Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
Neo-Bank Volt has closed its doors and is returning deposits to its customers and selling its mortgage book. We look at why this happened, and whether other banks are at risk in this rising rate environment.
Go to the Walk The World Universe at https://walktheworld.com.au/
Commonwealth Bank has today launched X15 Ventures, an Australian technology venture building entity, designed to deliver new digital solutions to benefit Australian consumers and businesses.
X15 will leverage CBA’s franchise strength, security standards and balance sheet to build stand-alone digital businesses which benefit from and create value for CBA’s core business. CBA customers will benefit from a broader range of solutions which complement the bank’s core product proposition.
The bank will partner with Microsoft and KPMG High Growth Ventures to deliver X15 Ventures. Microsoft will bring its platform and engineering capability to the initiative, while KPMG will provide advisory services.
CBA Chief Executive Officer Matt Comyn said: “We remain focused on bringing together brilliant service with the best technology to deliver exceptional customer outcomes in the core of our business. X15 will enable us to innovate more quickly, and continue to offer the best digital experience for our customers.”
X15 will be a wholly-owned subsidiary of CBA, with funding provided from CBA’s $1 billion annual technology investment envelope, its own delivery model, and a dedicated management team. X15 will be headed by Toby Norton-Smith who has been appointed Managing Director of X15 Ventures.
Mr Norton-Smith said: “X15 allows us to open the door and partner more easily with entrepreneurs than ever before. Under its umbrella, we will create an environment for new businesses to flourish, we’ll empower Australia’s innovators and bring new solutions to market designed to empower customers as never before.
“X15 businesses will be nurtured and developed as start-ups but will have the scale and reach of CBA behind them to achieve rapid growth. We are pleased today to be unveiling our first two new ventures, Home-In, a digital home buying concierge, and Vonto, a business insights aggregation tool. We intend to launch at least 25 ventures over the next five years.”
Microsoft Australia Managing Director Steven Worrall said: “Commonwealth Bank has always excelled in terms of its technology vision and we have partnered with the bank for more than 20 years. Today’s announcement takes that innovation and transformation effort to the next level with the launch of X15 Ventures. I believe that the next wave of major technology breakthroughs will come from partnerships such as this, bringing together our deep technical capabilities and absolute clarity about the business challenges that need to be addressed.”
Amanda Price Head of High Growth Ventures KPMG said: “A performance mindset can be the difference between success and failure for start-ups. We look forward to working with CBA and X15 Ventures to build the ecosystem of support these new ventures need. From founder programs designed to unlock sustained high performance, to business and strategy solutions for high-growth ventures, there will be a wealth of smart tools at their disposal to help them overcome the challenge of scaling at speed.”
Further information:
More information on X15 Ventures, please visit: www.x15ventures.com.au.
Home-in, which is live for select customers today, is a virtual home buying concierge that will simplify the complex process of buying a home. Smart app technology helps buyers navigate the purchase process more easily from end-to-end, leverage a platform of accredited service providers like conveyancers and utility companies, access tailored checklists and a dedicated home buying assistant who will respond to queries with the touch of a button. More information is available at www.home-in.com.au.
Vonto, launched today, is a free app available to all small business owners, not matter who you bank with. It draws data from Xero, Google Analytics, Shopify and other online business tools and presents the data and analytics in one location, allowing users to obtain a quick, holistic and rich view of their business for ease and increased control. For more information on Vonto, please visit: www.vonto.com.au.
The Financial Stability Board (FSB) today published two reports that consider the financial stability implications from an increasing offering of financial services by BigTech firms, and the adoption of cloud computing and data services across a range of functions at financial institutions.
BigTech in finance: Market developments and potential financial stability implications
The entry of BigTech firms into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-sized enterprises.
However, BigTech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks.
The financial services offerings of BigTech firms could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects. An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions.
A range of issues arise for policymakers, including with respect to additional financial regulation and/or oversight. Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms.
Third-party dependencies in cloud services: Considerations on financial stability implications
Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications.
