Digital Finance Analytics (DFA) Blog – Page 516

Terrified of Bitcoin, banks forced to innovate for the first time in 40+ years

Yesterday morning, several banks in Australia started rolling out a new payment system they’re calling NPP, or “New Payments Platform.”

Until now, sending a domestic funds transfer in Australia from one bank to another could take several days. It was slow and cumbersome.

With NPP, payments are nearly instantaneous.

And rather than funds transfers being restricted to the banks’ normal business hours, payments via NPP can be scheduled and sent 24/7.

You can also send money via NPP to mobile phones and email addresses. So it’s a pretty robust system.

Across the world in the United States, the domestic banking system has been working on something similar.

Domestic bank transfers in the Land of the Free typically transact through an electronic network known as ACH… another slow and cumbersome platform that often takes 2-5 days to transfer funds.

It’s pretty ridiculous that it takes more than a few minutes to transfer money. It’s 2018! It’s not like these guys have to load satchels full of cash onto horse-drawn wagons and cart them across the country.

(And even if they did, I suspect the money would reach its destination faster than with ACH…)

Starting late last year, though, US banks very slowly began to roll out something called the Real-time Payment system (RTP), which is similar to what Australian banks launched yesterday.

[That said, the banks themselves acknowledge that it could take several years to fully adopt RTP and integrate the new service with their existing online banking platforms.]

And beyond the US and Australia, there are other examples of banking systems around the world joining the 21st century and making major leaps forward in their payment system technologies.

It seems pretty clear they’re all playing catch-up with cryptocurrency.

The rapid rise of Bitcoin and other cryptocurrencies proved to the banking system that it’s possible to conduct real-time [or near-real-time] transactions, and not have to wait 2-5 days for a payment to clear.

Combined with other new technologies like Peer-to-Peer lending platforms, fundraising websites, etc., consumers are now able to perform nearly every financial transaction imaginable– deposits, loans, transfers, etc.– WITHOUT using a bank.

And it’s only getting better for consumers… which means it’s only getting worse for banks.

All of these threats from competing technologies have finally compelled the banks to innovate– literally for the FIRST TIME IN DECADES.

I’m serious.

When the CEO of the company launching RTP in the US announced the platform, he admitted that the “RTP system will be the first new payments system in the U.S. in more than 40 years.”

That’s utterly pathetic. The Internet has been around for 25 years. Even PayPal is nearly 20 years old.

Yet despite the enormous advances in technology over the past several decades, the last major innovation in bank payments was back when Saturday Night Fever was the #1 movie in America.

Banks have been sitting on their laurels for decades, enjoying their monopoly over our savings without the slightest incentive to improve.

Cryptocurrency has proven to be a major punch in the gut. The entire banking system keeled over in astonishment over Bitcoin’s rise, and they’ve been forced to come up with an answer.

And to be fair, the banks have reclaimed the advantage for now.

NPP, RTP, and all the other new protocols are faster and more efficient than most cryptocurrencies.

Bitcoin, for example, can only handle around 3-7 transactions per second. Ethereum Classic maxes at around 15 transactions per second. Litecoin isn’t much better.

By comparison, there were 25 BILLION funds transfers in 2016 using the ACH network in the US.

Based on the typical holiday schedule and the banks’ 8-hour working days, that’s an average “throughput” of roughly 3500 transactions per second.

So, now that banks have finally figured out how to conduct thousands of transactions per second in real-time, they clearly have superiority.

But that superiority is unlikely to last.

It takes banks decades to innovate. They have enormous bureaucratic hurdles to overcome. They have endless committees to appease, including the Federal Reserve’s “Faster Payments Task Force.”

And most importantly, given that most banks are still using absurdly antiquated software, any new systems they develop have to be carefully designed for backwards compatibility.

Cryptofinance and other financial technology companies have no such limitations.

As my colleague Tama mentioned in the podcast we released yesterday, the cryptocurrency space sort of exists in ‘dog years’.

Things move so quickly that one year in crypto is like 7 years for any other industry.

Right now there is almost a unified push across the crypto sector to solve the ‘scalability’ problem, i.e. to securely transact a near limitless number of transactions in real time.

Those solutions will almost undoubtedly come from technologies that you haven’t heard very much about yet.

Hashgraph and Radix, for example, are two such ventures working on extremely elegant payment solutions that break the mold of previous cryptos.

Rather than build upon standard cryptocurrency concepts like blockchain, Proof of Work, and Proof of Stake, both Hashgraph and Radix have created their own algorithms from scratch.

This is the bleeding edge of the bleeding edge of a massively disruptive sector that has existed for less than a decade.

And there are literally dozens of other companies and technologies aiming for similar heights.

Some of them will undoubtedly succeed. And still other ventures that won’t even be conceived for years will have yet more disruptive power in the future.

