a digital play.  This is unlike other players who generally handle paper-based information, and run a “shadow” ledger for customers, requiring more time and effort to maintain and manage.  One reason why Trade24Plus is so named.

Adam said

 “We’ve enjoyed immense and rapid success in our home market of Switzerland in just two years of operations, including attracting investment from the likes of Credit Suisse, SIX Group, and Berliner Volksbank, but we always had global expansion in mind when we developed the business,” said Adam Lane, Managing Director of Tradeplus24 Australia.

“We believe several characteristics of the Australian business lending market and wider economy make our offering uniquely well-positioned for success in this market.

“Lack of competition in Australia not only reduces the need for banks and larger lenders to innovate, but also means they’re free to release capital largely under their own terms. To this end, banks regularly take a charge over an entire business and also secure the loan against the owner’s personal property assets. They also struggle to lend without property as security, which is a major factor contributing to the current shortage of capital for Australian SMEs.

“Secondly, Australia’s weakening housing market is also compounding the inability of business owners to secure funding by offering property as collateral for further borrowing, with many ‘running out’ of adequate security to offer.

“Finally, the Banking Royal Commission has put everyone on notice when it comes to credit; there is simply less of it flowing through the economy as a whole. These factors combined create an urgent need for more innovative business credit solutions which don’t require a borrower to put up property assets as collateral.”

Tradeplus24 is currently in the advanced stages of negotiating a nine-figure debt facility and is exciting about making a difference by enabling many Australian SMEs to reach their growth potential.

They are in the throes of testing and expect to be in operation by early July 2019.

To me this is a classic demonstration of how smart digital disruption can really make a difference to businesses. Such innovation should be welcomed.

Deutsche Bank To Create A “Bad Bank”?

According to a report in the Financial Times, Deutsche Bank is going to overhaul its trading operations and create “bad bank” which will house or sell assets valued at up to €50B (risk adjusted). This would lead to the closure or reduction in its U.S. equity and trading businesses.

While this will likely de-risk the business, it will also reduce profitability (as the US trading division contributed higher returns, and the remaining bank will rely more on deposits for funding. This helps to explain the falls in its share price.

Monthly average losses to NBN scams almost triple in 2019

Australians are losing more money to NBN scams, with reported losses in 2019 already higher than the total of last year’s losses, according to the ACCC.

Consumers lost an average of more than $110,000 each month between January and May this year, compared with around $38,500 in monthly average losses throughout 2018 – an increase of nearly 300 per cent.  

“People aged over 65 are particularly vulnerable, making the most reports and losing more than $330,000 this year. That’s more than 60 per cent of the current losses,” ACCC Acting Chair Delia Rickard said.

“Scammers are increasingly using trusted brands like ‘NBN’ to trick unsuspecting consumers into parting with their money or personal information.”

Common types of NBN scams include:

  • Someone pretending to be from NBN Co or an internet provider calls a victim and claims there is a problem with their phone or internet connection, which requires remote access to fix. The scammer can then install malware or steal valuable personal information, including banking details.
  • Scammers pretending to be the NBN attempting to sell NBN services, often at a discount, or equipment to you over the phone.
  • Scammers may also call or visit people at their homes to sign them up to the NBN, get them a better deal or test the speed of their connection. They may ask people to provide personal details such as their name, address, date of birth, and Medicare number or ask for payment through gift cards.
  • Scammers calling you during a blackout offering you the ability to stay connected during a blackout for an extra fee.

It is important to remember NBN Co is a wholesale-only company and does not sell services directly to consumers.

“We will never make unsolicited calls or door knock to sell broadband services to the public. People need to contact their preferred phone and internet service provider to make the switch,” NBN Co Chief Security Officer Darren Kane said. 

“We will never request remote access to a resident’s computer and we will never make unsolicited requests for payment or financial information.”

“If someone claiming to work ‘for the NBN’ tries to sell you an internet or phone service and you are unsure, ask for their details, hang up, and call your service provider to check if they’re legitimate. Do a Google search or check the phone book to get your service provider’s number, don’t use contact details provided by the sales person,” Ms Rickard said.

“Never give an unsolicited caller remote access to your computer, and never give out your personal, credit card or online account details to anyone you don’t know – in person or over the phone – unless you made the contact.”

