Fintech – Page 12 – Digital Finance Analytics (DFA) Blog

Alternative Lending 101

Kabbage is one of the most interesting platform lenders offering loans to SME’s in the US, and now Canada, Mexico and via white label platforms other countries, including Australia. Their analytic platform takes business activity data such as online sales and accounting information to facilitate fast underwriting in just a few minutes. Loans of up to $100,000 are available to businesses with a turnover of $50,000 or more.

The Kabbage platform has originated more than US$1.6 bn in loans, via Kabbage, the SME platform, Karrot, their consumer lending business and via white labeling to third party lenders. Kabbage is funded and backed by leading investors including Reverence Capital Partners, SoftBank Capital, Thomvest Ventures, Mohr Davidow Ventures, BlueRun Ventures, the UPS Strategic Enterprise Fund, ING, Santander InnoVentures, Scotiabank,and TCW/Craton.

In 2015 Kabbage announced plans to move into the Australian market with a white-label offering of its small business lending technology. The launch in Australia represents Kabbage’s first foray into the Asia-Pacific region, having already been in operation in both the U.K. and the U.S.

The service in Australia is operated by Kikka Capital, which licensed the platform and manages marketing, funding, and loan servicing. Kabbage handles underwriting and management of the loans.

Here is an interesting post where Kabbage discuss small business funding options. We have previously discussed the difficulty SME’s face in getting access to funding, and the role of fintechs have in changing the lending landscape. The latest Disruption Index measures the growth in momentum for SME lending in Australia.

Many small business owners might at some point find it difficult to get working capital or a small business loan from a traditional bank – and in that situation, it’s important to know about the various alternative loan options that are available.

According to a recent article in the Harvard Business School “Working Knowledge” blog, as of May 2014, only 13 percent of applicants for small business loans at big banks were getting approved. The SCORE organization has found that small business owners are less likely to get a bank loan if their business is young (less than 2 years in business), if they have less than perfect credit (credit score below 640) and if they are seeking a relatively small loan amount (less than $250,000). Big banks tend to prefer to issue larger loans than most small business owners need, because the banks’ costs of issuing loans are not much smaller for small loans than they are for big loans.

According to a survey published in an article in the Wall Street Journal, 19 percent of small business owners have postponed investments in their businesses because of lack of loan funding, and only 18 percent could get a bank loan – faced with a lack of funding from traditional sources, 17 percent of business owners borrowed money via credit cards, and 13 percent asked their friends and family for loans. Small business owners are starting to get more creative in looking for alternative loan options when they cannot get what they need from the traditional bank lenders.

One of the biggest new trends in helping business owners find alternative loan options is the rise of platform lending. With platform lending, borrowers can get the money they need without relying on the traditional bank system. A study from Harvard Business School found that in 2014, although the total loan volume of small business bank loans decreased by 3.1 percent, overall online lending to small businesses grew by 175 percent. This is a sure sign that platform lending is on the rise and is taking the place of traditional lenders.

With so many business owners seeking loans and finding it more difficult to get approved by traditional bank lenders, it’s no wonder that new options like platform lending are starting to fill the gap. Platform lending is an innovative new way to get loans, where people can sign up online, go through a faster, efficient approval process and get the funds they need more quickly than a typical bank loan.

If you’re looking for a small business loan and wondering how to navigate the alternative loan options such as platform lending, here are a few guidelines on how to evaluate each of your options:

Loan from Family and Friends

Borrowing from family and friends is often a first-resort loan for many small business owners. After all, the people who know and love you best are often eager to support you in your business endeavors. If you want to let your family and loved ones in on a great investment opportunity, selling equity in your business or asking for a small business loan could be one way to get the cash you need.

Advantages: Friends and family typically know you best, and they will believe in you and support your vision of success, even if a traditional bank lender cannot offer you a loan. It’s natural to want to turn to your inner circle first. And your family might be willing to give you more favorable payment terms – lower interest rate, longer time to pay off the loan, etc. – than a typical bank would.

Drawbacks: First of all, it can be hard to raise enough money just by asking your family and friends. Unless your family are a bunch of angel investors, they might not have enough money to spare to be able to fund a significant business investment. And even if you can get enough money from them, borrowing from friends and family can be risky – not only in a financial sense, but also emotionally risky. After all, what if your business idea doesn’t work out? What if you lose your family’s money? What if your business becomes a source of hurt feelings and damaged relationships with the people you love most? It’s often better to keep business and family concerns separate from each other.

Crowdfunding

Other small business owners look for alternative loan options by using crowdfunding. By setting up an online crowdfunding campaign, your business can ask your social media followers, friends and fans to contribute money to help fund your business’ next phase of growth.

Advantages: Online crowdfunding platforms like Kickstarter, GoFundMe and others give you the power to raise money to support your business, whether it’s funding for new product development or for any other specific purpose. By giving away prizes and using other participation strategies, you can motivate people to give more money – for example, by giving donors a special behind-the-scenes experience or an early-stage sample of your new product.

Drawbacks: Crowdfunding is flexible and adaptable, but that same flexibility can also make the results unpredictable: according this Kabbage article, the typical crowdfunding campaign takes about 9 weeks and raises an average of $7,000. Depending on how much time you have and how much money you need, crowdfunding might not be the best fit for your goals.

