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/
More about innovation from Zoran from SmarterLite.
SmarterLite’s Chief Technology Officer, Zoran Ovuka, explains the innovation journey the company has been on as it has created a next generation luminosity product. https://smarterlite.com/.
See our earlier show at: https://youtu.be/SoYHKrevwsM
Go to the Walk The World Universe at https://walktheworld.com.au/
SmarterLite’s Chief Technology Officer, Zoran Ovuka, explains the innovation journey the company has been on as it has created a next generation luminosity product. https://smarterlite.com/.
Proof Australian firms have the capacity to be innovative, despite the many barriers in play.
Go to the Walk The World Universe at https://walktheworld.com.au/
I chat with Des Vary from Bentley Power Equipment, a Western Australian business which has been leading the way in terms of innovate green lighting solutions. But the journey has not been straightforward and yet the potential is significant. We tell his story, as part of our innovation series.
We discuss the need for a new economic reality, and a focus on innovation based reform.
Three years ago, then prime minister Malcolm Turnbull went to an election spruiking the wonders of innovation. “There has never been a more exciting time to be an Australian,” government advertising had enthused in the months before.
But the public wasn’t enthused, and Turnbull’s government barely scraped back into office.
Since then innovation policy has spooked the political class. They see it as a vote loser, and a threat to jobs – mostly their own.
Consequently, innovation and industry policy has received the least attention just when the decline of investment in research and development may matter most to our economic future.
Here’s how we got to where we are.
After the terms of trade downturn of the 1980s and the economic reforms of the 1990s, Australia enjoyed the biggest, unanticipated mining boom in our history, thanks to the rise of China. John Howard wanted us to be “relaxed and comfortable” and we were, at least while it lasted.
Increased commodity prices boosted our terms of trade, without any extra effort on our part. By contrast with Norway, which prepared for its post-oil future with a 76% resource rent tax and sovereign wealth fund, Australians enjoyed tax cuts and a spending splurge.
However, the underlying structural problem of our economy had not gone away. Measured by the research intensity of our exports, Australia’s “economic complexity” ranks at 59, between Kazakhstan and Lebanon.
This index compiled by MIT’s Observatory of Economic Complexity is topped by Japan, Switzerland and Germany. Our position in global innovation rankings is no less dismal, especially when it comes to turning ideas into products.
While recent domestic growth has been driven by services, retail and construction, our future living standards will depend on how we pay our way in the world. This means identifying new, more sustainable sources of export income.
Of course, resources will still have a part to play, but not as unprocessed raw materials. For example, we have everything we need for renewable energy production, battery manufacture and hydrogen exports. And how could anyone contemplate continuation of the barbaric live animal trade?
The graphic below shows Australia’s export profile in 2017. Of US$244 billion in total exports, US$131 billion were mineral products.
This rebalancing won’t happen automatically through the market. It will require active intervention to manage the post-mining boom transition to an inclusive and dynamic knowledge-based economy. And to reverse the slowdown in productivity growth associated with current wage stagnation.
During the boom, high prices for coal and iron ore masked Australia’s deteriorating productivity performance. Now mining no longer contributes to growth, the impact on our national income has become all too obvious.
That’s why it was so important to Malcolm Turnbull to reinvigorate the national innovation and science agenda with a focus on startups and business-university collaboration, after Tony Abbott’s $3 billion cuts to Labor’s programs.
And why it was then so disappointing he could not build on his agenda for an “ideas boom” to replace the mining boom.
The Coalition government has cycled through three prime ministers and six industry ministers. It continues to cut science and innovation programs. Its latest budget “savings” included $4 billion from the Research and Development Tax Incentive scheme, $3.8 billion from the Education Investment Fund and $2.2 billion from higher education.
As a result, Australia’s total spending on research and development is now just 1.88% of GDP, from 2.11% five years ago. The government contribution (0.57%) is where it was in the 1980s. Meanwhile Japan and Sweden are committing more than 3%, and Korea and Israel more than 4%.
For any mention of innovation and industry policy in the current election campaign, you have to look hard.
The Coalition has confined itself to some low-key announcements on a new space agency, defence innovation, genomics, food, marine science and manufacturing.
It has rejected or parked the recommendations of its own Innovation and Science Australia 2030 strategy, including using any savings from winding back the R&D Tax Incentive to promote high-growth export opportunities.