Cloud services may present a number of benefits over existing technology. By creating geographically dispersed infrastructure and investing heavily in security, cloud service providers may offer significant improvements in resilience for individual institutions and allow them to scale more quickly and to operate more flexibly. Economies of scale may also result in lower costs to clients.
However, there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.
The report concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.
Morningstar has low hopes for new banks like Volt, Xinja, 86 400 and Judo, which it says are at high risk of taking on low-quality debt in the pursuit of growth, via InvestorDaily.
In a research report published this week, Morningstar analyst Nathan Zaia said neobanks are unlikely to cause any disruption in the Australian banking industry, which remains dominated by CBA, Westpac, NAB and ANZ.
“Volt, 86 400, Up, Xinja and Judo are just a few of the interestingly named banks gaining media attention as ‘disruptors’ in the Australian banking sector,” Mr Zaia said.
“It’s easy to be lured by a new website, heavy marketing, new account discounts and a promise of offering something different. But history has shown it can be extremely difficult to build requited scale to run a profitable and sustainable bank.”
The analyst said competition from non-bank and digital banks have had limited effect on the banking landscape to date.
He said a number of neobanks, focused on digital offerings, are growing and while some are reporting large percentage growth rates in their loan books, they have made only a minor dent in market share.
Mr Zaia noted that digital-only banking is nothing new in Australia, pointing to ING Bank Australia, which has held a banking licence since 1994 and amassed a total loan book of $60 million and $47 million in deposits. Morningstar stated that without the balance sheet and technology to leverage tech spend, neobanks will struggle to be as disruptive as ING.
“There are significant risks to the challenger banks and fintech start-ups that we think the market is underestimating,” Mr Zaia said.
“Chasing growth in lending often comes at the expense of credit quality, and in a downturn, spectacular growth can quickly give way to mounting bad debts,” he said, pointing to numerous boom and bust examples in Australia.
CBA acquired Bankwest in 2008 after its UK parent at the time, HBOS, ran into financial trouble during the GFC. Mr Zaia said the bank incurred hefty impairments following a period of rapid expansion and took on high-risk loans that other lenders did not want.
“Westpac’s acquisition of RAMS Home Loans followed another notable industry failure,” the analyst said.
“In 2007 the RAMS Home Loans business model of lending to low-income earners using cheaply sourced debt in the US came unstuck when credit markets froze and it was unable to roll out $5 billion in commercial paper.”
Mr Zaia added that prioritising low growth over credit quality has also caught out regional bank Suncorp, which required a capital raising after incurring large corporate and commercial property impairments.
Australia’s pioneering alternative lender, SocietyOne, has reinvented P2P lending for retirees and savers in response to continuing reductions in interest rates, where a growing inability to survive on fixed-term deposit returns is causing an exodus into higher-risk investment options.
Where P2P or marketplace investment options have traditionally been segmented by risk-return tiers, SocietyOne is once again leading with its new “P2P 2.0” model, which provides two completely separate and differentiated offerings for its two key investor categories: individual investors and institutional investors.
Under the new model, institutional investors will access the original P2P product but now at a minimum investment of $10 million, so they gain exposure to a large enough pool of loans to achieve an acceptable level of diversification and risk for the desired return.
Individual investors will instead be offered an entirely new income-managed fund in which investment can now start as low as $50,000, and which will provide a smoothed 6 per cent per annum return, paid monthly and supported by a reserving mechanism, as well as increased liquidity, access, and diversification.
The new model is the next evolution of traditional P2P or marketplace lending, says CEO Mark Jones, and yet again demonstrates SocietyOne’s commitment to a constant process of innovation to meet its customers’ changing needs.
“Being the first P2P lender in Australia, we’ve had many years to build a thorough understanding of our different investor categories’ needs, and hone our investment products accordingly,” said Mr. Jones.
“We’re also conscious of changing economic conditions, such as the all-time-low interest rates pushing a growing number of retirees and savers to invest in more risky products to achieve acceptable returns. We wanted to provide a more diversified, higher-return, and income-producing alternative.”
The Reserve Bank recently cut interest rates back-to-back in June and July of this year, landing them at a historic low of 1 per cent and representing the first back-to-back cut since 2012.
