Digital Finance Analytics (DFA) Blog – Page 559

Digital Transformation IS Revolutionary

An excellent article from Mckinsey which makes the point that if Digital Transformation this isn’t on your agenda, then you’ve got the wrong agenda! Its not about new shiny tech things. Rather, all value chains will be disrupted, it is revolutionary. The benefits are breathtaking.

Digital transformation is about sweeping change. It changes everything about how products are designed, manufactured, sold, delivered, and serviced—and it forces CEOs to rethink how companies execute, with new business processes, management practices, and information systems, as well as everything about the nature of customer relationships. I’m seeing leaders who get this. They’re all over it: they want to launch five transformation initiatives right now; they’re talking to me and every digital leader they know about where the technology threats are coming from; and they’re hiring the best people to advise them. Yet I’m shocked by—even fearful for—the many CEOs I know who seem to be asleep at the switch. They just don’t see the massive disruption headed their way from digital threats, seen or unseen, and they don’t seem to understand it will happen very quickly.

So when I see CEOs who may be experimenting here and there with AI or the cloud, I tell them that’s not enough. It’s not about shiny objects. Tinkering is insufficient. My advice is that they should be talking about this all the time, with their boards, in the C-suite—and mobilizing the entire company. The threat is existential. For boards, if this isn’t on your agenda, then you’ve got the wrong agenda. If your CEO isn’t talking about how to ensure the survival of the enterprise amid digital disruption, well, maybe you’ve got the wrong person in the job. This may sound extreme, but it’s not.

It’s increasingly clear that we’re entering a highly disruptive extinction event. Many enterprises that fail to transform themselves will disappear. But as in evolutionary speciation, many new and unanticipated enterprises will emerge, and existing ones will be transformed with new business models. The existential threat is exceeded only by the opportunity.

When Holding Cash Beats Paying Debt

From The US On The Economy Blog.

For families who are struggling financially, there are times when it is better to keep some cash on hand, even if they hold high-interest debt.

A recent In the Balance article highlights the importance of emergency savings to the financial stability of struggling households. It was authored by Emily Gallagher, a visiting scholar at the St. Louis Fed’s Center for Household Financial Stability, and Jorge Sabat, a research fellow at the Center for Social Development at Washington University in St. Louis.

The Struggle to Make Ends Meet

Many families continue to struggle to make ends meet, the authors said, noting a recent Federal Reserve survey that estimated that almost half of U.S. households could not easily handle an emergency expense of just $400.

Given this, they asked: “Should more families be encouraged to hold a liquidity buffer even if it means incurring more debt in the short-term?”

In explaining why it might make sense, for example, to keep $1,000 in a low-earning bank account while owing $2,000 on a high-interest-rate credit card, Gallagher and Sabat’s research suggests this type of cash buffer greatly reduces the risk that a family will:

Miss a rent, mortgage or recurring bill payment

Be unable to afford enough food to eat

Be forced to skip needed medical care within the next six months

Linking Balance Sheets and Financial Hardship

Gallagher and Sabat investigated which types of assets and liabilities predicted whether a household would experience financial hardship over a six-month period.

Their survey encompassed detailed financial and demographic results that covered two time-period observations for the same household: one at tax time, and the other six months after tax time.

“This feature of our data set is ideal for capturing the probability that a household that is currently financially stable falls into financial hardship in the near term,” the authors explained. “Furthermore, the survey samples only from low-to-middle income households, our population of interest for understanding the antecedents of financial hardship.”

They tracked families in the first survey who said they hadn’t recently experienced any of these four main types of financial hardship:

Delinquency on rent or mortgage payments

Delinquency on regular bills, such as utility bills

Skipped medical care

Food hardship (going without needed food)

Gallagher and Sabat also asked if the family had any balances in:

Liquid assets, such as checking and saving accounts, money market funds and prepaid cards

Other assets, including businesses, real estate, retirement or education savings accounts

High-interest debt, such as that from credit cards or payday loans

Other unsecured debt, such as student loans, unpaid bills and overdrafts

Secured debt, including mortgages or debts secured by businesses, farms or vehicles

Controlling for factors such as income and demographics, they then tracked whether the 5,000 families in the survey had suffered a financial shock that would affect the results.

Cash on Hand Matters Most

The authors found that having liquid assets or other assets always predicted lower risk of encountering hardship of any kind, while having debts generally increased the risk of hardship.

Liquid assets had the most predictive power, Gallagher and Sabat said. They noted that a $100 increase (from a mean of $6) was associated with a 4.6 percentage point reduction in a household’s probability of rent or mortgage delinquency.

