ACCC Fixed Line Services Decision Leads to 9.4% Fall in Access Prices

The Australian Competition and Consumer Commission has released its final decision on the prices that other operators pay to use Telstra’s (ASX:TLS) copper network to provide telecommunications services to consumers.

The final decision will require a one-off uniform fall of 9.4 per cent in access prices from current levels for the seven fixed line access services. This revises the 9.6 per cent fall estimated in the June further draft decision. The new prices will apply from 1 November 2015 until 30 June 2019.

“The ACCC has dealt with a number of complex issues during this inquiry, including the unique circumstances of the transition from Telstra’s copper network to the NBN. Our final decision on prices is the result of a number of considerations, with downward pressures more than offsetting upward pressures,” ACCC Chairman Rod Sims said.

“Downward pressures largely come from lower expenditures, falling cost of capital, the treatment of the effects of migration to the NBN and updated information on the NBN rollout. These more than offset upward pressures from a shrinking fixed line market due to consumers moving away from fixed line services and to mobile services.”

“Importantly, users of Telstra’s network should not pay the higher costs that result from fewer customers as NBN migration occurs. If there is no adjustment for these higher costs then customers who have not yet been migrated to the NBN will ultimately pay significantly higher prices for copper based services,” Mr Sims said.

“The ACCC has taken this approach because it considers that users of the fixed line network have not caused the asset redundancy and under-utilisation and will not be able to use those assets and capacity in the future. It would not be in the long term interests of end users (LTIE) for costs to be allocated to users of the network who do not cause them, particularly when Telstra has an avenue to recover those costs.”

NBN Co released new information on its rollout plan in August 2015 and the ACCC’s decision accepts Telstra’s expenditure forecasts subject to updating for that latest information. The allowed expenditure is also subject to exclusion of the capital and operating expenditures that are specific to the NBN and which should not be recovered from users of the copper network.

The ACCC’s final decision also covers connection and disconnection charges and a decision to not exempt the CBD areas from coverage under the final access determinations.

The ACCC’s final decision and related materials available at

How the NBN could boost Australia’s GDP by 2%

From The Conversation.

The National Broadband Network (NBN) can boost Australia’s Gross Domestic Product (GDP) by about 2% in the long term and, more importantly, add to our national welfare by improving real household consumption by 1.4%.

These results, based on our recent research on the NBN’s economic benefit, mean the NBN will produce a step-change in Australia’ economic activity. If the future that we have modelled comes to pass, Australia will be better off with the NBN than it would have been without it.

With the NBN, valuable services are potentially more widely available than they would be without the NBN. We have been careful to attribute to the NBN only the value of increased availability of online services.

The services we have considered are ones that have documented evidence of their economic benefit. The six service categories included in our study were: cloud computing for small business; electronic commerce for small business and government; a hybrid form of online higher education; several forms of telehealth practice; teleworking; and entertainment services. Of these, telehealth and teleworking stand out as the most valuable contributors to the Australian economy with the NBN.

There is much uncertainty over what network capabilities are truly required to deliver the expected benefits from these services. We have therefore modelled two scenarios: one in which the services exploit advanced broadband capabilities; and one in which only modest capabilities are needed.

The difference between modest and fast

In the first scenario, we have assumed that most services require 10-25 Mbps downstream access speeds, with higher education and telehealth requiring only 2.5-10 Mbps. (The NBN was originally planned to provide 25 Mbps downstream.) The required upstream access speeds for most services were assumed to be at least 2.5 Mbps. This scenario produces a step-change in GDP in the long term – after the NBN is deployed – of 1.8%. Real household consumption increases by 2.0%, but this is reduced to 1.4% when the necessity of paying off the cost of the NBN is taken into account.

The second scenario is based on today’s applications and considering the low end of the possible range of access speeds. We have assumed relatively modest 2.5 Mbps downstream and 256 Kbps (0.256 Mbps) upstream access speeds are needed in most cases, with 10-25 Mbps downstream required to support streaming video and entertainment services. In this case, there is a modest rise in GDP (less than 0.2%) but real household consumption falls by about 0.4%. This clearly shows that an NBN built solely for entertainment is not economically worthwhile.

For our model of the Australian economy, we have used TERM, The Enormous Regional Model, from the Centre of Policy Studies at Victoria University. TERM has been used previously for studies related to environmental economics and other matters. We have modified it to include the NBN and to take account of the cost of building the network. We have assumed that the cost of the NBN is ultimately reflected in greater foreign debt, which must be paid for through higher export volumes.

