Sizing up the Asia Pacific’s booming alternative finance sector

From The Conversation.

If digital disruptors like crowd-sourced equity funding and peer-to-peer lending platforms are going to transform the finance sector, they need to be regulated. If they are going to create permanent positive change, they need to be regulated intelligently.

But so far, the ability of regulators and industry to agree on the rules has been hampered by a significant knowledge gap: there is no accurate, up-to-date information about the size, scale and scope of the rapidly growing online alternative finance sector in our region.

The University of Sydney Business School has joined forces with the United Kingdom’s University of Cambridge and Tsinghua University in China, to conduct the first comprehensive survey of the rapidly expanding alternative finance sector in China and across the rest of the Asia-Pacific.

Building on a successful 2015 benchmarking survey of the UK and Europe, the Asia-Pacific survey will run through to mid December 2015. By early 2016, we will have aggregate information about the various types of online platforms, the overall size and recent growth of the alternative finance sectors in Australia, New Zealand, Singapore, China and other Asia-Pacific neighbours.

Why is aggregate data on crowd-sourced and peer-to-peer finance so critical? Uninformed regulation can indeed be harmful — so why regulate at all? Direct connection between lenders and borrowers, or donors and causes, is part of the attraction of alternative finance, and that’s all between consenting adults after all. But it’s the “peer-to-peer” feature of these markets that calls for intelligent regulation.

Naïve ideology sees all regulation as anathema to free markets. In reality, most markets can’t function without it. Efficient markets depend on reliable information about product quality being shared between buyers and sellers, as Nobel prize winner George Akerlof demonstrated in his analysis of the used car market – his famous work on the “market for lemons”.

If buyers can’t tell whether they are buying a good car or a lemon they will never pay what a good car is worth. Owners of good cars will not offer their cars for sale and eventually only lemons will be left. Markets with this unequal information problem are likely to collapse without minimum quality guarantees.

In crowd-funded and peer-to-peer finance markets, the borrower knows much more about their ability to repay than the lender does. Minimum credit worthiness standards for borrowers, some limitations on risk exposure for unsophisticated lenders, and effective disclosures are needed for the survival of these platforms.

Take peer-to-peer lending for example. In conventional lending markets an intermediary like a bank transforms the deposits of lenders into loans for borrowers. Intermediation turns one person’s bank deposit into another person’s loan but no individual depositor cops a direct hit if a particular borrower defaults; the intermediary bears this risk. Of course, banks charge for the service of disconnecting lenders from the risk of individual borrowers.

This charge partly accounts for the (at least 10 percentage points) difference between term deposit rates and personal loan rates.

Peer-to-peer lending uses a direct connection between lenders and borrowers. This allows the platform to shrink the difference between lending and borrowing rates. Someone wanting a $5,000 loan for a holiday might register with a peer to peer platform. If they default on their repayments, whoever lent them the money bears the loss. While the average default rate across all loans on a peer-to-peer lending platform in normal times might be low – say less than 3% – the actual outcome for each lender depends on the specific borrowers they lend to and economic conditions at the time.

Without some minimum guarantees and lender protections, interest rates and charges are likely to rise as poor quality borrowers (lemons) drive out good quality borrowers, and the market will collapse. Similarly, the crowd-sourced equity platforms that can enable brilliant and highly profitable new ideas (so-called “unicorns”) to find capital depend on regulatory protection for unsophisticated investors. Stability, sustainability and trust are needed so we can all benefit from the accessibility and efficiency of this digital disruption.

Most alternative finance providers now operating in Australia are well aware of the need for sustainable business practice. Peer-to-peer lenders, for example, check the credit worthiness of borrowers in conventional ways, using credit history, capacity to pay, and sometimes secured assets. The platforms usually spread lenders’ funds across a range of borrowers, and facilitate payments and repayments.

However minimum regulatory guidelines ensuring good practice will protect the sector from “fly-by-night” entrants with lower standards. Setting those minimum standards well can only be done with comprehensive data on the alternative finance sector.

We don’t want to lose or delay the benefits of digital disruption in finance simply because not enough is known about the structures and participants.

Author: Susan Thorp, Professor of Finance, University of Sydney

Measuring Disruption in Small Business Lending

Launched today, the Financial Services Disruption Index, which has been jointly developed by Moula, the lender to the small business sector; and research and consulting firm Digital Finance Analytics (DFA) shows that Financial Services are undergoing disruptive change, thanks to customers moving to digital channels, the emergence of new business models, and changing competitive landscapes. Combing data from both organisations, we are able to track the waves of disruption, initially in the small business lending sector, and more widely across financial services later.