Platform Lending

With banks making it more difficult for small business owners to get loans, a variety of online services known as “platform lending” services have come onto the market. Kabbage is one of these online platform lenders where business owners can get loans more quickly and often more effectively than they could from a traditional lender.

Advantages: Platform lending is often a good option for people who have less-than-perfect credit. Also the loan amounts offered by platform lending services are often a better fit with what small business owners are seeking – for example, $40,000 to $100,000. Another advantage of platform lending is that the approval process is more flexible and relevant to small businesses than the traditional bank loan process; for example, platform lenders tend to look at a business’ online sales and social media following and other metrics to show the creditworthiness of the business that are separate from the traditional approach of looking at credit scores.

Drawbacks: Platform lending tends to charge a slightly higher interest rate than a typical bank small business loan. Make sure to do your research and understand the fine print of any platform lending agreement before you sign – just like you would if you were signing up for a new credit card or other financial product.

If your business is struggling to get approved for a bank loan, don’t get discouraged – get money! There are more alternative loan options than ever before, especially if you are able to be creative and flexible and pursue some new services like platform lending.

Fintech will boost bank earnings by 3.8% – UBS

From Fintech Business.

A UBS survey of bank management worldwide reveals fintech will help boost bank revenues by 3.8 per cent over the next three years.

The UBS Evidence Lab surveyed 61 banks to gauge the objectives, targets and expectations of management of fintech.

The study shows impact (both negative and positive) of fintech on revenues net of cost benefits is estimated at 3.8 per cent over the next three years.

However, the effect is more pronounced in emerging markets where boost to revenues is projected to be 5.1 per cent. In developed markets, the boost to revenues is only 1.3 per cent.

The UBS survey found that 38 per cent of bank management respondents currently have a partnership with a fintech company offering a service other than mobile banking.

This is expected to rise to 51 per cent in the next 12 months.

UBS said investment in fintech has boomed in recent years, with more than US$50 billion invested in the sector since 2010 – including US$22 billion of investments in 2015 alone, according to an Accenture report.

“As the so-called ‘fourth industrial revolution’ approaches, the pace of growth in fintech investments shows no signs of abating, with the emergence of new areas of fintech innovation, from blockchain and smart contracts to robotics, artificial intelligence and the internet of things,” UBS said.

“Against a backdrop of rapid change, banks cannot afford to stand still and do nothing.

“Players that are quick to embrace innovation and digitalisation, possibly via partnerships and collaboration, will be well-placed to maximise opportunities to improve revenues and efficiency while mitigating disruptive pressures.

“In contrast, banks that are slow to adapt and invest are at risk of losing their competitive strength, market positioning and ultimately their earnings power.”

Financial Sector Digital Disruption In Full Swing

The latest edition of the Disruption Index, a joint initiate between Moula and Digital Finance Analytics, shows disruption continues apace. In the latest results, focussing on small business lending, more of the market is in play, with an overall disruption score of 36.18, up 2.99%.

SME service expectations continue to rise with the continued deployment of online applications and tools, in concert with the ongoing rise in mobile, always on smart devices. There has been a significant rise in awareness of non-traditional funding alternatives this quarter, following recent publicity and government innovation statements on fintech. As a result, a slightly higher proportion of SMEs are willing to trade their data.

Business confidence amongst borrowing SMEs has risen, as a result of the announced budget tax changes, and more favourable business conditions, especially in the east coast states. This was offset by a fall in confidence in WA and SA.

While knowledge of non-bank lenders is starting to increase, we are still seeing low usage of such credit options by small businesses (at less than 10% of all businesses in the sample); with increasing awareness, and increasing focus on the fintech sector by media commentators, we expect that non-bank lending to small businesses will become mainstream in time.

SME expectation of the time it should take to access unsecured finance has continued to collapse, with the most recent observation at 6.5 days. This is reducing quickly, and highlights the small businesses sector’s increasing awareness of alternatives in the market, coupled with the expectation that lending decisions should be fast in an era of data availability.

We are witnessing a significant trend in terms of borrower’s preparedness to provide electronic access to private information, mainly in the form of bank and accounting data feeds. This trend has been evolving quarter on quarter, with the most recent quarter showing an 11% increase in loan applicants that permission data, and a doubling since the Disruption Index began a year ago.

The key interpretation here, we believe, is that consumers and small businesses have accepted that data permissioning and data transfer are:

necessary to access new financial service offerings, and
data transfer is generally accepted as being secure.

The Disruption Index is an important tool which will highlight the changing face of financial services in Australia. There is no doubt that new business models are emerging in the context of the digital transformation of the sector, and bank customers are way ahead of where many incumbents are playing. The SME sector in particular is underserviced, and it offers significant opportunity for differentiation and innovation.

Digital Finance Analytics says that in the last three months we have seen a significant shift in attitudes amongst SMEs as they become more familiar with alternative credit options and migrate to digital channels. The attraction of online application, swift assessment and credit availability for suitable businesses highlights the disruption which is underway. There is demand for new services, and supply from new and emerging players to the SME sector.