Labor has committed to a “collaboration premium” to encourage business engagement with universities and the CSIRO as part of a restructured R&D Tax Incentive (another key recommendation of the 2030 strategy).
However, it will also “bank” the Coalition’s savings to achieve its budget surplus. In this context, it will be all the more challenging for a new Labor government to achieve its R&D target of 3% of GDP, given that this will require additional investment of at least $20 billion.
In addition, Labor has announced an “off-budget” $1 billion Manufacturing Future Fund and a series of initiatives on renewable technologies, biofabrication, food and fibre, artificial intelligence, blockchain, space, hydrogen, electric vehicles and “digital skills hubs”. In an important symbolic gesture, it has also promised to rescue CSIRO climate science.
These initiatives are clearly worthwhile, but do not restore the funding that has been lost, let alone increase it.
If new policy must be paid for, why not cut expenditure that actually impedes economic transition? The diesel fuel tax rebate, for example. This $6 billion scheme, whereby taxpayers subsidise fuel costs for the resources sector, is equivalent to almost half the entire annual budget outlay for research and innovation.
Most successful economies around the world use “knowledge foresights” to identify national priorities in areas of existing or potential competitive advantage. They have long-term, coherent policy frameworks for pursuing these priorities.
Australia’s next government will have a chance to devise such a framework, in cooperation with business, unions and research organisations. Of course, it will require substantial public as well as private investment. But we can no longer afford a “do nothing” approach.
Author: Roy Green, Emeritus Professor & UTS innovation adviser, University of Technology Sydney
Given the tenor of the Royal Commission responsible lending inquiries this week, which focussed on the complexities of brokers and lenders complying with their responsible lending obligations, we believe the future will be distinctly digital. Our banking innovation life cycle road map calls this out.
To illustrate the point, there was a timely announcement from the Opica Group who have a new, and they claim Australia’s first responsible lending engine” (RELIE). This from The Adviser.
A new artificial intelligence-based expenses verification engine has been launched for brokers and lenders to ensure responsible lending and compliance obligations are met.
Billing the tech as “Australia’s first responsible lending engine” (RELIE), the Opica Group has launched the platform to help “protect any broker or lender from a breach of their responsible lending requirements”.
According to Opica Group founder Brett Spencer, the platform is needed because “lenders traditionally have been very quick to put blame on brokers for any application that goes sour”.
Mr Spencer said that following a tighter regulatory environment and “greater scrutiny being placed on our industry by regulators”, the group identified that “brokers needed something that provided them some protection”.
As such, it built the RELIE platform to enable brokers (and lenders) to perform a “RelieCheck” that could prove they had done the adequate checks into expenses and the consumer’s ability to service the loan.
How it works
The RELIE engine makes use of a specially built artificial intelligence engine, Sherlock™, which analyses a consumer’s banking and credit card transaction data over a period of 12 months and automatically provides “income verification, an understanding of the client’s mandatory expenditure, and therefore their ability to service a loan”.
According to the group, the key differentiator of the RELIE platform when compared to credit checks is that it uses machine learning to categorise transactions, allowing for the differentiation of transaction types, including mandatory versus discretionary expenditure and recurring versus one-off spending.
It also automatically highlights areas of concerns within the transaction data such as undisclosed debts, spikes in expenditure of high-risk categories such as gambling, and possible changes in life circumstances such childbirth.
Mr Spencer commented: “With the advancements in technology and legislation crackdown, we saw an opportunity to protect brokers and automate significant components of an applicant’s income and expense verification process…
“We believe that running a RelieCheck will protect any broker or lender from a breach of their responsible lending requirements.”
Speaking to The Adviser, Mr Spencer elaborated: “While a credit check simply looks at your credit worthiness, a RelieCheck looks at the consumer’s 365-day spending and income transactions and interrogates the data from a responsible lending perspective.
“It then presents back to the broker or lender a summary of exactly what, when and where an applicant’s income and expense are positioned.”
However, the Opica Group founder said that while the AI engine “does all the grunt work” to auto categorise and allocate spends to a range of buckets (such as mandatory versus discretionary expenses), the broker is able to review each category of spend and re-allocate expenses to a different category as part of their responsible lending discussions with the customers.
Each change made is then notated by the broker in order to meet their responsible lending requirements.
Revealing that the engine has been 16 months in the making, Mr Spencer said that the group wanted to “create a platform that a broker could use to protect themselves from any unintended breach of their responsible lending requirements”.