“It’s also important to know that NBN does not make automated calls to tell you that you will be disconnected. If you get a call like this just hang up.”

“If you think a scammer has gained access to your personal information, such as bank account details, contact your financial institution immediately.”

ANZ NZ CEO Quits

ANZ NZ says David Hisco, its CEO of almost 9 years, is leaving due to ‘ongoing health issues’ and ‘the characterisation of certain transactions following an internal review of personal expenses’

This follows the Reserve Banks’ censure of their operations, as we reported recently.

NZ Reserve Bank censures ANZ

According to a report in interest.co.nz, ANZ NZ is comfortably New Zealand’s biggest bank. As of March 31, it had total assets of $164.952 billion, total liabilities of $153.224 billion, and gross loans of $132.275 billion. Last year the bank’s annual profit was a shade under $2 billion.

The report says David Hisco, ANZ New Zealand’s CEO since 2010, is leaving the bank under a cloud.

In a statement ANZ says Hisco’s departure follows “ongoing health issues as well as Board concern about the characterisation of certain transactions following an internal review of personal expenses.”

“ANZ today confirmed the appointment of Antonia Watson as Acting CEO of ANZ New Zealand, following the departure of David Hisco,” ANZ says.

“While Mr Hisco does not accept all of the concerns raised by the Board, he accepts accountability given his leadership position and agrees the characterisation of the expenses falls short of the standards required.”

ANZ New Zealand Chairman John Key says it’s disappointing Hisco is leaving ANZ under such circumstances after such a long career, his departure is “the right one in these circumstances given the expectations we have of all our people, no matter how senior or junior.”

Monday’s announcement comes after ANZ NZ announced in late May that Hisco had taken extended sick leave with Antonia Watson, the bank’s managing director for retail and business banking, stepping in as acting CEO.

“We are fortunate to have an experienced executive in Antonia Watson to step in while we conduct a search for a replacement. Antonia’s extensive banking career has her well placed to help ANZ manage through this transition,” Key says.

“Mr Hisco will receive his contracted and statutory entitlements to notice and untaken leave, with all unvested equity to forfeit. The Reserve Bank of New Zealand and Australian Prudential Regulation Authority have been notified of the changes and are being provided all requisite filings.”

Key and Watson will hold a press conference later on Monday morning.

ANZ’s 2018 annual report shows (page 54-55) that in the year to September 2018 Hisco was on a A$1,170,703 fixed salary. On top of this he received A$644,397 in cash as ‘variable remuneration’ and A$864,274 of ‘deferred variable remuneration’, which vested during the year, giving a total remuneration received during the year of A$2,679,384. Hisco was paid in New Zealand dollars, with the amounts converted into Australian dollars.

Hisco’s appointment as ANZ NZ CEO was announced in September 2010, with him succeeding Jenny Fagg. An Australian, he had previously been managing director of ANZ NZ subsidiary UDC Finance between 1998 and 2000. Hisco, 55, has also been a member of Australian parent the ANZ Banking Group’s group executive committee with responsibility for Asia wealth, Pacific, and international retail.

An undoubted high-point of Hisco’s time as CEO of ANZ NZ was the successful culling of the National Bank brand, and movingANZ onto National Bank’s core ‘Systematics’ banking platform in 2012. The two moves effectively unified the two banks nine years after the ANZ Banking Group bought the National Bank from Britain’s Lloyds TSB for A$4.915 billionplus a dividend of NZ$575 million paid from National Bank’s retained earnings.

Canada’s Soft Home Price Landing?

On 14 June, the Canadian Real Estate Association (CREA) reported that May home sales rose 1.9% nationally from April, says Moody’s. The report confirms other recent data suggesting that macro-prudential measures the Canadian government has taken to cool extreme houseprice appreciation over the past five years have been successful in engineering a “soft landing,” easing market concerns that some of the country’s more expensive markets such as Toronto and Vancouver were poised for a major correction. CREA now predicts home sales nationally will rise a sustainable 1.2% in 2019, a reversal from a previous forecast for a drop of 1.6%.