Moula ramps up for long-term growth

Moula, the data-driven lending platform for small businesses has announced the appointment of former Managing Director of Xero, Chris Ridd, to its board as it positions itself for significant growth. They also released the latest edition of the Disruption Index, which measures the digital intrusion of new players into the Financial Services Sector. Ridd’s appointment comes off the back of strong growth for Moula over the past twelve months, as Australian small businesses change the way they access loans.

The Disruption Index, shows that the number of data-approved loan applicants has doubled over the past year. The Disruption Index index has been jointly developed by Moula and research and consulting firm Digital Finance Analytics (DFA). It is an initiative designed to track the waves of disruption in Australia in the small business lending sector.

Business confidence among SMEs seeking finance has risen over the past quarter as a result of taxation changes outlined in the recent Federal Budget along with more favourable business conditions, according to the latest findings from the Disruption Index,

Figures from the Disruption Index reflect the changing way in which SMEs access finance, including:

the number of data-approved loan applicants has doubled over the past year as more businesses become comfortable with providing bank and accounting data to access unsecured finance

SMEs want faster access to unsecured finance, with the average expected wait time reducing from 7.5 days to 6.5 days over the past year

The Hon. Philip Dalidakis, Minister for Small Business, Innovation and Trade welcomed the role that alternative lenders like Moula play in supporting the economy.

“Having access to capital is one of the most important requirements for a small business to get off the ground or stay operating.”

“It is wonderful to see fintech companies like Moula providing our small businesses with innovative new ways to access capital and manage their finances at the same time. This is another great local success story that cements Victoria’s growing reputation as the number one tech and startup destination in the Asia Pacific region.”

A fully Australian-owned and operated platform, Moula enables businesses to grow by providing loans that are approved via a short online application process.

“Small business owners know that to survive in business you need to meet customer expectations. We live in an age of instantaneous transactions with the increasing availability of data at our fingertips. This means that the pace of business has increased exponentially and in line with that, so too have customer expectations. The lending space is no different,” said Moula CEO and co-founder Aris Allegos.

Over the past twelve months, Moula has aligned itself with best-in-class partners including Liberty and Xero to deliver its unique lending solution to Australian SMEs.

“The Disruption Index indicates a significant shift in the way SMEs expect to access finance, and there is a huge opportunity to help SMEs grow through accessible finance that is based on a thoroughly transparent, data-driven approach. Having somebody of Chris’ calibre on the board, with his track record of building exceptional businesses, is a tremendous boon to Moula,” Allegos said.

“He has a genuine talent and a passion for this space. He ‘gets’ small businesses and the challenges they face and is a huge advocate for what Moula is trying to achieve — to help Australian SMEs grow via a simple loan application that is fast, affordable and responsible.”

As a Xero preferred financial services partner, Moula was the first online lending platform globally to use Xero’s API integration to analyse and underwrite a business loan.

“Over the course of my five years at Xero Australia, I saw a marked shift in the way SMEs use online data to streamline business process and drive growth. The findings from the Disruption Index support this with a slightly higher proportion of SMEs willing to trade their data,” Chris Ridd said.

“There is an opportunity to help support the continued success of small businesses. Lending based on the strength of accounting data is a unique point of differentiation in the market, and one that is the way of the future for finance-as-a-service.”

Ridd joins the board of five executives, including Moula co-founders Aris Allegos and Andrew Watt, Sherman Ma, Managing Director of Liberty Financial and tech entrepreneur Nathan Cher.

Fintechs can help incumbents, not just disrupt them

Interesting piece from McKinsey showing that the structure of the fintech industry is changing and that a new spirit of cooperation between fintechs and incumbents is developing. For example, in corporate and investment banking, less than 12 percent are truly trying to disrupt existing business models.

Fintechs, the name given to start-ups and more-established companies using technology to make financial services more effective and efficient, have lit up the global banking landscape over the past three to four years. But whereas much market and media commentary has emphasized the threat to established banking models, the opportunities for incumbent organizations to develop new partnerships aimed at better cost control, capital allocation, and customer acquisition are growing.

We estimate that a substantial majority—almost three-fourths—of fintechs focus on retail banking, lending, wealth management, and payment systems for small and medium-size enterprises (SMEs). In many of these areas, start-ups have sought to target the end customer directly, bypassing traditional banks and deepening an impression that they are disrupting a sector ripe for innovation.

However, our most recent analysis suggests that the structure of the fintech industry is changing and that a new spirit of cooperation between fintechs and incumbents is developing. We examined more than 3,000 companies in the McKinsey Panorama FinTech database and found that the share of fintechs with B2B offerings has increased, from 34 percent of those launched in 2011 to 47 percent of last year’s start-ups. (These companies may maintain B2C products as well.) B2B fintechs partner with, and provide services to, established banks that continue to own the relationship with the end customer.

Corporate and investment banking is different. The trend toward B2B is most pronounced in corporate and investment banking (CIB), which accounts for 15 percent of all fintech activity across markets. According to our data, as many as two-thirds of CIB fintechs are providing B2B products and services. Only 21 percent are seeking to disintermediate the client relationship, for example, by offering treasury services to corporate-banking clients. And less than 12 percent are truly trying to disrupt existing business models, with sophisticated systems based on blockchain (encrypted) transactions technology, for instance.