The index tracks a number of dimensions. From the DFA Small business surveys (26,000 each year), we measure SME service expectations for unsecured lending, their awareness of non-traditional funding options, their use of smart devices, their willingness to share electronic data in return for credit, and overall business confidence of those who are borrowing relative to those who are not.

Moula data includes SME conversion data, the type of data SMEs share, the average loan amount approved, application credit enquiries, and speed of application processing.

The index stood at 33.02 from May to July 2015, and rose to 33.94 in the August to October period. The higher the score, the greater the disruption. Of note SMEs are becoming more aware of non-traditional unsecured lending options, are becoming more demanding in terms of application processing times, are more willing to share data and are more likely to apply using a smart device. In addition, the loan values being written are rising, more businesses are willing to share richer data, and the confidence levels among borrowing SMEs is on the rise.

Overall, unsecured lending to the SME sector is being disrupted significantly, and we expect the index will continue to trend higher, as awareness of alternatives to traditional banking continues to rise, and more firms apply for credit.

  1. The average expectation duration was down from 9.2 days in Q3 2015 to 7.5 days this quarter. SMEs continue to expect better service standards when applying for credit. Whilst they accept it may take a few days for an application to be processed, the survey data shows that many think a week should be enough to complete an unsecured loan and get money into their account, and they expect to receive regular progress reports and updates on the way through.
  2. We see a rise in awareness among SMEs of the availability of alternative credit solutions and greater familiarly with the tag “Fintech”. This month 3.75% of businesses recognised the concept, up from 2.74% last month, and momentum is increasing.
  3. More business owners are using smart devices to run their business. They expect access to a wider range of services this way, and more immediate responses. Last quarter 42.6% of businesses used a smart device, this time it was 44.6%, and the rate of adoption is increasing.

The index is featured in an SMH MySmallBusiness article today.

Cash No Longer King for Australian Shoppers

According to the Galaxy research commissioned by MasterCardAustralians of all ages continue to embrace contactless payments, with 66% preferring to use tap and go for small transactions under a $100 instead of entering their PIN, and 64% favoring it as a payment method over cash. The study was conducted online during October 2015 using a sample of 1,005 Australians aged between 18-64 years old, who have a credit or debit card.

Results from the survey showed that speed and convenience continue to generate increased adoption of the technology by Aussies (77%), and safety benefits available through contactless cards are also contributing to its growing popularity over cash; the majority of Australians (82%) believe they are more likely to be reimbursed for unauthorised contactless payments made with a stolen credit or debit card than they are likely to get stolen cash back.

First introduced into Australia in 2007, contactless payments have been one of the fastest-adopted payment technologies globally, and despite recent reports, MasterCard data in addition to industry data, reveals no increase in fraud specifically relating to contactless payments. Australian Card Data* has found that fraud relating to contactless payments makes up less than 2% of all total card fraud. This is despite huge growth in the category, where contactless MasterCard transactions have grown 148% based on card data compiled by MasterCard and Visa showing that number of Contactless MasterCard transactions grew 148% between July 2013 and 2014.

MasterCard SVP and Country Manager, Andrew Cartwright said “This research indicates not only a shift in the preferred methods in which consumers like to pay, but also suggests that they are beginning to understand and trust the safety benefits associated with paying by card.  As contactless payments continue to rise, cash is increasingly become unnecessary real estate in wallets.

“I’ll take a card any day of the week – it is safer than cash.  With a card I’m protected against unauthorised purchases, whereas, if my wallet is stolen, the cash is as good as gone”, said Cartwright.

Shoppers in West Australia have the highest preference for contactless payments in the country (72%), followed by shoppers in NSW (67%), VIC and TAS (66%).

RateSetter sees monumental growth from broker channel

From Australian Broker Online.

Leading peer-to-peer (P2P) lender RateSetter has seen significant growth in broker referrals, with almost one third (30%) of its business now coming through the third party channel.

Speaking to Australian Broker, the chief executive of RateSetter, Daniel Foggo, said that the broker channel is an important avenue of growth for the P2P lender, which specialises in providing personal loans, and he expects business referred through brokers to make up around half of its business volumes in the next year.

“We have 50 brokerage firms referring applicants to us, which reflects around 50 different brokers. They are now referring about 30% of our business volumes to us – so it is quite significant and we see it as an avenue of significant growth for us,” Foggo said.