As a result, current average fixed-term deposit yields are now sitting at around 2 per cent and, according to futures markets, are likely to drop by another 0.25 per cent within 6 months with RBA governor Philip Lowe recently telling the House of Representatives “it’s possible we end up at the zero [rate] lower bound”.
Long-term falling yields are forcing the growing pool of retiree savings into higher risk products such as ‘high-income or defensive equity portfolios’ more suited to institutional and professional investors. The significant capital-at-risk nature of these asset classes is often glossed over.
In the event of a further economic downturn, such as a significant global equities correction, these higher-risk options mean Australians who are no longer earning and who require income-based investments could lose a substantial proportion of their savings, according to SocietyOne Chief Investment Officer, John Cummins.
“Current and future market yields are a reflection of a slowing global and local economy. Any further downturn in global growth and trade should lead prudent investors to choose quality yield-based assets and not higher-risk investments,” said Mr. Cummins. The SocietyOne P2P 2.0 “Personal Loans Unit Trust” for individual investors, as it’s named, is currently open to wholesale and professional investors. SocietyOne intends to open it to retail investors in the future.
Last week the Judge delivered his verdict in the ASIC-Westpac HEM case, essentially because of the ~260,000 loans examined in the case less than 5,000 would have potentially had their loans tweaked lower if the HEM was not used, whereas the bulk of the loans would have been bigger if HEM was not utilised in the decisioning.
I have now had the chance to speak to a number of industry players, and most have fallen into expected camps. Lenders in the main welcome the decision, suggesting that common sense has prevailed, and that ASIC was not reasonable in its interpretation of responsible lending guidelines. On the other side, consumer advocates are calling for tighter controls and suggesting that the HEM benchmarks, even in their revised form are too low – meaning that households are committed to servicing loans they cannot afford. And ASIC has commenced a review of responsible lending by years end.
But among my conversations on this topic, I found a sensible and balance view expressed by Fintech CEO Mark Jones from SocietyOne. They of course are on the cutting edge of technological innovation through their lending processes in Australia.
Mark made the point that recently lenders have been raising their standards, but the question becomes whether a lender has to try and uncover untruthful declarations from prospective borrowers. In Australia there is no clear-cut legal obligation of borrowers to be honest and transparent in their declarations, whereas in the USA there is such a legal obligation, and in New Zealand a Code of Conduct.
He cited examples where applicants had clearly lied on loan application forms.
What is the right balance between asking in painful detail for information from applicants, some of which are unsure of their specific spending patterns, and the fact that in any case if they take a loan, they may be capable of “life-style modification”?
So, he sees HEM in the context of the broader loan assessment processes, with data from applications tested again HEM, and additional dialogue around other unusual commitments which might include school fees, alimony, and other elements. This is all around knowing your customer. And there needs to be a focus on both discretionary and non-discretionary categories to give a complete picture.
The systems which Fintech’s like SocietyOne use are more sophisticated and can handle the complex algorithms which reflect real life. Positive credit and now Open Banking, both of which are arriving, are helpful in uncovering critical information. As a result, there are better outcomes for customers. No lenders want to make a loan which is designed to fail! And it opens the door to more sophistication around risk-based pricing
So, in summary, the trick is to get the right balance between getting every scrap of potential data from a customer, thus getting bogged down in the detail but missing the big picture; and applying simplistic ratios which do not provide sufficient precision to spot good and bad business. And it is this balance which needs to be defined in responsible lending, to a level which passes both community expectations and the operational requirements of lenders. To that end, the debate should not really be about HEM at all!
On 6 June, JPMorgan Chase & Co. announced that it would shut down Finn, its digital consumer banking brand focused on attracting younger customers, via Moody’s.
At first glance, some might consider the decision to shut down the offering as a setback, however it also demonstrates JPM’s superior ability compared to many peers to experiment and invest aggressively in technology while maintaining robust profitability. A customer-centric approach to innovation is essential for incumbent firms to react to the offerings of financial technology (fintech) challengers.