Liquid assets also significantly reduced the likelihood of entering into more common forms of hardship. A $100 increase in liquidity was associated with declines in the rates of:

Regular bill delinquency (by 8.3 percentage points)

Skipped medical care (by 6.3 percentage points)

Food hardship (by 5.2 percent percentage points)

“These estimated effects are substantial relative to the probability of encountering each hardship,” they said.

Conclusion

“Our findings suggest that households should be encouraged to maintain at least a small buffer of liquid savings, even if the cash in that buffer is not being used to pay down high-interest debt,” Gallagher and Sabat concluded.

Fintech startup Trade Ledger makes APAC “Top 25 FinTech Companies 2017” list

Trade financing deep tech startup, Trade Ledger, has made it onto the APAC CIOoutlook “Top 25 FinTech Companies 2017” list after just 5 months with its unique digital banking platform for business banks and alternative lenders, who were previously unable to address the challenging SME sector without high expected losses. See our Fintech Spotlight Series note on the firm.

The list recognises promising fintech companies in the Asia-Pacific region that have not only demonstrated the use of technological innovation to solve an urgent and sizeable problem, but who have also shown an ability to commercialise their innovation for rapid adoption and scale.

“Trade Ledger was always intended to be a global end-to-end platform. The working capital problem we are solving is common to businesses and banks everywhere in the world,” said Martin McCann, CEO and Co-Founder of Trade Ledger.

“Finance providers have never been able to accurately leverage quality operational supply chain data to determine business lending risk, due to not having digital data access or suitable technology for credit assessment technology.

“As a result, most of the world’s SMEs are considered too risky for credit, when the truth is actually that credit modelling and underwriting processes are simply designed for multinationals and large corporations, not for our smaller SMEs.

“The unfortunate reality is that despite their smaller size, these SMEs represent an enormous chunk of the global lending opportunity: neglecting this important segment has resulted in a business loan undersupply to the tune of AU$90 billion each year in Australia, and AU$2.7 trillion globally.

“This essentially represents the size of the unaddressed opportunity for any business lenders wishing to use the Trade Ledger technology,” concluded Martin McCann.

Over 500 companies were assessed by the APAC CIOoutlook research team for inclusion in the final 25 fintech companies list.

These companies were all considered to be at the forefront of tackling market challenges and building technologies that greatly benefited other firms in the finance industry.

However, those who made the final cut stood out from their peers in terms of technological innovation, the size and urgency of the problem they solved, and their commercial prowess in bringing their technology to market.

Commonwealth Bank receives an amended statement of claim from AUSTRAC

Commonwealth Bank (CBA) says it has today been served with an amended statement of claim from AUSTRAC, alleging further contraventions of Australia’s anti-money laundering and counter-terrorism financing legislation. The new allegations, among other things, increase the total number of alleged contraventions from approximately 53,700 to approximately 53,800.

In our ASX Announcement of 13 December 2017 we noted that AUSTRAC had indicated that it proposed to file an amended claim and we are updating the market as this has now occurred.

CBA will review the amended statement of claim and update the market as appropriate. We will file an amended defence in due course.

CBA re-states its position that we take our anti-money laundering and counter-terrorism financing (AML/CTF) obligations extremely seriously, and deeply regret any failure on our part to comply with these obligations.

CBA commenced a Program of Action in 2015 to significantly upgrade and expand its operations to ensure compliance with the AML/CTF Act. During 2017 we have stepped up the rigour and intensity of the program and extended it across all aspects of financial crime obligations and all business units to further strengthen regulatory compliance.

Through its Program of Action, CBA has made significant progress in strengthening its policies, systems and processes relating to its obligations under the AML/CTF Act, and recognises that having increased the scope of work and resources being deployed we may come across additional matters. As CBA continues to strengthen our financial crimes compliance we will continue to work closely with regulators across those jurisdictions in which it operates to fight financial crime.

Westpac refunds $11 million to interest-only customers

ASIC says Westpac will provide 13,000 owner-occupiers who have interest-only home loans with an interest refund, an interest rate discount, or both. The refunds amount to $11 million for 9,400 of those customers.

The remediation follows an error in Westpac’s systems which meant that these interest-only home loans were not automatically switched to principal and interest repayments at the end of the contracted interest-only period.

As a result, affected customers did not start paying any principal on their loans at the time agreed with the bank, and now have less time to repay the principal amount of their loans. These customers would also have paid more in interest.

To remediate the affected customers, Westpac will now:

Refund the additional interest paid from when the loan was contracted to convert to principal and interest repayments

Discount the interest rate for the remaining term of the loan.

This remediation has been designed so that customers pay no more interest over the life of the loan than they would have if the system error had not occurred.