The banks don’t stand a chance. The future of finance absolutely belongs to crypto.

Suncorp HY18 Profit Down 15%

Suncorp released their Hy18 results today. Reported net profit before tax was $452 million, down 15.8% on pcp. They explain this fall in terms of the impact of the damaging Victorian hailstorm that occurred just prior to the balance date, as well as the significant investment in their two major programs.

The management are doing the right things to get the business onto a stronger revenue and profit generating position, but still have risks relating to the future share of home lending, and ongoing natural hazards. Their digital strategy is beginning to pay dividends, but there is more to do. APRA’s recent announcements on capital ratios means the advanced capital approach will likely be less beneficial.

The result included the Business Improvement Program investment of $50 million, Marketplace spend of $36 million, with Natural Hazards $65 million unfavourable to allowance, driven primarily by the Victorian hail storm. Natural hazards were $395 million overall.

The Group’s top line growth was 2.5% driven by strong momentum in both Consumer General Insurance and Banking: Australian Home and Motor Insurance Gross Written Premium (GWP) up 3.9%; Bank lending growth 8.7%, well above system; Australian Life Insurance underlying profit after tax increased to $39 million, up 56% and New Zealand General Insurance achieved GWP growth of 7.6%

Total operating expenses increased 3.3 per cent, excluding the Business Improvement Program, and 5.7 per cent when including the net investment in the program.

Their $2.7 billion Business Improvement Program will reset the cost base and they foresee stronger growth ahead (presumably large insurance claims permitting!). The net benefits this year will be $10 million but that grows quickly to an expected $195 million next year, and $329 million in FY20.

Digital interactions are up 19% since this time last year. This has contributed to a 10% reduction in complaints.

In FY19, they are committing to a $2.7 billion cost base despite expected volume growth, and inflation.

The interim dividend was 33 cents, reflecting a payout ratio of 90%.

Looking across the divisions:

Insurance (Australia) – NPAT of $264 million was down 28.5 per cent as solid growth in net earned premiums was offset by higher natural hazard costs and the impact of investment in the Business Improvement Program.
GWP growth for Home and Motor Insurance was 3.9 per cent, driven by unit growth and price increases, while GWP growth in Commercial lines was 1.5 per cent for HY18. CTP premium growth was impacted by scheme reform in NSW and Queensland.

Net incurred claims costs were up 14.7 per cent, reflecting higher natural hazard costs.

Investment income on the insurance funds was $120 million. The headline result was supported by mark-to-market gains from narrowing credit spreads and the outperformance of inflation-linked bonds. This was offset by mark-to-market losses from an increase in risk-free rates. The underlying portfolio yield was $106 million, or 2.3% annualised, which is slightly below our expectation of around 80 basis points above the risk-free rate.

Australian Life Insurance underlying profit after tax was $39 million, up 56 per cent for the half, reflecting benefits of repricing and the ongoing focus of the optimisation program.

Banking & Wealth– delivered an NPAT of $197 million for the half, down 5.3 per cent on HY17, with good top line growth, offset by investment in the Business Improvement Program. Lending growth of 8.7 per cent reflected strong consumer and commercial lending momentum within Suncorp’s risk appetite.

Net interest margin (NIM) of 1.86 per cent remained strong supported by asset repricing and efficient funding.

Business credit quality was strong over the period. Impairment losses of $13 million, representing 4 basis points, remain well below the long‐run range

New Zealand – achieved a profit after tax of NZ$67 million (A$61 million) for the half year, an improvement of 81 per cent over the prior corresponding period. GWP growth was 7.6 per cent (in NZ dollar terms), with good performance across all channels (on a like for like basis, excluding the impact of the sale of Autosure in FY17, GWP increased 10.4%). Strong new business and retention rates delivered in‐force premium growth of 5 per cent (in NZ dollar terms).

After payment of the dividend, the franking account balance will be $158 million. The Group is well capitalised with $381 million in CET1 capital held above its operating targets.

Suncorp remains committed to returning excess capital to shareholders.

With regards to advanced capital management (IRB) they said:

While the pathway to advanced status has been more protracted than we had originally anticipated, we continue to work constructively with the Regulator to clarify the next steps in this process and the associated Basel 3 and ‘unquestionably strong’ capital requirements.

ASIC reports on Credit Rating Agencies

ASIC has conducted a market-wide surveillance of credit rating agencies (CRAs) and made a number of recommendations for change.

The findings of the surveillance are outlined in REP 566 Surveillance of Credit Rating Agencies.

ASIC’s main areas of focus were the CRAs’ governance arrangements (including relating to conflicts of interest and their corporate structure), transparency and disclosure.

ASIC’s report makes a number of observations about CRAs’ activities with some leading to recommendations for change in areas such as board reporting, compliance teams and compliance testing, analytical evaluation of ratings and human resources.