We have been careful to compare like with like when we consider Australia with and without the NBN. In particular, we have assumed that without the NBN there would still be improvement in network access speeds. The primary delivery mechanism for broadband today is DSL, Digital Subscriber Line. We have assumed that all current and currently planned DSL deployments would be upgraded to ADSL2+, the highest speed variant available today. We have not assumed any expansion in Fibre to the Premises or HFC (Hybrid Fibre Coax) footprint.

For the NBN itself, we have used the technologies described in the NBN Strategic Review in December 2013. After this review, currently planned deployments of fibre-to-the-premises will continue – we have used the published plans from nbn co.

The existing HFC networks will be used with some fill-in of blackspots – in these circumstances we have mapped the existing HFC networks and modelled the effect of adding 900,000 premises to the HFC footprint. Fixed wireless will be deployed in less densely populated areas – in these areas we have used the published plans. We have assumed that the remainder of the NBN fixed-line footprint, after these other technologies have been taken into account, will be covered with fibre-to-the-node. Actual plans for fibre-to-the-node have not yet been published.

For the NBN capabilities, we have assumed that the network will deliver what has been foreshadowed. Specifically, this means downstream and upstream speeds of 25-100 Mbps for fibre-to-the-premises and HFC; 25-100 Mbps downstream and 2.5-10 Mbps (nominally 5 Mbps) upstream for fibre-to-the-node; and 10-25 Mbps downstream and 2.5-10 Mbps (nominally 4 Mbps) upstream for fixed wireless. We have excluded the satellite footprint from our study.

Our estimated benefits to the Australian economy are clearly conservative. They show the potential of the NBN but will only be realised if Australians and Australian industry embrace the opportunities provided by the NBN.


Authors: Leith Campbel, Honorary Fellow, Melbourne School of Engineering, University of Melbourne; Sascha Suessspec, Economist and Ph.D. Electronic and Electrical Engineering student, University of Melbourne.


Australians Are Data Hungry And More Connected Than Ever

The latest internet usage statistics from the ABS, released today, to June 2015 shows there were approximately 12.8 million internet subscribers in Australia at the end of June 2015. This is an increase of 2% from the end of June 2014. Our own surveys show that many households enjoy multiple internet connections, including a fixed line ADSL service, and mobile services, so subscriptions should not be equated with individual households (there are about 9 million separate households). This again highlights the digital disruption underway, which creates both opportunity and risk. The trends in our Quite Revolution Report on digital channels, if anything, understated the speed of change.

As at 30 June 2015, almost all (99%) internet connections were broadband. Fibre continues to be the fastest growing type of internet connection in both percentage terms and subscriber numbers. Internet subscriptions to a fibre connection increased by 107% (or 217,000 subscribers) from the end of June 2014 to the end of June 2015.

There are more mobile subscriptions than fixed subscriptions now, with 47% of subscriptions being for mobile services and 40% on ADSL services.

Net---Subscribers-June-2015The average speeds are increasing significantly, with more than 80% of subscribers now enjoying download rates of 8 Mbps more higher.

Net---Speeds-June-2015The volume of data being downloaded has risen significantly, especially via fixed line networks. Total volumes have more than doubled since 2012.

Net---VOlume-June-2015The average user on a mobile subscription downloads about 6 Gb of data, up from 4 Gb in 2010 per month. However the real growth has been in fixed line services, where the average user is now close to 200 Gb a month, compared with 45 Gb in 2010.

Net---Average-June-2015  The data volumes are likely to continue to grow, thanks to video on demand services, and more content rich sources, as well as cloud services. The nbn may not delivery sufficient capacity soon enough, and we are slipped behind other countries in terms of capacity and speed. Innovation and growth will likely be slowed as a result.

Apple’s brilliant assault on advertising — and Google


Apple’s brilliant assault on advertising — and Google

For their iOS 9 release, Apple not only permits, but actively encourages developers to make Apps that remove advertising and tracking from the web. They added this feature deliberately; it’s not a hack by developers they’ve turned a blind eye to.


I’ve been using two Apps called Adblock Fast and Crystal for the past week and surfing the web on my iPhone has become delightfully fast and uncluttered. Blocking ads on your mobile phone is like moving from a crowded apartment complex in a polluted, violent city to a peaceful lake house.

It’s a massive, noticeable change for two important reasons that have to do with the device you’re holding: screen size and bandwidth.