Assets and relationships matter. It’s not surprising that in CIB the nature of the interactions between banks and fintechs should be more cooperative than competitive. This segment of the banking industry, after all, is heavily regulated.¹ Clients typically are sophisticated and demanding, while the businesses are either relationship and trust based (as is the case in M&A, debt, or equity investment banking), capital intensive (for example, in fixed-income trading), or require highly specialized knowledge (demanded in areas such as structured finance or complex derivatives). Lacking these high-level skills and assets, it’s little wonder that most fintechs focus on the retail and SME segments, while those that choose corporate and investment banking enter into partnerships that provide specific solutions with long-standing giants in the sector that own the technology infrastructure and client relationships.

These CIB enablers, as we call them, dedicated to improving one or more elements of the banking value chain, have also been capturing most of the funding. In fact, they accounted for 69 percent of all capital raised by CIB-focused fintechs over the past decade.

Staying ahead. None of this means that CIB players can let their guard down. New areas of fintech innovation are emerging, such as multidealer platforms that target sell-side businesses with lower fees. Fintechs also are making incursions into custody and settlement services and transaction banking. Acting as aggregators, these types of start-ups focus on providing simplicity and transparency to end customers, similar to the way price-comparison sites work in online retail. Incumbent banks could partner with these players, but the nature of the offerings of such start-ups would likely lead to lower margins and revenues.

In general, wholesale banks that are willing to adapt can capture a range of new benefits. Fintech innovations can help them in many aspects of their operations, from improved costs and better capital allocation to greater revenue generation. And while the threat to their business models remains real, the core strategic challenge is to choose the right fintech partners. There is a bewildering number of players, and cooperating can be complex (and costly) as CIB players test new concepts and match their in-house technical capabilities with the solutions offered by external providers. Successful incumbents will need to consider many options, including acquisitions, simple partnerships, and more-formal joint ventures.

Reckon Offers SME Loans

Accounting software developer Reckon has announced it will offer loans through an agreement with small business online lender Prospa, as the company extends its suite of financial services accessible to its customers. The introduction of business loans adds to recent news flow, with Reckon partnering with OFX to provide low-cost international payments and PayPal to unlock online credit card payments for companies without card processing facilities.

Small businesses loans of between $5,000 and $250,000 will be available, with terms range between three and twelve months and with daily and weekly payment options available.

Applications are made via Reckon and assessed by Prospa who can give approval inside 24 hours. The health of a business is evaluated by Prospa using a proprietary technology platform to rapidly determine the borrowers lending capacity. The process is significantly faster than traditional loan approvals.

“Data from accounting software used to evaluate cash-flow is seen as the best measure of business fundamentals, helping to determine the businesses ability to repay and manage risk during the life of a loan”, Reckon CEO Clive Rabie said.

“This ability to provide data to a bank or fintech player so that they can do a real-time credit check and provide safer loans to small business is disrupting this space,” said chief operating officer Daniel Rabie.

Reckon will continue to look for additional services and partnerships.

Established in 2011, Prospa has funded more than $150 million small businesses loans.

From Accountants Daily and Australian Broker.

FinTech and the financial ecosystem – evolution or revolution?

Separating hype from reality was the theme of Ms Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada, speech, in which she argues FinTech, has created a lot of excitement, but also quite a lot of hype, depending on your perspective. Google searches for “finTech” have increased by more than 30 times in the past six years. FinTech has also attracted real money: over the same period, around 100 fintech start-ups in Canada have raised more than $1 billion in funding. At a global level, almost $20 billion was poured into fintech last year alone. She says now is the time for financial institutions, new entrants and policy-makers to work together. The opportunity cost of sitting back and waiting for the dust to settle is too great.

Financial institutions and infrastructure operators are making important strategic decisions about which parts of their businesses they want to defend and grow and which ones they want to scale back. This urgency is not only coming from fintech contenders. Banks are also dealing with a more demanding regulatory environment and exceptionally low interest rates around the world that are squeezing profit margins. Banks already spend close to $200 billion a year on IT globally, so replacing legacy systems will mean difficult and critical investment decisions.

For the Bank of Canada, our priority is to see upgrades made to the core payment systems that the financial system relies on and that the Bank oversees: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These systems have served us well, but both require investments that are needed to fully meet our oversight requirements. Investment will also help the systems better meet the modern needs of participants and their customers.

Take the ACSS, for example, which still handles most retail transactions today. It was implemented over 30 years ago, when everyone wanted a Commodore 64. The ACSS may have been at the forefront in 1984, but we are far from the efficient frontier now. Cheques take up to four days to clear, and some information needs to be re-entered manually.

Now is the time to make our core systems more efficient and competitive. For consumers and business users, we need to move closer to real-time access to funds. In both the ACSS and LVTS, we need to collect richer data on transactions and, ideally, make them interoperable to avoid having to manually re-enter information. This effort is not change for change’s sake. If we can leverage some of the existing infrastructure and still achieve our goals, that is all the better.

For our part, policy-makers and regulators need to address innovation in financial services in a few proactive ways.