ASIC Commissioner Cathie Armour said, ‘CRAs play an important role in our market by giving market users, for example, investors, issuers and governments, a better understanding of credit risks and informing their investment and financing decisions

‘While many of the CRAs operate in a global market with global standards, it is important that they do not lose sight of their regulatory obligations in Australia’, Ms Armour said.

ASIC is actively engaged internationally on policy development for credit rating agencies through its membership of the International Organization of Securities Commissions (IOSCO) and participates in supervisory colleges for the three large international CRAs – Fitch, Moody’s and S&P. Supervisory colleges were established to facilitate the exchange of information between the supervisors of internationally active CRAs in order to foster more effective supervision of these firms.

Background

Under the Corporations Act, CRAs are required to hold an Australian financial services (AFS) licence and to comply with the conditions of the licence, including requirements to comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies. CRAs are also required to provide assistance to ASIC, including in relation to their compliance with the Corporations Act.

There are currently six licensed CRAs operating in Australia and they all formed part of the surveillance – A.M Best Asia-Pacific Limited, Australia Ratings Pty Ltd, Equifax Australasia Credit Ratings Pty Limited, Fitch Australia Pty Limited, Moody’s Investor Services Pty Limited and S&P Global Ratings Australia Pty Ltd.

Employment Growth Slowing?

The ABS released the January 2018 employment data which shows that the trend unemployment remained steady at 5.5 per cent, where it has hovered for the past seven months.

The ABS says that full-time employment grew by a further 9,000 persons in January, while part-time employment increased by 14,000 persons, underpinning a total increase in employment of 23,000 persons.

Full-time employment has now increased by around 292,000 since January 2017 and makes up the majority of the 395,000 net increase in employment over the period. In line with the increasing female participation in the labour force, female full-time employment accounted for 55 per cent of the full-time employment growth over the past year.

Over the past year, trend employment increased by 3.3 per cent, which is above the average year-on-year growth over the past 20 years (1.9 per cent). Prior to the past two months, the last time it was 3.3 per cent or higher was back in February 2008, before the Global Financial Crisis.

The trend monthly hours worked decreased slightly, by 1.2 million hours (0.1 per cent), with the annual figure continuing to show strong growth (2.7 per cent).

The trend unemployment rate has fallen by 0.3 percentage points over the year but has been at approximately the same level for the past seven months, after the December 2017 figure was revised upward to 5.5 per cent.

Over the past year, the states and territories with the strongest annual growth in trend employment were the ACT (4.8 per cent) Queensland (4.7 per cent) and New South Wales (3.6 per cent).

All states and territories recorded a decrease in their trend unemployment rates, except the Northern Territory and the ACT (which increased 1.1 and 0.3 percentage points respectively).

Final Auction Results Up(ish)

CoreLogic’s final auction results are out for last Saturday. Higher than last week, but significantly lower than last year at this time.

Last week, the final auction clearance rate increased across the combined capital cities, returning a 63.7 per cent clearance rate across almost double the volume of auctions week-on-week (1,470).

Over the week prior, a clearance rate of 62.0 per cent was recorded across 790 auctions. Both auction clearance rate and volumes were lower than what was seen one year ago, when a 73.2 per cent clearance was recorded across 1,591 auctions.

Opinions Differ On The Australian Interest Rate Outlook

We heard from both Westpac and NAB on the outlook for interest rates both here and in the US. There is consensus that rates will rise in the US, but not in Australia.

Alan Oster, NAB Chief Economist says:

The RBA has indicated that it is in no rush to raise rates in lock-step with global central bank counterparts. However, lower unemployment, and evidence of wages growth moving upwards — even gradually — should be enough to give the RBA confidence that inflation will eventually lift above the bottom of the band. We continue to forecast two 25 basis point rate hikes in August and November, although acknowledge the risks are that these hikes could be delayed.

Whereas Bill Evans, Westpac’s Chief Economist sees no change in the RBA cash rate this year or next.

This raises an interesting question. How far can the “elastic stretch” between Australian and US rates? Bill Evans says “with two more Fed hikes expected in 2019, we now anticipate that the differential will reach negative 112 basis points by June 2019”.

That is uncharted territory with the previous record being negative 50 basis points in the late 1990s.

This suggests the Australian dollar will be lower, towards 70 cents, compared with its current rate of close to 80 cents relative to the US dollar.

CBA Blocks Credit Card Purchases of Bitcoin Etc.

CBA has said that due to the unregulated and highly volatile nature of virtual currencies, customers will no longer be able to use their CommBank credit cards to buy virtual currencies. This came into effect as of 14 February 2018.

Our customers can continue to buy and sell virtual currencies using other CommBank transaction accounts, and their debit cards.

We have made this decision because we believe virtual currencies do not meet a minimum standard of regulation, reliability, and reputation when compared to currencies that we offer to our customers. Given the dynamic, volatile nature of virtual currency markets, this position is regularly reviewed.