Given the increasing size of our desktop monitors, multiple windows to choose from, and increasingly fast cable modems and fiber connections, ad blockers have been a minor innovation on the desktop this past decade. (We hate you if you have fiber, really.) On a desktop, you barely notice the ads are gone, because the ads weren’t laying on top of the content. They were typically around the content.

On an iPhone, well, you’re dealing with 5-10% of the screen size of your desktop monitors, so publishers putting up a roadblock on the content, then asking you to use your fat fingers to hit the tiny little X or ‘skip the ad in 4… 3… 2… 1…’ is just overbearing.

Mobile advertising is so ugly and intrusive, it actually makes people AVOID mobile browsing. That’s why the ‘read it later’ feature, pioneered by Marco Arment’s brilliant Instapaper and Nate Weiner’s Pocket, became so popular that Apple copied them. When a user hits ‘read it later,’ it means ‘read this when I don’t have to deal with all this bullshit.’


Apple doesn’t give an ‘ish about advertising, unless of course they’re buying it for their award-winning TV commercials. (More on that later.) Apple cares only about you loving and using the product that now generates nearly 70% of their (top-line) revenue – and perhaps even MORE of their (bottom-line) profits – the iPhone.

The iPhone is everything to Apple. Everything important about Apple – their resurgence as a company, the lust their fans feel for the brand, the fanboy/girl obsession with their keynotes, the slavish CNBC analysis over everything Tim Cook says – traces back to the luscious, warm-gravy margins of the iPhone.

For every 1% in smartphone marketshare Apple converts, they make another $10b a year in revenue*, and Apple very much thinks that they can convince the world to convert from cheap phones to the more expensive iPhone.

[ * back of envelope: 1.44b smartphones will ship in 2015, 1% = 14m iPhones * ~$658 average revenue per unit = $9.5b ]

And they’re right.

Life is better in Apple’s world.


Google is assaulting us with advertising to the point that the FTC and EU want to sanction them (in fact, the WSJ reported that, magically, the FTC’s action against Google was killed – conspiracy theories abound).

What is not up for debate is that Google is ripping away our privacy every day, taking the most intimate pieces of our lives and selling them in buckets of parts – like pieces of cow flesh in a Whole Foods display case.

Google makes a massive portion of their money, according to studies, getting people to accidentally click on ads (40% of people don’t know Google Ads are ads). Ads that are taking up the top 11 of 13 search results on some search pages.

Google kept heating up the water until they accidentally boiled the frog. And the frog is us.

Apple knows it and they’re assaulting Google on every front. Ad-blocking is the attack we are talking about today, but privacy is another and their wildly-improving, hiding-in-plain-sight search engine is yet another. I wrote about this search engine back in June 2015, and I will do a Part 2 of this piece if someone reminds me and I actually get some sleep this week. (I got some life-changing, big news last week and I’m not sleeping well … I’ll disclose it when Gayle King interviews me about “having it all.”)

Google knows what’s up, and that’s why Larry gave himself a promotion to CEO of Alphabet.

Larry doesn’t want his legacy to be grinding every last percentage point out of their advertising network. Sergey doesn’t want folks coming up to him at parties and asking him about why they are trying to kill Yelp, Mahalo, and eHow (trust me, I have the inside line on this one).

Nope, like the Middle Eastern sovereign wealth fund I met with yesterday, Google is trying to trade their oil money for something more refined, like self-driving cars, life extension (Calico) or home automation (Nest).

Google wants to be proud of their legacy, and tricking people into clicking ads and selling our profiles to advertisers is an awesome business – but a horrible legacy for Larry and Sergey.

[ Side note: When I asked the Sovereign wealth fund why they were bothering to meet with me, when they had billions of dollars to put to work and I angel invest $100,000 at a time, they said they were rebalancing their oil to tech and they needed to meet with the ‘mother of unicorns.’ I think that makes me Khaleesi? That’s kind of awesome. ]


It’s your device, so you can do whatever you want with it. When you download something onto your device, it is now yours to remix and play with in any way you want – provided you don’t republish it and make money from it. (Fair use is the exception here.)

According to this basic tenet, if I buy the New York Times in print, clip out all the ads and then tape it back together at home, well, that’s my right.

Now, Apple didn’t just bake ad blocking into the browser. They enabled developers to add ad blockers – via the App store – to consumers’ browsers. In this way, you still have to buy the scissors and clip the ads, but that takes under five seconds and will be enabled for the rest of your life.

Apple could, and would, be sued by publishers if they enabled it themselves.