Reducing elevated house-price growth without triggering a severe correction in housing markets supports financial stability in Canada’s
banking system and reduces the prospect of rapid consumer deleveraging, which would pressure Canadian bank asset quality. Although Canadian banks’ mortgage portfolios are relatively resilient, unsecured consumer exposures would generate substantial incremental loan losses under the stress of a major housing price correction. This would pressure profitability at the Canadian domestic systemically

important banks (D-SIBs) and be detrimental to their strong credit profiles. The D-SIBs are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank and National Bank of Canada. Rising house prices in the major urban areas of Toronto and Vancouver have been the main driver of the growth in Canadian residential mortgage debt to almost CAD1.9 trillion (about 95% of GDP) as of 31 March 2019. Roughly 50% of domestic banking assets are
residential mortgages. Positively, about 85% of Canadian mortgage debt is in disciplined amortizing structures, which are lower risk than interest-only home equity lines of credit (HELOCs).

Policy decisions by the national and several provincial governments, including the tightening of mortgage eligibility requirements, have stabilized prices somewhat in recent quarters. We expect a more sustainable growth rate in housing prices over the next year, as supported by the CREA announcement.

A significant number of Canadian mortgages are explicitly backstopped by the Canadian government through Canada Mortgage and Housing Corporation (CMHC, Aaa stable) insurance, and the loans’ historical credit quality is high. However, federal initiatives to reduce the government’s exposure to housing risk have reduced the proportion of insured mortgages to about 33% at 31 March 2019 from 47% at 31 March 2014.

Structural features of the Canadian mortgage market also buffer banks against the effects of a housing shock: mortgage loans are full recourse, securitization and broker origination levels are low, payments are not tax-deductible and the level of subprime loans is low.

Banks are not invulnerable to losses on mortgages in a stress scenario, but losses would be moderate relative to strong capitalization and earnings. The non-mortgage consumer loans of Canadian banks are relatively more prone to rapid deterioration in the event of an economic shock, especially given high household indebtedness. These exposures also have higher expected loss given defaults than real estate secured debt. We expect increased provisions for credit losses on consumer portfolios over the next year, starting from a low base, with the potential for more significant asset quality deterioration in the event of an economic shock. Evidence of a moderation in housing price growth rates reduces the prospect of this risk.

Inducing Consumer Paralysis

Do you think you are paying more than you should for energy, banking, insurance, internet and phone services? You are not alone, and you are probably right. From The Conversation.

Companies offer a growing number of deals that supposedly enable you to choose what is best for you. Every basic economics textbook tells us greater choice should deliver cheaper prices. But in reality this isn’t necessarily the case.

So what’s going on?

A big part of the answer is that businesses are taking advantage of the behavioural phenomenon of “consumer paralysis” to maximise profits.

They provide us with many plans and deals to make us feel like we are in control, but too many choices actually leads most of us to make a bad (or no) choice.

Energy pricing

Let’s consider how this works in the context of Australia’s electricity market.

In most areas of the country, residential customers have at least half a dozen retailers to choose from.

Market share by generation capacity by region, January 2018. ACCC, Retail Electricity Pricing Inquiry Final Report

Nonetheless, according to the Australian Consumer and Competition Commission, electricity prices and profit margins are among the highest in the world, and rising. The consumer watchdog calculates that in the decade to 2018 the average residential electricity bill increased by 55% (or 35% in real terms) – and only a very small part of that had to do with alleged culprits such as renewable energy.

Australia’s biggest electricity company, AGL, made a net profit of A$1.6 billion in 2018 – 194% more than the year before.

Depending on where you live, AGL offers up to 11 energy plans to residential customers. There’s the “Savers” plan, “Savers Online”, “Everyday”, “Freedom”, “Standing Offer”, “Essentials”, “Essentials Plus”, and so on.

Each plan, in turn, has four to eight tariff type options: “Flexible Price”, “Time of Use Interval”, “5 Day Time of Use”, “Single Rate”, “Two rate: single rate with controlled load”, “Single Rate Demand Opt-in”, and so on.

That adds up to literally dozens of price plans from just one retailer. Other companies are hardly better. For a customer in inner Sydney, there are more than 350 retail plans to choose from.

All this “choice” gives the appearance of a competitive market, but its effect is the opposite. It give retailers wriggle room to charge more, not less.

Experiments in choice behaviour

Many experiments over the past three decades have demonstrated the ubiquity of too much choice leading to consumer paralysis.

One classic experiment was run by psychologists Sheena Iyengar and Mark Lepper in a San Francisco supermarket in 1999. Customers visiting the store were given a chance to sample jams. Half the time they were allowed to taste up to six jams; the other half they could taste up to 24 jams.