The first is to develop a solid analytical framework to understand and assess the benefits and challenges of something so new. This is something the Financial Stability Board is working on. Authorities will make their assessments through many lenses, including consumer protection, financial inclusion, market integrity, competition policy and financial stability. That is why other international groups such as the Committee on Payments and Market Infrastructures, the Basel Committee on Banking Supervision, and the International Organization of Securities Commissions are also involved. The Bank of Canada, together with our domestic colleagues, is actively contributing to these efforts. Since fintech is a global phenomenon, it is critical that this regulatory effort be global. We must also learn from emerging-market economies that are further along in some areas.

While fintech innovations promise to solve some current problems, they could also create new ones. Let me give you an example: I worry that network effects, which underpin the success of many payment applications, could lead to an excessive concentration of payment service providers. If this happens, households and businesses may not benefit from cost savings. This is clearly an issue for competition authorities.

It also is an issue for financial stability because “too big to fail” could emerge in a new form outside the current regulatory perimeter. Once again, payments are a great example. I worry that players not covered currently by regulation could become important to the system even if they never take on bank-like risks, such as maturity transformation or leverage, or become big enough to be considered systemically important. The move to increased direct access means that even smaller players could very well create critical dependencies within the financial system, particularly if they connect directly to core payments infrastructure. This could give rise to moral hazard. At a minimum, authorities need to put a large enough weight on operational dependencies when looking at systemic importance, particularly in light of cyber risk. When a payment system grows to be prominent or systemically important, the Bank of Canada’s job is to oversee it. Even before we reach that point, regulatory measures should be considered to address specific issues, such as operational resilience and consumer protection.

I also wonder how DLT-based infrastructures could affect the financial ecosystem. Ever-increasing automation through, say, smart contracts, could increase efficiency and certainty but could also increase financial volatility. Would that volatility be short-term, such as flash crashes? Or would it entail procyclical dynamics or new channels of contagion?

There are also questions about whether the regulatory perimeter is adequate, given new entrants and risks of regulatory arbitrage. In my view, the field of inquiry should include the inherent risk and systemic importance of an activity, regardless of what entity is performing it. Even as we strive to implement a regulatory response that is proportionate to the risk, we need to keep in mind that maintaining a level playing field is important. Some of these issues are not too different from those that authorities face in their work on shadow banking, another area where new entrants are challenging traditional players.¹⁶ And, big or small, operational risk deserves much greater attention.

The second way to address innovation in financial services is active engagement between authorities and the private sector. Some countries, such as the United Kingdom, Australia and Singapore, have created official regulatory “sandboxes.” These sandboxes allow start-ups to experiment with services without jumping through all the usual regulatory hoops.

Here in Canada, we are consulting with fintech entrepreneurs. The Bank of Canada is also partnering with Payments Canada, Canadian banks and R3 – which leads a consortium of financial institutions – to test drive distributed ledgers. Our only goal at this stage is to understand the mechanics, limits and possibilities of this technology. The plan is to build a rudimentary wholesale payment system to run experiments in a lab environment.

Our experiment includes a simulated settlement asset used as a medium of exchange within the system. It is very much like the settlement balances in LVTS, except it is using DLT. Because it cannot be used anywhere else, it is a different animal altogether from a digital currency for widespread use.

This is an experiment in the true sense of the word. I cannot think of a better way to understand this technology than to work with it. Other frameworks need to be investigated, and there are many hurdles that need to be cleared before such a system would ever be ready for prime time.

The third way to address innovation proactively is to do fundamental research on the effects of new technology. The Bank of Canada’s research over the past few years has focused on new payment methods, the adoption and competitiveness of digital currencies, and the essential benefits of private e-money. We are continuing this work and broadening it to include other developments, such as peer-to-peer lending and uses of DLT.

We also want to understand how new financial technologies will address the underlying forces that created the need for financial intermediation in the first place. In theory, new technology could enable a different framework for addressing the same frictions, potentially one that does not require financial intermediaries at all. The names and faces may change, but I do not see technology changing the need for maturity transformation, loan monitoring, intermediation of borrowers and lenders, and trust. This is a good question for academics.

FinTech – Revolution or Evolution?

FinTech could mean a more open, more transparent, and more democratic global financial system according to Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, in a speech “Enabling the FinTech transformation – revolution, restoration, or reformation?”. He also announced the Bank is launching a FinTech Accelerator to work in partnership with FinTech to help harness FinTech innovations for central banking. He concludes that FinTech should neither be the Wild West nor strangled at birth.

The Potential impact of FinTech on financial and monetary stability

FinTech has the potential to affect monetary policy transmission, the safety and soundness of the firms we supervise, the resilience of the financial system, and the nature of shocks that it might face.

It could also have profound implications for the Bank’s secondary objective, as supervisors, to facilitate effective competition between the firms we regulate.

The impact on firms’ safety and soundness depends on several factors. By making wholesale and retail settlement faster and capital allocation more efficient, FinTech could boost banks’ returns and therefore viability.

Already, FinTech is spurring new entrants including payments providers, peer-to-peer lenders, robo advisors, innovative trading platforms, and foreign exchange agents. This could, with time, unbundle traditional banking models and deny banks their traditional economies of scale and scope.