The restriction on credit card usage for virtual currencies will also apply to Bankwest credit cards.

Q&A

Why are we making this change?

Virtual currencies are unregulated and, as has been made clear in recent months, highly volatile. Effective 14 February, we will no longer authorise credit card purchases for these currencies.

How can I buy virtual currencies?

You can still buy and sell virtual currencies using other CommBank transaction accounts, and debit cards, as long as you comply with our terms and conditions and all relevant legal obligations.

I recently tried to purchase virtual currencies using my debit card and it was declined. Why did this happen?

We are aware of some instances where customers found that their attempts to buy or sell virtual currencies did not work. This can be due to a number of reasons, including:

The virtual currency exchange the customer is using has been blocked by our security systems. A currency exchange will be blocked if a number of the transactions it has previously processed are found to have been fraudulent, inconsistent with our policies or outside of the Group’s risk tolerance.

The payment method the customer uses is no longer accepted by the currency exchange. Some exchanges have recently stopped accepting certain payment methods.

The virtual currency exchange’s bank blocks the transaction for security reasons.

Can I still get credits from virtual currency exchanges paid to my credit card?

Yes, credits will continue to be authorised by the Bank onto credit cards.

US Inflation Up 0.5% In January

More evidence of inflation lurking in the US economy, as the headline rate for January was higher than expected. This gives more support to the view the FED will indeed lift interest rates.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.

The seasonally adjusted increase in the all items index was broad-based, with increases in the indexes for gasoline, shelter, apparel, medical care, and food all contributing. The energy index rose 3.0 percent in January, with the increase in the gasoline index more than offsetting declines in other energy component indexes. The food index rose 0.2 percent with the indexes for food at home and food away from home both rising.

The index for all items less food and energy increased 0.3 percent in January. Along with shelter, apparel, and medical care, the indexes for motor vehicle insurance, personal care, and used cars and trucks also rose in January. The indexes for airline fares and new vehicles were among those that declined over the month.

The all items index rose 2.1 percent for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 5.5 percent and the food index advanced 1.7 percent.

ASIC welcomes establishment of the Australian Financial Complaints Authority

ASIC welcomes the passage through Parliament of the Bill to establish the Australian Financial Complaints Authority (AFCA).

AFCA will be the culmination of more than 20 months of public consultation and inquiry, commencing with the review of the dispute resolution framework by an independent panel led by Melbourne Law School’s Professor Ian Ramsay.

ASIC Deputy Chair Peter Kell said, ‘Fair, timely and effective dispute resolution is a cornerstone of the financial services consumer protection framework. The combination of firms’ internal dispute resolution procedures and access to a free independent external scheme currently provides redress for many tens of thousands of Australians each year. Strengthening these dispute resolution requirements will help deliver higher standards and better outcomes in the financial services market.’

‘The establishment of a single scheme for all financial services and superannuation complaints is a very positive development, building on the outcomes achieved over many years by the existing three schemes: the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO) and the Superannuation Complaints Tribunal.’

Higher monetary limits and compensation caps, including for primary production businesses, will give more consumers and small businesses access to a free and independent forum to resolve their complaints.

ASIC will work with Government and scheme stakeholders to ensure that the transition to the commencement of AFCA is as smooth as possible. In the interim, ASIC will retain direct oversight of the two ASIC-approved schemes – FOS and CIO – which will continue to provide high levels of service to consumers and firms. Separate arrangements are in place for the ongoing operation of the SCT to enable it to deal with existing complaints.

Important information about transition

AFCA will start accepting complaints no later than 1 November 2018

The operator of the scheme will be authorised by the Minister, and the scheme will be subject to ongoing oversight by ASIC.

In order to maintain access to external dispute resolution for consumers in the lead up to commencement of AFCA, ASIC will monitor member compliance with existing EDR scheme requirements as well as the effectiveness of scheme operations.

Members of each of CIO and FOS – including licensees and credit representatives – must continue to maintain their EDR membership through this period, including paying membership and other scheme fees in full as required. ASIC has asked the two schemes to report any failure of members to do so.

A memorandum of understanding between CIO and FOS will prevent members inappropriately moving between the schemes in the transition period.

ASIC will be consulting soon on updated Regulatory Guide 139 (REG 139), which will set out details of ASIC’s oversight of AFCA. This will be finalised and published when AFCA commences operations.

ASIC will also publicly consult on new IDR standards and the mandatory IDR reporting requirements that are also contained in the AFCA Bill – but this consultation will not take place until afterAFCA commencement.

Current legislative IDR requirements for superannuation trustees and retirement savings account providers (including 90-day timeframes and requirements for written reasons) will continue to apply in their current form until ASIC consults on and then issues updated IDR policy (RG 165).