Traditional economics says a consumer is much more likely to find a jam they really like with a sample of 24 rather than six. So offering 24 jams should lead to more jam purchases.

Yet exactly the opposite was found. Of the consumers who chose to taste jams, only 3% of those who could sample 24 jams ended up buying jam, whereas 30% (or 10 times more) of those who could sample just six jams ended up buying.

More choices provided, more paralysis.

More recently, in 2012, Iyengar’s Columbia University colleague Eric Johnson and others reported on an experiment with much greater consequences.

They asked people to choose health insurance coverage from a set of four or eight options. The options varied on monthly premiums and deductibles. When given four options, 42% of subjects chose the best value option. On average their choices cost about $200 more than the best option on offer.

When given eight options, only 21% chose the best option – no better than simply making a random choice.

Reinforcing psychological biases

Given the massive number of products and plans available in the energy, banking, insurance, internet and mobile phone sectors, the time and effort needed to choose the best deal leaves us feeling overwhelmed and overloaded. In response, we rely on shortcuts (rules of thumb) to save both time (and our sanity).

But these shortcuts can also cause biases that result in further paralysis, including:

  • Present bias – we put much greater weight on the present than the future. Since the cost of making decisions happens in the present (like the time and effort to compare options and switch services) while the benefits happen later (like saving money), we minimise the time we spend making decisions
  • Status quo bias – we tend to stick with a chosen option or default, even when a much better option may be available
  • Loss aversion – we place much greater weight on losses and often overestimate the chance of a bad outcome.

There is considerable evidence pointing to how these biases lead to consumer paralysis in the retail banking and energy sectors.

In 2017, Britain’s energy regulator, Ofgem, ran a randomised control trial involving more than 130,000 electricity customers. Participants received personalised letters either from Ofgem or their current provider offering substantially better electricity deals.

The result: compared with the control group in which only 1% switched tariffs within the next month, 3.4% of those who received an offer from their electricity provider switched to a better deal. Even when presented with notable savings, more than 96% stuck with the status quo.

Results of Ofgem’s Cheaper Market Offers Letter (CMOL) trial. Ofgem

Other Ofgem research shows that among those who have not switched energy plans, 51% consider it a hassle they don’t have time for, and 48% worry that things would go wrong.

Yvette Hartfree and her colleagues at the University of Bristol’s Personal Finance Research Centre have noted similar fears among bank customers: “The biggest concern for those considering switching is that something will go wrong at some point in the process of switching.”

Taking action

We should not be surprised that energy companies and others use an avalanche of choice to confuse us. It is a brilliant business strategy: it seems more competitive from a traditional assessment, yet actually reduces competition.

So what can you do?

On your own, you will need to make a conscious effort to overcome paralysis. You need to devote the time to carefully compare offers.

Fortunately, you can find tools that can help, such as the Australian government’s energy comparison website. However, be wary of commercial “switching services” and websites that provide comparisons. These operations are often being paid by retailers. Their motives are not necessarily to direct you to the best deal.

What can we do collectively?

One option is government action to ensure switching services are trustworthy. At a minimum, there should be guidelines that switching services not take payments from retailers, and only charge you when you actually save money.

Another option is to form “consumer unions”, which can bargain collectively to get members better deals. The potential of community groups to leverage bulk-buying arrangements has been demonstrated in other contexts. In Victoria’s Gippsland region, for example, local organisations have banded together to offer discounts on renewable energy technology.

There’s no reason something similar could not be done to overcome the choice problems induced by big energy retailers and the like.

Author: Robert Slonim, Professor of Economics, University of Sydney

Auction Results 15 Jun 2019

Domain have released their preliminary results for today.

The final result last week settled at 47.4%, on low volumes thanks to the long weekend.

This week, the volume is higher at 1,281 listed for auction though still lower than a year ago, when 1,661 were listed. The final clearance will settle lower.

Canberra listed 29, reported 27 and sold 12 with 4 withdrawn giving a Domain clearance of 44%.

Adelaide listed 65, reported 24 and sold 15, with 6 withdrawn giving a Domain clearance of 50%

Brisbane listed 73, reported 43 and sold 19, with 3 withdrawn giving a Domain clearance of 41%.