Finn gave users access to an app, branded separately from JPM’s flagship Chase mobile app but running on the same back-end infrastructure, along with various perks, including JPM branch access for more complex banking services and use of the ATMs of partner banks. But more than half of Finn’s users had existing relationships with JPM, which may have influenced the decision to re-focus on the Chase digital banking brand. JPM leads peers in digital banking customers and possesses among the strongest US consumer deposit franchises.
Earlier this year, JPM during its annual investor day announced plans to make $11.5 billion in technology investments in 2019 – a sum equivalent to 28% of its 2018 pre-tax earnings, a credit positive. Only a few of JPM’s large consumer banking peers possess the scale to make such a commitment. These technology investments are important for JPM as it faces a growing number of fintech challengers along various points of the consumer and wholesale banking value chain. JPM noted that these investments would go
toward various initiatives, including developing new products, enhancing client choice, personalization and ease of doing business, and business efficiency.
Neobank Xinja is offering potential investors a chance to buy shares through an equity crowdfunding platform for the second time, via Australian Broker.
Xinja, which was recently granted a restricted banking licence, originally launched its first equity crowdfund in January 2018.
This most recent raise was opened early to existing investors, customers and people who had registered interest, and it passed the minimum of $500,000 in less than nine hours.
With shares available on equity crowdfunding platform Equitise, Xinja chief executive and founder Eric Wilson said he was confident there would be early and consistent interest from investors who wanted to help shake up Australia’s banking system.
Wilson said the bank was now a step closer to delivering real competition in the local banking market.
“We are now working towards a full banking license from APRA in 2019 subject to regulatory approval [and] we have ambitious plans in place for the years ahead.
“We’re all about making banking easy. We’re about banking technology that more closely resembles what people expect from innovators and disruptors, like Netflix or Uber, as opposed to old-style, bricks and mortar-based banking.
“We want people to make better decisions about their money. Getting them on board, as early shareholders, also helps us build a better bank.”
As part of these plans, it has released a beta version for its Xinja home loans to friends and family.
The digital bank has an Australian Credit Licence and plans to roll out home loans to the public alongside bank accounts, subject to regulatory approval.
Co-founder of leading equity crowdfunding platform Equitise, Jonny Wilkinson, said since the last raise Xinja has continued to receive significant interest from investors, customers and the Australian public.
He added, “Xinja hit the ground running with its first equity crowdfund and interest continued to remain strong from previous and new investors who were keen to know when the next raise would be.
“Xinja is a fantastic example of the power of equity crowdfunding where ‘the crowd’ is given the opportunity to back a company they believe in.”
Xinja will issue shares at $2.04 each, with a minimum parcel of $255 for each investor, with expectations of raising up to $5 million.
In its raise in 2018, Xinja reached its minimum funding goal within 18 hours, raising a total of $2.7million. It was pitched at $1.25 a share and added more than 1,220 new investors to the Xinja share register.
More than 23,000 people have signed up for the Xinja app and over 9,000 tap-and-go Xinja cards have been issued. The card is in use in 17 countries a day, on average.
SocietyOne says it has today become Australia’s first and only marketplace lender to reach $500 million in loan originations across its personal loan, agri lending and marketplace business, and is now setting its sights on reaching $1 billion by the end of calendar year 2019.
The milestone follows a record August and the recent appointment of ex-Westpac and Citibank exec, Mark Jones, to the top job of CEO.
“We’re delighted to have reached this significant milestone as we deliver an even better deal for our borrowers and investor funders,” said Mr. Jones.
“We’ve been growing steadily over the past 12 months while we continued to transform our business and build new capabilities for our customers. As a result, we’re now seeing real momentum in the business that we expect to continue, and which should see us achieve breakeven by the end of March 2019 and reach $1 billion in loan originations by the end of 2019.”
We had a record August month for personal lending with $14 million in originations, up 46% on August 2017, and well above the monthly average for the past 12 months. September is now also shaping up to be another record month, with volumes expected to further increase into the fourth quarter of the calendar year.
“The seasonal increase in consumer credit heading into the festive season will combine with the rollout and expansion of a number of new initiatives, including continued expansion of our broker distribution offering, the launch of our new brand campaign, and the release of the first phase of our new technology platform,” continued Mr. Jones.