He added: “We also wanted to speed up the physically demanding process of paper-based statement reviews so that a broker could reduce the amount of time it takes to process a loan, and in the process providing a far greater service to the customer.”
Opica Group revealed that “early indications” have shown that by performing a RelieCheck on an applicant, a broker or lender could reduce processing times by approximately 90 minutes per application (when compared to manual assessment of the applicant’s banking and credit card transactions).
Mr Spencer concluded: “We want to create a new industry standard.
“Data is a commodity, but what you do with the data is the key ingredient.”
He added that he did not believe anyone else was thinking about “what we do with the data to aid the lending process”.
Opica Group is reportedly working with a number of aggregators and lenders to establish whether the engine could be integrated into their customer relationship management (CRM) systems. The service costs $15 (plus GST) per applicant for a broker account, or $10 (plus GST) per applicant for an aggregator or lender account.
The Financial Conduct Authority (FCA) is the conduct regulator for 56,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms. The FCA recently published feedback on its Discussion Paper on Distributed Ledger Technology (DLT).
In April 2017 The FCA announced that it was seeking stakeholder views on the potential for future development of DLT in the markets the FCA regulates.
The FCA received 47 responses from a wide range of market participants including regulated firms, national and international trade associations, technology providers, law firms and consultancies.
DLT has come to greater public prominence as it underpins digital currencies such as Bitcoin. This paper is not about Bitcoin or other so-called cryptocurrencies. Rather its remit is to consider the range of ways that DLT can impact on financial services and the regulatory implications.
Respondents expressed particular support for the FCA maintaining a ‘technology-neutral’ approach to regulation and welcomed the FCA’s open and proactive approach to new technology, including our Sandbox and RegTech initiatives.
The feedback also suggested that current FCA rules are flexible enough to accommodate the use of DLT by regulated firms and no changes to specific rules were proposed. Many respondents suggested that DLT solutions could deliver regulatory requirements more efficiently than current systems, substantially reducing costs for firms and regulators alike.
However, some respondents doubted the compatibility of permissionless networks (permissionless networks allow general public visibility of transactions online and are open for broad participation whilst permissioned networks typically feature a ‘gatekeeper’ who controls access) with our regulatory regime. Based on the feedback and its own work, overall the FCA is open to all forms of deployment of DLT (including both permissioned and permissionless DLT networks) provided the operational risks are properly identified and mitigated.
The FCA will continue to monitor DLT-related market developments, and keep its rules and guidance under review in the light of those developments. It will work collaboratively with industry, HM Treasury, the Bank of England, the Information Commissioner’s Office and other UK bodies to ensure a co-ordinated approach towards DLT in the UK. At an international level, the FCA will work closely with national and international regulatory bodies to shape regulatory developments and standards.
On the Initial Coin Offering (ICO) market, the FCA will gather further evidence and conduct a deeper examination of the fast-paced developments. Its findings will help to determine whether or not there is need for further regulatory action in this area beyond the consumer warning issued in September. In the meantime, the FCA highlights how an ICO-related business proposition needs to be designed to satisfy the ‘consumer benefit’ condition for access to the FCA’s Innovate facilities.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:
“The original paper opened a discussion about DLT and the volume and breadth of responses we received from the industry demonstrates the significance of this issue. DLT has the potential to transform practices across a number of markets, sharpening competition and improving risk management. At the same time we have to be alive to the risks of certain applications of it. We will continue to work with a range of agencies and firms to ensure a co-ordinated approach to the use of DLT in financial services.”
ASIC says that from 29 September 2017, the new crowd-sourced funding (CSF) regime will come into effect and ASIC will begin accepting licence applications from CSF intermediaries.
Under the CSF regime, eligible public companies will be able to make offers of fully paid ordinary shares to a large number of investors via the online platform of a licensed intermediary. Generally, the CSF regime reduces the regulatory requirements for public fundraising and the intermediaries will play an important oversight role in this process.
ASIC Commissioner John Price said that the new system balances the need for regulatory oversight with supporting innovation.
‘ASIC welcomes the start of the new crowd-sourced funding laws. Crowd-sourced funding helps both start-ups and small to medium sized businesses and investors access the opportunities that are available from an innovative economy. It is also important for investors to understand the benefits and risks of crowd-sourced funding and we encourage them to refer to the materials on crowd-sourced funding on our MoneySmart website‘. he said.