ASIC will monitor Westpac’s consumer remediation program to ensure it is meeting consumer requirements.

ASIC Acting Chair Peter Kell said banks must ensure proper systems processes and oversight, particularly when it affected important assets such as consumers’ homes:

‘Greater regulatory scrutiny of interest-only loans has led to improvements in how lenders are providing these loans, including in lenders identifying system errors.’

‘All banks should be reviewing their systems to ensure that they minimise the chance of any such errors occurring, and that any risks to customers are identified early. If past errors are identified, remediation needs to be timely, transparent and effective.’

Westpac is contacting all affected customers, however customers with questions about their loan or the remediation can contact Westpac on 1300 132 925.

ASIC and Westpac are continuing to discuss an appropriate remediation program for investor customers with interest-only loans affected by the same system error.

This has been a long-standing error and has affected some interest-only home loans for owner occupiers who had an interest-only loan with Westpac between 1993 and August 2016.

More information about interest-only home loans　

Interest-only home loans have an initial agreed interest-only period, commonly up to five years. During the interest-only period consumers only pay the interest on the amount borrowed. At the end of the interest-only period the loan reverts to a principal and interest loan, to repay the loan over the remaining term. Repayments increase at the end of the interest-only period.

ASIC’s MoneySmart website has information for consumers about

interest-only mortgages as well as an interest-only mortgage calculator to help consumers work out their repayments before and after the interest-only period.

Additional background

ASIC is undertaking a targeted review of interest-only home loans and provided an update on this review in 17-341MR ASIC update on interest-only home loans.

ASIC is reviewing whether other major lenders have experienced a similar issue.

In 2015, ASIC reviewed interest-only loans provided by 11 lenders and issued REP 445 Review of interest-only home loans (refer: REP 445), which made a number of recommendations for lenders to comply with their responsible lending obligations (refer: 15-297MR).

In 2016, ASIC reviewed the practices of 11 large mortgage brokers and released REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (refer: REP 493). REP 493 identified good practices as well as opportunities to improve brokers’ practices.

What To Do When The Interest-only Period On Your Home Loan Ends

There is a sleeping problem in the Australian Mortgage Industry, stemming from households who have interest-only mortgages, who will have a reset coming (typically after a 5-year or 10-year set period). This is important because now the banks have tightened their lending criteria, and some may find they cannot roll the loan on, on the same terms. Interest only loans do not repay capital during their life, so what happens next?

Our friends at finder.com.au have put together this guide for households in this position, authored by Richard Whitten*.

Interest-only loans offer borrowers several years of very low mortgage repayments. However, there is always that fateful day when the interest-only period ends, and if you’re not prepared for that moment, it can really hurt. It’s a serious problem, with almost 1 million Australians already facing mortgage stress.

Many borrowers aren’t even aware of what it will mean financially when their loan switches from interest-only to principal and interest repayments. This makes interest-only loans a risky product, and it’s the reason why the Australian Prudential Regulation Authority (APRA) has been cracking down on interest-only lending.

Borrowers with interest-only loans need to be prepared for the day that their loan reverts. When that day comes, borrowers have three options.

Extend the interest-only period

You could try to extend the interest-only period. If you’ve crunched the numbers and you realise that you cannot meet the increased cost of principal and interest repayments, this could really help.

Of course, this is not a good position to be in and your lender could easily refuse your request. However, they probably don’t want to lose you as a customer, and if you’re facing genuine stress, it’s in both of your interests to come up with a solution.

But keep in mind that the bank always wins. Interest-only loans cost borrowers more in the long run compared to principal and interest loans and extending the interest-only period only adds to your overall mortgage costs.

Switch to the principal and interest period

You could opt to do nothing and your loan will revert to principal and interest repayments. However, you should definitely review your loan and your financial position before this happens. Make sure you calculate your new repayment amount so that you’re not caught out.

There are several advantages to this option: it requires the least amount of effort and by repaying the principal of your home loan you’ll finally be moving towards paying off your debt.

It also means that you’re building equity in your home. If you think about the equity in your home as a form of savings, those enormous monthly repayments don’t seem so bad.

But you do have one more option.

Refinance your home loan

You’re a customer, after all, and you’re not locked into your home loan. You could try to negotiate a better rate with your current lender or you could refinance to a completely new lender. This allows you to either switch to a new interest-only loan or find a principal and interest loan with a lower interest rate or better features.

Be sure to compare your interest-only options carefully and read the fine print on both your current loan and the one you’re planning to switch to. You might have to pay various discharge or early exit fees to leave your current home loan and application or establishment fees to begin your new one. You’ll need to balance these upfront costs with the potential long-term savings that come with a lower interest rate.