“We’ve also launched our new “When it happens” brand campaign this past weekend, bolstered by support from our shareholders. The campaign is an honest reflection of the way that even joyful moments can sometimes present financial stress to otherwise financially-fit people, as a result of unexpected costs.
“‘It’ can happen to any of us, but there’s no need to add extra stress by racking up high-interest credit card debt when a low rate personal loan from SocietyOne is often a far better solution.
“Looking ahead, the impending introduction of comprehensive credit reporting and open banking, ASIC’s proposed regulatory changes to credit cards, a robust economic backdrop, and a push for a better deal following the royal commission into banking all bode well for a highly prosperous 2019,” concluded Mr. Jones.
Fintech, GetCapital, one of the most interesting SME business lenders here in Australia, recently announced a distribution agreement with aggregator PLAN. So I took the opportunity to discuss the growth of the business with GetCapitals’ COO Frank Sterle in our occasional Fintech Spotlight series.
Frank Sterle COO GetCapitalGetCapital is a specialist lender to the SME sector. It was founded in 2013, and really hit the market in earnest in 2015, offering finance to businesses with an annual turnover of typically between $200k and $2m, though they have written deals for much bigger firms too. Their focus is the Australian and New Zealand Markets. They have lent more than $250 million in loans so far, and this is still growing, with a team now topping 100.
Frank, who by the way previously worked at Deutsche Bank within the Fixed Income, Currencies and Commodities (FICC) division of its Investment Bank, highlighted that they will consider deals across all sectors, and they offer loans for a range of business purposes from vehicle purchase, working capital, equipment finance and import lines of credit, with the proviso that borrowers will need to provide a personal guarantee as a minimum. They operate in the “Prime” to “Near-Prime” credit space.
Around one third of leads come via their direct channel – using an on-line application, one third from strategic partnerships, and one third from a portfolio of aggregators, including AFG, CFG, Fast, Plan, and others. In fact, this is the channel which is expanding fastest and they expect to announce additional aggregator partnerships soon.
Their underwriting processes are interesting, as they have invested big in technology at the back end, for example to be able to capture bank statement data using tools from Proviso and this supports quick assessments of deals by their dedicated Relationship Managers, who will also consider credit history, and serviceability. Although a portion of loans with a low “expected loss” are fully automated, GetCapital still used a final human overlay by an experienced credit officer for larger and more complex underwrites. This also enables a broker to transparently workshop a deal with their Relationship Manger rather than being advised of a black box “computer says ‘no’ response”. They can approve finance in under 24 hours, often much less. They have three price tiers, with the lower value one typical of the sector, averaging around $40,000, but the average is much higher in the stronger credit tiers, with different pricing structures above. Frank was at pains to underscore the prime quality of the loans they write thanks to their specialist capabilities, and that their loss rates are very low, across the country. They claim to be “sharp on price” as well, though the price will depend on how long the business has been trading, their credit score and the assets backing the deal.
They are funded by a couple of institutional investors, including NAB, who provides their wholesale funding, so no crowd funding in sight here!
The experienced team also includes CEO, Jamie Osborn, ex. Managing Director at Macquarie Capital; Chief Commercial Officer Renata Cihelka, ex. ANZ, AMP, Morgan Stanley and CBA; Head of Sales, Cristian Fedrigo, ex. AFG, CBA; Head of Customer Operations, Brad Kinna, ex. ING Direct and Rabobank and Chief Risk Officer, David Hurford, ex. Westpac Institutional Bank.
Looking ahead, Frank believes the SME funding market is set to grow, but in so doing, there will be a bifurcation in the target market, with some focussing on the higher more sophisticated end of the sector, while others will battle it out at the lower end. He thinks they are well positioned for the former, and sees the prospect of further expansion in Australia ahead.
My sense is that GetCapital is indeed well positioned to disrupt core prime lending to SME’s in Australia, and as such are becoming a force to be reckoned with. Highly relevant given the feedback from our latest SME surveys which shows again that the incumbent lenders are forcing SME’s to jump though ever higher hoops to get a loan.
Further evidence of the digital disruption of finance ahead!