“We identified [engaging with brokers] quite early on as an opportunity for a broker to provide another service to their customers in a very light touch way. About a year ago we initiated some conversations with brokers about the opportunity. That percentage keeps growing so we expect it to be up around 50% in a year or so.”

There are different referral models a broker can use when referring a client to RateSetter, according to Foggo, depending on how ‘hands-on’ the broker wants to be.

“The first model is very simple for the broker, they literally just send a web link to their customer and the customer thereafter fills out an application form and the broker is kept entirely up to date as to how that application is progressing,” Foggo told Australian Broker.

“The broker is also provided a portal where they can log on anytime to see the status of any application and how much money they have actually made through referring people to us.

“The next model is slightly more hands on the for the broker and in less than a minute they can actually perform a rate estimate for the customer which basically requires them to provide a name and address and some brief details and we will give the applicant an indicative loan rate and it is up to the broker then whether they proceed with the application themselves on behalf of the customer or whether the customer does it directly.”

But whilst RateSetter is seeing significant growth from the broker channel, Foggo told Australian Broker that there is still a common misconception that P2P lenders pose a threat to the market.

“I think, generally, there is a perception that P2P lenders might be a threat over time, but really, we definitely see them as being an opportunity for brokers to broaden out their offering. We don’t think [P2P lenders] are ever going to disrupt their core brokerage market of residential property but we might be able to complement it with personal loans and other areas. It really just adds another strength to the bow of the broker.”


ATO leads Digital by default – In Theory

The ATO has opened community consultation on its Digital by default initiative, as it continues its push to deliver better products and services for all taxpayers.

But unless the clunky and inefficient MyGov processes are substantially improved, this could be a disaster.  DFA’s experience has been that the migration to a digital channel was suddenly imposed, without notice, and the supposed email alerts never arrived, leaving a gaping hole in messages from the ATO and risking tax penalties. It simply put the onus on the tax payer to go and log in on the off-chance there might be a new message and the ATO simply blamed “the system”. So whilst the theory might be good, it all comes down to excellence of execution, and so far, this is a major FAIL!  A bland email alert, even it it did arrive is not acceptable.

Here is the ATO release:

The proposed change will deliver a simpler, easier, more flexible and adaptable way of interacting digitally with the ATO and puts the taxpayer experience at the forefront of service delivery.

Deputy Commissioner Michelle Crosby said the Digital by default initiative will require most taxpayers to use ATO digital services to send and receive information and payments, except where they do not have the ability to do so.

“More and more, people are carrying out their day-to-day business online and in the last couple of years a focus of ours has been to make sure our digital services meet the community’s needs. The Digital by default initiative is an extension of this commitment,” Ms Crosby said.

“For most people, it just makes more sense to use our online products, which offer a more personalised and convenient service.”

Ms Crosby said while there were lots of benefits to a digital approach, such as improved access to information at convenient times on the device or software of choice, and faster turnaround times, the ATO knows that for those who have relied on paper products it may be a big change.

“This ATO-led initiative will require people still using paper products to switch to ATO digital services. We’ll be providing time and support for those who need help to make the shift from paper to digital,” Ms Crosby said.

“We have released a consultation paper and are seeking feedback from all sections of the community. We want to make sure we have a fully-rounded understanding of the support needed to transition to digital services, the approach we take for those who cannot use digital services, and any concerns people might have.”

Ms Crosby said there would be some instances where it would not be possible to go digital due to individual circumstances.

“We will ensure that alternative services are available to this small group of people,” Ms Crosby said.

To get involved in the Digital by default conversation and provide your feedback, visit our Let’s Talk webpage: Link

The opportunity to provide feedback on the Digital by default consultation paper is open from 30 November to 15 January 2016.

Digital by default is one of three initiatives announced in the 2015-16 Budget as part of the ‘Reducing red tape measure – reforms to the Australian Taxation Office’External Link.

How Uber and Airbnb are reducing their Australian tax bill

From The Conversation.

The current international tax regime was developed in the last century when the internet was not yet invented. At that time, a foreign company would typically require a substantial physical presence in Australia before it could be in a position to earn significant amount of income from Australian customers. This is what’s known in the tax world as permanent establishment.

The concept of permanent establishment is embedded in most domestic tax laws as well as virtually all the 3,000 plus tax treaties in the world. It dictates that in general, business profits of a foreign company will be subject to tax in Australia only if the company has a permanent establishment in Australia. In other words, the ATO cannot tax a foreign company’s profits if it has no permanent establishment in Australia.