For companies to access the benefits of the new CSF regime, ASIC must first license suitable intermediaries to provide crowd-funding services. Providers of CSF services must hold an Australian financial services (AFS) licence. From 29 September 2017 ASIC will begin accepting applications from potential CSF intermediaries for AFS licence authorisations to provide a crowd-funding service.
To facilitate implementation of this regime as soon as possible, ASIC’s Licensing team will consider applications from CSF intermediaries as a matter of priority.
ASIC has today released further details of its approach to the assessment of CSF intermediaries, and the information required for both new licence and variation applications seeking CSF service authorisation.
Applicants should read the information provided on this page before making an application.
ASIC has also released an update to ASIC Form 206 which can be used to convert an existing company so that it is eligible to use the new CSF regime. ASIC will now accept lodgement of ASIC Form 206.
Malcolm Turnbull’s Innovation Agenda focused attention on startups and technology-driven innovation, but this is not enough to overcome the broader problems inhibiting innovation in Australia. Businesses may be looking to the government to ease red tape as a means to increase innovation but what’s really blocking innovation is the short-term view of senior executives, our research finds.
We interviewed 12 board Chairs and nine CEOs of top ASX-listed companies, one-on-one in wide-ranging interviews to try and find out what the leaders of large Australian businesses are thinking and doing in the innovation space.
Our interviewees pointed out there is no real interest among senior executives in taking a risk that may pay off in the long-term because of current risk-reward practices that reward short-term outcomes. One CEO said:
“People try and blame shareholders, but it’s not. It’s management saying, ‘am I really going to be here in 10 years’ time when this actually kicks off’?”
And another board chairperson agreed:
“Does great innovation come out of Australasia? Not normally because the risk-reward perspective is skewed towards I must turn up with my number.”
As a result of this short-term thinking, the amount of money allocated to innovation projects is conservative and released through a stage gate process with the need to report on outcomes. We also found there were very few innovation strategies within these companies.
Executives were risk averse even when a company could afford to make significant investment in innovation. For example one CEO said:
“We are deliberately followers in pretty much everything we do whether it is financial structuring or application of technologies and it’s borne of a risk profile that is a consequence of our market position…we might distribute a couple of hundred million dollars, (and have) A$1 million to spend on something that’s risky.”
Who needs to lead innovation?
Executives and academics have argued that innovation often takes place in large, established businesses. Yet, there is evidence that big business mostly fails at innovation.
In Australia, the 2015 NAB report on business innovation showed that only 29% of very large firms (ASX 300) rated themselves as highly innovative. A recent study by the Centre for Workplace Leadership at the University of Melbourne revealed that just 18% of private sector organisations reported high levels of radical innovation.
The people we talked to as part of this study identified various challenges for innovation in Australia. They pointed out that the Australian market is too small and the Australian culture too laid-back, resulting in less motivation to innovate and disrupt.
Others blamed the large and complex system of government regulations, corporate tax levels, inflexible industrial relations, and the toll poppy syndrome.
However there was little evidence of global aspiration or ambition. Nor was there much discussion about companies’ positioning in a global marketplace.
Some CEOs and Chairs agreed that they are too risk averse to engage in radical innovation, but blamed the short-term orientation of the market and shareholders for their failure to innovate big.
As recognised by others, large organisations tend to frame innovation in terms of improving existing business models rather than disrupting them. As one chair described it:
“I don’t think innovation requires [betting] the business. Innovation now is much more about improving, constant change, constant improvement.”
Based on the interviews we conducted, the current outlook for innovation being fostered by Australia’s established companies is bleak, as summarised by this interviewee:
“Talking about business in Australia, I have a lot of concerns, because I don’t think that there’s enough people in the bigger companies in Australia saying, ‘OK, let’s develop a strategy, let’s develop a business plan, let’s engage with the market and tell them what we are doing, in a very open way, and let them take the rise and fall with us, as to if we get there we get there, if we miss it by a little bit, [let’s] explain to them why we missed it. That doesn’t happen.’ ”
A lot has to change for Australian big business to become more innovative. As a start, companies need to introduce long-term incentives for executives, change attitudes to support taking risks and thinking big, and focus on developing innovation strategies.
Authors: Linda Leung, Honorary Associate, University of Technology Sydney; Jochen Schweitzer, Director MBA Entrepreneurship and Senior Lecturer Strategy and Innovation, University of Technology Sydney; Natalia Nikolova, Senior Lecturer in Management, University of Technology Sydney