The systemic consequences of FinTech are even more complex. More diverse business models and alternative providers are positives for financial stability. By allowing better credit screening and less adverse selection, FinTech could improve risk assessment, credit allocation, and capital efficiency. But if it encourages herding on common information, trading positions could become more correlated. And if switching costs in funding markets fall, liquidity risk could rise and systemic risks grow.

Indeed, sometimes when I hear of democratising finance, spreading risk in capital-light originate-to-distribute models, I think I haven’t been this excited since the advent of sub-prime.

FinTech could also affect the conduct of monetary policy. Unbundled banking would change the roles of bank capital and funding costs in the credit channel of monetary policy. If FinTech enhances participation in financial markets, the wealth channel of monetary policy could strengthen.

More broadly, Big Data techniques could tell us about the state of the economy more accurately and promptly. Forecast performance could improve, akin to the forecast improvements that better measurement of atmospheric conditions has, over time, delivered for meteorologists.

My own forecast is that FinTech’s consequences for the Bank’s objectives will not become fully apparent for some time. Many of the technologies needed to deliver such transformations are nascent – their scalability and compatibility untested beyond Proofs of Concept. Moreover, the bar for displacing incumbent technologies is very high. Nor will the Bank of England take risks with the resilience of the core of the system. Disruption won’t come either easy or cheap.

Enabling the FinTech Transformation

We are actively exploring how new financial technologies could support our policy objectives. There are five ways the Bank is enabling the FinTech transformation.

The first is widening access to central bank money to non-bank Payments Service Providers, known as PSPs.

As the internet revolutionised commerce, making trade faster and markets more competitive, payments technology lagged in many countries, although it is worth remembering that the UK has been a global leader on real-time retail payments. Faster Payments (FPS) was one of the earliest real-time retail systems introduced, in 2008. Now, new entrants and established players are seeking to provide payment services that are instantaneous, secure, reliable and accessible anytime from anywhere.

Retail consumers and firms are increasingly demanding payments completed in seconds, not hours or days.

They expect payments to be seamless, reliable and cheap whether to recipients overseas or just up the street.

And they expect to make payments without visits to a bank branch or even logging onto a desktop computer.

Similarly, companies, financial intermediaries and governments want to process ever larger and more complex bulk payments covering multiple systems, countries and currencies.

Central banks lie at the hearts of payment systems, giving households and firms the assurance that transactions have settled in the most secure form of payment: central bank money. To fulfil that role, our payments infrastructure needs to remain fit for purpose: reliable, resilient and robust. But we must also be responsive to changing payments demands. So earlier this year the Bank announced we would be drawing up a blueprint to replace our current real-time gross settlement (RTGS) system, now twenty years old.

48 institutions currently have settlement accounts in RTGS. All other users of the systems that settle across RTGS access settlement via one of four agent banks. These users include over 1000 non-bank PSPs serving customers’ increasingly demanding standards, and many rely on major UK payment schemes, particularly Faster Payments (FPS).

As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and goodwill of the very banks with whom they are competing. Re-selling services ultimately provided by banks limits these firms’ growth, potential to innovate, and competitive impact.

That is why I am announcing this evening that the Bank intends to extend direct access to RTGS beyond the current set of firms, allowing a range of non-bank PSPs to compete on a level playing field with banks.

By increasing the proportion of settlement in central bank money, diversifying the number of settlement firms, and driving greater innovation in risk-reducing payments technologies, expanding access should bring financial stability benefits. It should also enable more efficient, effective and inclusive payments, including in ways that we cannot fully anticipate.

It is not a one-way street, however.

As we extend access, we will safeguard resilience in three ways: by holding settlement account holders to the appropriate standards; by removing legislative barriers to non-bank access; and by designing the right account arrangements for new entrants.

I am pleased that both the FCA and HMRC, who together supervise these institutions, are committed to developing a strengthened supervisory regime for those who apply for an RTGS settlement account, to give assurance that non-bank PSPs can safely take their place at the heart of the payment system.

And I welcome the Chancellor’s commitment tonight to make the necessary legislative changes to ensure that these new entrants can access RTGS safely and efficiently.

By extending RTGS access, our objective is to increase competition and innovation in the market for payment services. To ensure that PSPs are not disadvantaged relative to banks offering equivalent payment services, the Bank intends to give appropriate remuneration for balances that PSPs will be required to hold overnight to support their payments activities.

The second way the Bank is enabling the FinTech transformation is by being open to providing access to central bank money for new forms of wholesale securities settlement.

Securities settlement is the lifeblood of modern wholesale financial markets – the associated payments account for fully half of RTGS’s daily settlement flows.

However, as with retail payments, securities settlement is now ripe for innovation. A typical settlement chain can involve many different intermediaries, meaning securities settlement is comparatively slow. Transactions that take nanoseconds to execute settle in days. This also means large costs and operational risk. And, like in payment systems, economies of scale introduce concentration and create single points of failure. All of that ties up potentially tens of billions of pounds worth of capital. With the economics of wholesale banking under pressure, cutting inefficiencies is a high priority for industry.

That is why it is welcome that FinTech innovators are exploring the potential of distributed ledger technology to simplify the settlement chain, reduce its cost, and raise its speed while increasing resilience. The instruments involved range from equities to bank loans. However, the challenges facing such projects are legion, including reliability, resilience, security and scale. And fundamentally, how to prove technologies that are still nascent?