The recent hearings of the Senate inquiry into corporate tax avoidance made it clear the tax structures of Uber, Airbnb, like their older peers Google and Microsoft, are designed to ensure income from Australian customers is earned by a foreign company that does not have a permanent establishment here. The permanent establishment concept is not effective for today’s digital economy.

Uber’s business and tax structure

Take Uber, which though established in the US, has a wholly-owned subsidiary in the Netherlands, which in turn has a wholly-owned subsidiary in Australia.

The most important asset of Uber is its digital platform that supports the app linking individual drivers and their customers. It’s unlikely this app was developed in the Netherlands. Despite this, Uber-Netherlands has the right to book income generated from customers in Australia.

For example, if a customer pays $100 for a ride in Sydney booked through the Uber app, the money is in fact paid to Uber-Netherlands. Out of the $100, Uber pays the driver about $75. The gross profit of $25 is booked in the Netherlands. This is so even though the transaction happens largely in Australia, including the driver, the customer and the ride.

Uber-Australia receives a service fee from Uber-Netherlands for its marketing and support services performed in Australia. The fee is determined based on the operating costs of Uber-Australia, plus a mark-up of 8.5%. The mark-up is effectively the taxable profit of Uber in Australia under its tax structure.

Airbnb’s business and tax structure

Airbnb, another young business founded in the US, has a structure very similar to that of Uber. Airbnb’s parent company in the US has a wholly-owned subsidiary in Ireland, which in turn has a wholly owned subsidiary in Australia.

Airbnb charges fees to both hosts and guests for accommodation booking through its digital platform. Instead of Airbnb-Australia, Airbnb-Ireland books the fee income generated from accommodation bookings in Australia. This is so even if the host, the guest and the accommodation are all in Australia. For example, if a Sydneysider uses the Airbnb app to book accommodation in Melbourne, the payment is in fact paid to Airbnb-Ireland. The host of the accommodation is then paid by Airbnb-Ireland which charges a fee of 3%.

Airbnb-Australia is responsible for the marketing activities in Australia. It receives a service fee from Airbnb-Ireland for those activities, and the fee is again computed based on its operating costs plus a mark-up.

Déjà vu – Google and Microsoft

Comparing the tax structures of Uber and Airbnb with that of Google and Microsoft reveals striking similarities. It suggests that the appetite for tax planning is comparable between established and relatively “young” technology companies.

The common pattern: a parent company in the US establishes wholly owned subsidiaries in market jurisdictions (such as Australia) as well as in low-tax countries.

While the commercial reality is that all companies in a group are effectively one single enterprise, the tax law in general treats each company as a separate taxpayer.

On one hand, the Australian subsidiary typically is responsible for marketing and support services that have to be physically done in Australia, and earns a service fee on a cost plus basis. The amount of profits subject to tax in Australia is usually very small compared to the income generated from Australian customers.

On the other hand, intellectual properties – which are often the most important and valuable assets of technology companies – are located in low-tax jurisdictions such as Ireland, the Netherlands and Singapore. This structure allows those low-tax subsidiaries to book the income generated from customers in Australia, and effectively shields the income from the Australian tax net.

Policy responses

Action item 1 of the OECD’s base erosion and profit shifting (“BEPS”) project is “tax challenges of digital economy”.

The original intention of the OECD was to explore how the 20th century international tax regime should be reformed in response to the digital economy in the 21st century. It quickly realised it was extremely difficult, if not impossible, to achieve international consensus on the intended reform. The often conflicting and vested interests among countries present a formidable obstacle to international consensus on meaningful reform of the international tax regime.

Instead of relying on the BEPS project to resolve the issue, Australia has followed the lead of the UK and is in the process of introducing the Multinational Anti-Avoidance Law – commonly known as the Google tax – to address the issue. As the new law incorporates concepts that are new and untested, it is not clear whether it will be effective.

In any case, it’s important to remember that multinational corporations are very agile. They may replace their “avoided permanent establishment” structures to circumvent any Google tax or to incorporate new tax avoidance tools.

Author: Antony Ting, Associate Professor, University of Sydney


Mobile Microfinance: Delivering Financial Inclusion to the World’s Poor

From Juniper research.

As outlined in Juniper’s recently published research report, Mobile Financial Services: Developing Markets 2015-2020, the mobile device is becoming the core enabler for the world’s poor to seek financial inclusion, with users of such services set to grow to 283 million by 2020.