They would be sued, in all likelihood, for breaking the publishers’ Terms of Service, or perhaps better stated, for helping users to break the Terms of Service. This means if you make an App that blocks ads, be ready for a HUGE lawsuit. It will happen if these things hit scale. Apple might become party to these lawsuits for contributing to the interference of a company’s ability to do commerce. The side argument will be, as I’ve outlined in this post, that Apple and the ad blocker companies are benefiting unfairly on the publishers’ backs – consider this piece an amicus brief.

I’m not sure any of these legal concepts would actually work, but Google and publishers will put up a united front against ad blocking if it becomes > 25% of mobile users – of that you can be sure.

Is it moral for Apple to screw publishers? Wow, that’s a big question, but in a nutshell, this is business and it’s not personal. Apple wants to make consumers buy iPhones and use them and blocking ads will help them beat Android.

Apple’s highest moral commitment is to users – not publishers. So, although Apple covets content creators, it doesn’t put their need to make a few shekles above a user’s ability to enjoy the experience of the iPhone.

Apple really wants publishers to charge for content and take 30% through the App store and their marketplaces. People who work at Apple are rich, so they don’t really get the concept of not being able to afford to pay for content.

It’s classist, to be sure. Just like the margins on iPhones make them hard for poor people to embrace them. Then again, if you look at the cost of a new iPhone phone every 30 months, it’s around $20 a month (say $650 with a $50 trade in of your old phone).

If an Android phone was half the cost of an iPhone, the cost difference is $10 a month – or about one hour of work for the lowest paid folks in the United States.

One extra hour of work a month to own the best device as your PRIMARY consumption device in the world IS A BARGAIN.

Tim Cook knows this and he is watching as the poor people of the world figure it out. Apple’s message is the same as Starbucks: treat yourself poor people, you deserve it!

And they’re right! Why shouldn’t the housekeeper, gardener, or teenager spend just $0.35 a day to have the better phone if they use it three or four hours a day?

Back to stealing.

Would Apple allow you to put a bittorrent App on your phone and download TV shows and series, instead of paying for content in iTunes? Well, we actually know the answer to that question – hell no!

Apple draws the line at stealing content, and doesn’t see the subversion of ads as stealing – which all of us in the real world know it is. Undermining a publisher’s ability to monetize is stealing, but it’s Robin-Hood, feel-good stealing.

So killing advertising not only crushes Google, it also could flip many publishers from ad-driven models to subscriptions … in Apple’s App store.

Oh yeah, Apple launched a News App as part of iOS 9, too.

That’s interesting timing. I wonder if Apple will launch a ‘pay $10 a month for 500 newspapers/magazines’ subscription and share that revenue with those publishers based on some slick algorithm. (Consumption + a base payment for everyone.)

Apple will make their News App the Spotify of Content … giving every publisher a basic income based on the profits of the iPhone ecosystem. In fact, Google bought Oyster which was the “Netflix of books.” The idea of a big company providing all-you-can-eat for a monthly price is coming soon, you can be sure of that.

In Conclusion

Publishers are screwed.

Google is really screwed.

Consumers win.

Apple really wins.

Now, will consumers ultimately lose because publishers go out of business? That’s the obvious question … with the obvious answer: we’re gonna find out next year.

One thing you can count on: Apple has a Master Plan around privacy, saving the news business, doubling iPhone market share and killing Google for double-crossing Steve Jobs.

Never forget what Steve Jobs said:

“I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.” – Steve Jobs to Walter Isaacson in 2010.

To change our economy we need to change our thinking

From The Conversation.

It’s not surprising that new Prime Minister Malcolm Turnbull’s appointment has been well received by the startup community. When he talks about the Australia of the future being agile, innovative and creative, he is speaking their language.

There is only one question. How do we get there?

There are at least a few countries in the world that could be characterised as agile, innovative and creative. Among them: the USA, Singapore and Estonia. What could we learn from them?

The United States has led the digital revolution. It started in Silicon Valley. There, Stanford and other universities provided a skilled STEM research base, the industry contributed venture capital and business expertise, and the government added steady and sustainable funding to the mix.

In America, creativity, innovation and agility are deeply ingrained in society. The maker movement, exemplified by the global phenomenon of Maker Faires, started in California. Creativity is taught from the youngest age through initiatives such as City X, born in Wisconsin.