One challenge an otherwise robust system of sufficient scale would not face is access to central bank money from the Bank of England. The Bank has for many years sought to ensure that, wherever possible, wholesale securities settlement occurs in central bank money.

We are already clear that we stand ready to act as settlement agent both for regulated systemically important schemes supervised by the Bank, and, on a case-by-case basis, for other new systems.⁹ The Bank will use this to enable innovation and competition, without compromising stability.

The third way the Bank is enabling the FinTech transformation is by exploring the use of Distributed Ledger (DL) technology in our core activities, including the operation of RTGS.

If distributed ledger technology could provide a more efficient way for private sector firms to deliver payments and settle securities, why not apply it to the core of the payments system itself?

The great promise of distributed ledgers for central banks is their potential to enhance resilience. Distributing the ledger means multiple copies of the system. It can continue to operate if parts get knocked out. That removes the single point of failure risk inherent in a centralised system.

But if we are to entrust the heart of our financial system to such technology, it must be robust and reliable. The payments system we oversee processes £½ trillion of bank transactions, equivalent to around 1/3 of annual GDP, each day. Disruptions are potentially costly. That is why, in payments and settlement, the Bank has an extremely low tolerance for any threat to the integrity of the economy’s ‘plumbing’. We won’t beta test RTGS.

To help distinguish DL’s potential from its hype, the Bank has set up our own as a Proof of Concept. We have learned a great deal – about the opportunities and the challenges that need to be met before DL could be used in central banking.

Some of those challenges are familiar to any payments system.¹⁰ Others are more specific to DL. For example, we would need assurance that DL systems can be scaled, retain data integrity, and operate at the speeds and volumes required by central bank infrastructure – day in, day out.

And we need to be certain that the privacy of the data in those distributed copies cannot be compromised by cyber attack, not just today but in the future. One way this might be achieved is to limit the distribution of the ledger to existing trusted parties, such as other public sector entities.

To move forward we are working with other central banks. Beyond this we are open to working with others to explore further possibilities, including alternative applications of the technology.

In the extreme, a DL for everyone could open the possibility of creating a central bank digital currency. On some levels this is appealing. For example it would mean people have direct access to the ultimate risk-free asset. In its extreme form, it could fundamentally and perhaps abruptly re-shape banking.

However, were it to co-exist with the current banking model, it could exacerbate liquidity risk by lowering the frictions involved in running to central bank money.¹¹ These questions and others are why these topics are being examined as part of the Bank’s research agenda, with the prospect of a central bank digital currency for the UK, in my view, still some way off. We will work to make payments easier, and though cash may no longer be king it once was, its reign will endure for some time.

The fourth way the Bank is enabling the FinTech transformation is by partnering with FinTech companies on projects of direct relevance to the Bank’s mission.

I am announcing tonight that the Bank is launching a FinTech Accelerator to work in partnership with FinTech firms on challenges that we, as a central bank, uniquely face. The Accelerator will work with new technology firms to help us harness FinTech innovations for central banking. In return, it will offer firms the chance to demonstrate their solutions for real issues facing us as policymakers, together with the valuable ‘first client’ reference that comes with it. With time, the Accelerator will build a network of firms working in this space for the benefit of us and them alike.

How will this help us?

Consider that the Bank monitors risks that threaten the operational resilience of the UK financial system.

At the Financial Policy Committee’s instigation, we have been working with other authorities to encourage firms to improve their cyber defences.

Over the past two years, twenty-three firms have undergone CBEST penetration tests, with all core banks expected to have completed tests by the end of this year.

To complement these efforts, the Bank has begun examining how public data could be used to assess firms’ cyber resilience, including looking for malware on a firm’s systems, software vulnerabilities, or weak encryption that could be exploited by hackers.¹²

As a proof of concept and good cyber hygiene, we are using data publically available on the web to assess our own resilience. Early results indicate these techniques could complement existing tests in our regular assessments of firms’ operational resilience.

We are also exploring how we – and others – could use the data the Bank collects more effectively. Big Data has the potential to help the Bank’s policy committees identify trends in systemic risk and the economy. Much of the data we collect is rightly subject to strict limits on confidentiality and sharing. For example, our regulatory mortgage contract data comes under strict control to guarantee personal data protection. We can’t just share the private data to which we have access with external researchers, foreign authorities or even across the Bank.

But this means that, simply put, the people of the United Kingdom are not getting the most out of the data the Bank collects.

That’s why we are investigating ways of anonymising and de-sensitising data – fully respecting privacy laws without losing analytical content – to allow wider sharing.

Progress has been encouraging creating the prospect of better informed policy making.¹³

These are just two examples of a bigger programme of collaboration between the Bank and technology innovators. We are open to further collaboration and tomorrow will provide details of the next steps.

Finally, the Bank is calibrating its regulatory approach to FinTech developments.

FinTech should neither be the Wild West nor strangled at birth. The Bank is devoting considerable resources to ensure whatever develops is sustainable, not ephemeral.

If FinTech enables a great unbundling of financial services, risks will change in tandem.

Our interest is in ensuring the safety and soundness of banks, the protection of insurance policy holders and the resilience of financial ecosystem as a whole to these changing risks. It is about activities not labels.