Enabling the World’s Poorest

The unbanked populace in developing regions are being introduced to financial services through the use of mobile money platforms. This extends from simply sending remittances, to being able to receive life-saving services and provisions through sophisticated mobile money transactions, which include such offerings as loans, savings, and insurance.

Barriers to Financial Inclusion in Emerging Markets

The mobile device has proven a game-changer in financial development for poorer nations due to a number of reasons.

Firstly, the fact that consumers can register with their mobile device through widely available outlets and branches in local stores, means that people are no longer required to travel long distances. Thus avoiding the use of poor transport systems, and travel over long distances, to reach major cities to register with a bank.

Additionally, Microfinance providers themselves face a hurdle with regard to the initial start-up costs associated with their services. In many developing nations profit is not feasible by traditional methods and, as a result, MFIs (Mobile Financial Institutions) have been reluctant to set up shop. The mobile form of finance delivery offers cheaper start-up costs, and far reaching services.

Juniper’s Mobile Financial Services research discusses the further implications that mobile banking poses for developing nations, as well as the current trends and key services on offer in this sector. For an overview of the microfinance industry download the white paper Microfinance with Macro Potential.

Apple Pay Users Replace Credit, Debit Cards with Mobile Payments

From eMarketer.


ANZ to launch new internet banking site

ANZ today announced a significant upgrade to its internet banking platform that will see it become the first major Australian bank to have a consistent user experience across desktop, tablet and mobile.

Launching this weekend, ANZ’s 2.1 million internet banking customers in Australia will be able to access the full suite of internet banking features from any device as well as improved security features.

ANZ Managing Director Products and Marketing, Matthew Boss said: “We know our customers are looking to do more of their banking via digital channels and we also know we need to continue to make banking as simple and secure as possible.”

“This upgrade complements our existing mobile banking application ANZ goMoney™ and allows customers to do more of their banking when and how they want with no instructions required.
“Given smartphones are expected to account for 90 per cent of all internet traffic by 2020, we’re pleased to be able to provide our customers with internet banking that is quick and simple to use on any device,” Mr Boss said.

Additional features of the Internet Banking upgrade include:

  • Ability for businesses to now approve payments on-the-go using mobile internet banking
  • Easy new menu navigation to help customers update contact details, pay a bill or open a new account
  • State-of-the-art visual design where accounts look like the actual card in the customers’ wallet.

ANZ has also strengthened the security of internet banking with the introduction of ANZ Shield, which authenticates transactions and activity using a one-time security code to allow customers to increase pay anyone limits or instantly reset their password.

PayPal joins eftpos and plans to connect to the Hub in 2016

eftpos today announced that PayPal had become the latest payments company to join the eftpos membership, with plans to connect directly to the company’s new real time, centralised payments infrastructure, the eftpos Hub, in 2016.

eftpos Managing Director, Mr Bruce Mansfield, said PayPal was a popular payment option for Australian consumers and merchants and was a welcome addition to the eftpos Membership.

Mr Mansfield said eftpos had recently upgraded its infrastructure for Online payments and would work with PayPal and other Members to ensure that eftpos would be available to consumers and merchants as a payment option for online transactions. PayPal is only the fourth new eftpos Member to join since the inception of eftpos as a payment system in 2009, following ING Direct, Tyro and Adyen.

“We are very pleased that PayPal has decided to join eftpos and directly access the real-time processing capabilities of the eftpos Hub infrastructure and other benefits of being a Member,” Mr Mansfield said. “PayPal plays an important role in Australian Online payments and eftpos should be available as a payments choice for PayPal users. “eftpos is happy to work with PayPal to make eftpos payments available to more Australian consumers and merchants on new platforms.”

The eftpos Hub is a robust, reliable, secure and scalable centralised infrastructure that aims to provide the industry with cost effective, real time payments processing, as well as an enhanced capability to implement new products and services.

Since being launched in September 2014, the Hub is already processing almost 3 million eftpos CHQ and SAV transactions a day.  Ms Libby Roy, Vice President and Managing Director of PayPal Australia said, “eftpos is an established and important part of the payments landscape in Australia with a strong consumer base. We’re very happy to be working together to enable eftpos payments through the PayPal network. “Our membership of eftpos takes us one step closer to giving consumers the ability to use any funding mechanism through PayPal to transact securely and conveniently online and via mobile devices.”

eftpos is the most widely-used card system in Australia, accounting for more than 2.3 billion CHQ and SAV transactions in 2015 worth more than $140 billion.