And as with most things in life, you just need to do your homework.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.

Home Renovation Spending On The Slide Too

According to the HIA, in the December 2017 edition of their Renovations Roundup report which is released today, low wage growth and fewer home sales resulted in a slowing in renovations activity in 2017.

The HIA Renovations Roundup is the most comprehensive regular review of Australia’s $33 billion home renovations market. The report also includes the exclusive results of a survey of 595 renovations firms right across the country.

“The near term outlook for home renovations demand is being held back by sluggish wages growth. Because renovations activity is often initiated by the new owners of older homes, the dip in established house turnover over the past 12 months has not accelerated renovations activity this year,”

“During 2017, home renovations work contracted by 3.1 per cent. A further decline of similar magnitude is projected for 2018.

“The medium term holds better prospects for renovations activity. Interest rates are set to remain lower for longer than previously expected. The ageing of Australia’s dwelling stock will also work in favour of renovations demand – the number of houses in the key renovations age bracket of 30-35 years is going to rise substantially until the early part of the 2020s decade.

“Even though current conditions in the renovations market are marking time, the HIA renovations market survey suggests that 40 per cent of firms still intend to take on extra employees over the next 12 months.” said Shane Garrett, HIA’s Senior Economist.

HIA forecasts that renovations activity will suffer a 3.1 per cent decline during 2018 but that a 3.2 per cent recovery will take hold during 2019. In 2020, the pace of expansion is set to accelerate to 5.7 per cent.

Further growth of 0.9 per cent in 2021 is expected to bring the value of the home renovations market to $35.57 billion – compared with $33.36 billion in 2017.

Suncorp opens the doors of its Sydney Discovery Store

Suncorp has opened their Discovery Store in Sydney’s CBD. It is designed as a flexible, customer centric space, including third party brands and will be open 7 days a weeks. It will be interesting to see how this move fairs against the strong drift to digital based banking which we are observing, but some might draw parallels with the tech-sector retail flagships; we will see.

You can read more about customer channel preference in our recently published The Quiet Revolution Report, available for free, on request.

Customers will be treated to a unique retail experience, a first of its kind for financial services in Australia, with Suncorp opening the doors to its new Discovery Store in Sydney’s Pitt Street Mall today.

The Suncorp Discovery Store is designed to be a destination for customers, where they can access end-to-end solutions tailored to their life events. It draws on all of Suncorp’s brands as well as our innovative third-party providers. Discovery Store delivers an immersive retail journey, where visitors can attend events, interactive workshops and explore solutions tailored to their life goals.

Suncorp CEO Customer Marketplace Pip Marlow said it will be a new experience, which is designed to make financial solutions simpler and more accessible.

“We’re shifting the focus from products and services, to having conversations that are more about our customers’ aspirations, whether it’s home ownership, saving for a holiday or buying a car, so we can create value for them,” Ms Marlow said.

The store lay-out has been designed with a range of flexible spaces and interactive digital tools, built around a central amphitheatre.

Each month the entire space will be transformed to deliver a brand-new customer experience, with innovative product showcases, guest speakers and workshops focused on improving financial wellbeing.

“We want visitors to really take advantage of the space, drop in, have a coffee and wander around to see what’s on offer. Pitt Street Mall is one of Australia’s busiest retail precincts. It’s not just a place to shop, but also where people socialise and immerse themselves in new brands and experiences,” Ms Marlow said.

The Discovery Store will be open 7 days, including late trading. The upper level of the store is dedicated to customer conversations, learning and interactive workshops, while downstairs provides transactional banking services and access to other financial services specialists.

Key features:

First of its kind financial services offering to open in Pitt Street Mall.

Access to the breadth of Suncorp’s brands, products and services, and third-party partner solutions.

Suncorp’s Australian brands: Suncorp (Insurance and Banking), AAMI, GIO, Bingle, Apia, Shannons, Terri Sheer, CIL, Vero, Asteron Life and Resilium.

Convenient trading hours: open 7 days and open for late trading. Spans 446 square metres.

A community hub with free wi-fi and coffee.

CBA to introduce major accreditation changes next year

From The Adviser.

Commonwealth Bank has announced that, from next year, it will no longer accept accreditations from new mortgage brokers with less than two years of experience or from those that only hold a Cert IV in Finance & Mortgage Broking.

Speaking to The Adviser on Thursday (14 December), CBA’s general manager for third party banking, Sam Boer, and executive general manager home buying, Dan Huggins, explained that the bank would be bringing new benchmarks for mortgage brokers “designed to lift standards and ensure the bank is working with high-quality brokers who are meeting customers’ home lending needs”.
As part of the reforms, from “the first quarter of 2018”, new mortgage brokers will be required to meet new minimum education standards to be able to write Commonwealth Bank loans and demonstrate a commitment to professional development and on-the-job experience.