That is why the Bank has been engaging with FinTech firms to understand better the financial stability risks that could emerge as banking is re-shaped. We will monitor those that arise along the transition path and those that could endure.

Where firms or activities become systemic and risks to the real economy grow, they will come within the purview of the Bank’s responsibilities for the stability of the system as a whole. The Financial Policy Committee will continue to monitor the scope of the regulatory perimeter. Adjustments will follow if necessary.

When FinTech companies fall within our remits, we will monitor them in the same proportionate way that we approach other firms – backed by analytics and judgement, taking action where appropriate.

We are building a system that allows for orderly failures. Not just to end the blatant unfairness of Too Big to Fail, but also to foster industry dynamism and better outcomes for consumers. After all, ease of exit promotes ease of entry. We won’t discourage avatars by preserving dinosaurs.

ASIC enters fintech partnership with Singapore

According to InvestorDaily, ASIC has signed an Innovation Functions Co-operation Agreement with the Monetary Authority of Singapore (MAS) aimed at “helping innovative businesses in Singapore and Australia in their foray to the respective markets”.

The agreement will enable fintech businesses in Australia and Singapore to “establish initial discussions in each other’s market faster and receive advice on required licences, thus helping to reduce regulatory uncertainty and time to market”, a statement by ASIC said.

To qualify for the support offered under the agreement, businesses need to meet the eligibility criteria of their ‘home’ regulator, the statement said.

“Once referred by the regulator, and ahead of applying for a licence to operate in the new market, a dedicated team or contact person will help them to understand the regulatory framework in the market they wish to join, and how it applies to them,” ASIC said.

MAS chief fintech officer Sopnendu Mohanty said the agreement would help start-ups from both countries grow and expand into each other’s countries.

“Singapore has a vibrant fintech ecosystem, reinforced by sound infrastructure and a growing talent pool, to support companies intending to use Singapore as a gateway to other markets in Asia,” Mr Mohanty said.

“MAS is also looking forward to partner ASIC in joint innovation projects on the application of key technologies such as digital and mobile payments, blockchain and distributed ledgers, big data, and Application Programming Interfaces (APIs),” he said.

ASIC chairman Greg Medcraft said the Australian regulator is committed to encouraging innovation “that has the potential to benefit financial consumers and investors”.

“Since ASIC launched its Innovation Hub last year, we have seen a surge in requests by FinTech start-ups seeking assistance about how to navigate the regulatory requirements,” Mr Medcraft said.

“In particular we have dealt with robo or digital advice, crowdsourced equity funding, payments, marketplace lending and blockchain business models.

“It is very exciting to observe, and clearly some business ideas will want to scale up internationally. We believe this agreement with the MAS will help break down barriers to entry both here and in Singapore,” he said.

New Website Is Good for Traditional Banking Relationships but not so Good for Smaller Businesses

Getting the right funding is always a challenge for SMEs. The ABA and CPA Aust have developed a new website to help. Its really good for larger traditional banking relationships. But ignores fintechs which might be the best option for smaller businesses. Cross posted with permission from Neil Slonim, The Bank Doctor.

If you are an SME or you advise SMEs a free new online resource centre Small Business Finance could be of real benefit in establishing and maintaining better relationships with banks.

This website has been developed and funded by the Australian Bankers’ Association (ABA) in conjunction with CPA Australia. Support for the website has also been provided by the Council of Small Business Australia (COSBOA) and the NSW Business Chamber.

It guides users through the three main stages of obtaining bank finance starting with what to do before applying for a loan, how to complete a loan application and finally what to do once you have the loan. There are several useful templates that small business owners can download to prepare documents like a business plan, a business case assessment and a cash flow forecast.

The main limitation of the website is that it is premised on the traditional business banking relationship model which no longer works for smaller businesses that have borrowings of less than around the $250k level.

Many of these customers don’t have a relationship manager or if they do that individual has several hundred customers to look after, lacks experience or authority plus they seem to stay in their roles for very short periods of time.

For business loans of less than $250k banks simply cannot afford to have a manager sitting behind a desk reviewing business plans, business cases and cash forecasts. When assessing your creditworthiness, their primary focus is in how much equity you have in your home because this is the quickest, easiest and safest way for them to lend money. But if you don’t have a home, or have no equity in your home or you and/or your partner are just not prepared to put it at risk then, until recent times, your options have been very limited.

The future of business banking particularly at the lower end is all about Fintech. According to ABA statistics, the total market for small business bank loans is about $260b and almost half are for less than $100k. Within the next few years some experts are predicting fintech lending to SMEs will rise to around 10 per cent of the total SME lending market. In 2015 fintech lending to the SME sector was around $0.25b coming from a base of zero in two years. This means it could rise to around $26b, an increase of 100 times current levels. Its just too big to ignore.

Small Business Finance is a useful tool for larger businesses which still fit the relationship business banking model. It is much less relevant to those smaller businesses which don’t fit this model. Hopefully over time the website will be updated to reflect how technology can be leveraged to provide better outcomes for both SME borrowers and lenders.

To learn more on this subject you may like to read this SmartCompany article Banking resource centre aims to help SMEs but fintech is still the elephant in the room