For CBA accreditation, all new brokers will soon be required to meet the following standards:

– Hold at least a Diploma of Finance and Mortgage Broking Management

– Have at least two years’ experience writing regulated residential loans

– Be a current member of either the Mortgage & Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA)

– Be a Direct Credit Representative or employee of an approved Aggregator/Head Group or Australian Credit License (ACL) holder

Cert IV has ‘served its purpose’

Speaking of the changes, Mr Boer told The Adviser: “I actually sat down and reviewed a Cert IV for a friend of mine and looked at the process, and I think that while the Cert IV has served its purpose, with the new standards and expectations that are on us (which have been highlighted through the [ASIC and Sedgwick] reviews and through the Combined Industry Forum reform package), it’s time that we need to look at and set new benchmarks.

“So, that is what we feel is appropriate for the brokers that we want to partner with, to ensure that we are delivering those great customer outcomes.”

Mr Huggins added: “We want to ensure that customers feel confident that mortgage brokers have achieved that minimum standard of education and they can be confident in the advice or the guidance that they are seeing — because home loans are complex products and we want to make sure that customers get good outcomes.”

The executive general manager for home buying continued: “Brokers have done a fantastic job of supporting the industry and supporting great customer outcomes and we want to make sure that that continues for new entrants to the market.”

Two-year requirement

When asked why the decision has been made to only accredit new brokers with more than two years of residential loan writing experience, Mr Huggins said that the decision came down to the quality of loans written.

He told The Adviser: “The data that we have seen on the back book shows that there is a clear correlation that those that are more experienced (and those that are writing more loans) provide better customer outcomes, be they either the ongoing performance of the loan, the ongoing performance of the customer, and adherence to responsible lending as well.”

Mr Boer highlighted that there is a “huge amount of turnover” with new brokers, which he said was a “clear indication that these people need support”.

The general manager for third party banking continued: “They need more training, they need more investment to ensure that they are successful and, of course, with the increased complexity now and expectations on meeting responsible lending, we need to make sure that our brokers are meeting those standards and doing it right.

“So, it is very difficult for somebody without any financial experience, we believe, to be able to meet those standards. And therefore, we need to support, embed and ensure that they have that minimum level of capability.”

When asked whether new brokers coming from financial backgrounds (such as ex-bankers) would also be subject to the two-year requirement, Mr Boer said: “This is really about experience in sitting in front of customers and actually discussing mortgage products. But it’s not the only requirement that we have focused on. There is the education standard as well, which is also a very important part of the requirement.”

Aussie brokers to be held to same standards

Mr Boer emphasised that the new accreditation process holds “the same rules for everyone”, and that CBA-owned brokerage Aussie would also be subject to the same accreditation changes.

He told The Adviser: “It’s the same rules for everyone. We are investing with all our strategic business partners to ensure they meet the new standards.”

“We believe that [the changes] are in the best interest of consumers and the industry alike.”

Accreditation changes form aim to support Combined Industry Forum reform package

The accreditation changes for new brokers come off the back of the Combined Industry Forum’s reform package, which was released this week (and to which Commonwealth Bank was a contributor).

According to Mr Huggins, the new changes form part of CBA’s new mortgage broking model and “long-term commitment” to the industry.

“As a leading home lender we recognise mortgage brokers as a key channel for customers who are looking to purchase a home, and we have been working with the industry forum to find the right balance to ensure the best customer outcomes,” Mr Huggins said.

“Our new standards follow extensive consultation with the brokers, and are another example of our commitment to delivering the recommendations of the Sedgwick Report and ASIC review well before the 2020 deadline.”

Mr Boer added: “We’re committed to the process around the industry reform package – it is significant amount of change with quite a bit of challenge and a lot of investment required by industry. At CBA, we are making a huge investment to support the industry and ensure we are delivering on those standards.”

All new accreditations on hold

CBA said it would work closely with brokers who meet these requirements during the accreditation process, including conducting interviews and providing support with professional development plans.

The bank expects to launch the new process in the first quarter of 2018, with all new accreditations on hold until then to ensure the new process is implemented effectively.

In addition to the updated accreditation standards, CBA is also reviewing non-monetary benefits provided to brokers to ensure they support good customer outcomes; improving the value proposition for accredited brokers; and rolling out the industry’s proposed changes to commissions and KPIs. These changes will be in line with the principles announced in the CIF package, and further details will be released in the new year.