Singapore is one of the most advanced digital economies and benefits heavily from the commitment of its government. Singapore wants to become the world’s first “smart nation”. The government has established institutions that focus on creating a vibrant startup ecosystem. Generous funding of startups and an attractive taxation system are “icing on the cake” that the government serves.

Singaporeans want to be smart and well educated. The perception that knowledge can be the most valued resource of the country has been consistent over the 50 years of its existence.

Estonia is a young economy, moving fast in the digital space. Lack of legacy systems means that Estonians can quickly introduce digital solutions. There is no need to think about maintaining previous ones – there aren’t any. It’s an inventor’s heaven.

A strong push for STEM education has always been present in Estonia’s educational system. This, married with entrepreneurial spirit triggered when independence was restored in 1991, created a perfect storm. And it would not have been possible without the strong support of the government.

In the US, Singapore and Estonia, it is all about government support, education and the right innovation culture.

Governments need to play a very active role. A robust ecosystem, like Silicon Valley, can be developed when a government is strategically focused. The US government is now switching to a supportive role, with the digital economy becoming very mature.

The government of Singapore behaves more like a startup, with a clear vision, defined investment and incentive strategy. And Estonia, the youngest economy of the pack, is in a seeding phase, looking to implement and create an entrepreneurial ecosystem.

Education is a top priority. The decentralised model in the US has enabled grassroots movements resulting in great creative talent. The structured model in Singapore produces highly skilled and technically capable citizens. Estonia has traditionally focused on STEM skills and aims to digitise all learning experiences by 2020.

Be bold

While policies and education are important, innovation culture eats them for breakfast. Obama brings inventors to the White House. Singapore’s Lee Hsien Loong uses Facebook and Google Drive to share and discuss C++ code he wrote years ago. Estonian President Toomas Ilves reminds everyone that this young country is behind such disruptive technologies as Skype.

Estonians are bold, curious and not afraid of experimenting. Singaporeans are rigorous, ambitious and use their skills wisely. Americans are proud, entrepreneurial and global in their actions. They are all explorers of the digital economy in their own ways.

Governments that foster innovation are more about how they behave than their structure. In this case “talking the talk” is almost as important as walking it – to build the right innovation culture.

Turnbull’s beliefs, values and assumptions, born of his business experience, will be vital to keep innovation and entrepreneurship on the agenda while developing the ecosystem in Australia.

A well-designed educational system is crucial. There has to be a strong focus on developing STEM skills, while remembering that creative skills are just as important. We need to foster curious, creative and entrepreneurial minds. And we need to remember that education never ends: lifelong learning and digital literacy skills are key to a successful digital economy.

Innovation, creativity and agility need to be cherished and celebrated. Just like Obama praises creative kids in his tweets, we hope to see Turnbull continuously recognise individuals and organisations that exhibit entrepreneurial traits. And just like other successful economies, we need to create an environment where successful startups stay here.

Australians need to be bold and aspire to have the strongest and fastest-moving digital economy in the world. There is no reason to doubt it is possible.

If the first vision is not right, we can pivot. Just like any startup would.

Author: Marek Kowalkiewicz, Professor and PwC Chair in Digital Economy, Queensland University of Technology

Digital Darwinism and the financial industry

In a speech entitled Digital Darwinism and the financial industry – a supervisor’s perception, Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, says in the context of digital disruption, there is an “open end” to the evolution of the digital financial sector and if banks don’t think “digitally”, they’re going to find it difficult to compete for digital customers.

Dinosaurs are an often-used means of illustrating how “Darwinism” works. We still don’t really know why those creatures – which ruled the earth for millions of years – suddenly became extinct. Some make volcanic eruptions responsible; others cite meteorites or a sharp drop in sea level as a possible explanation. In any case, the assumption is not that dinosaurs ceased to exist because they could not cope with their new environment or adapt quickly enough. Applying this diagnosis to the financial sector, where banks have reigned throughout the last few centuries, and supposing that the digital transition indeed constitutes a new environment for banks, one may pose a rather provocative question: are banks dinosaurs that will one day become extinct? You may guess that I do not share this doom scenario, so let me start out by describing my views on the evolution of the banking business.

The digital era may indeed be considered a new environment for banks. Digitalisation of the financial sector is an irrevocable change that came about due to several factors.

First, the digitalisation of the financial sector has been fuelled by the development of highly effective, state-of-the-art technologies like broadband networks, advances in data processing and the ubiquity of smartphones. And there is a premise that is common to virtually all technological advances in market economies in the last few centuries: when a product becomes available, sooner or later it creates its own demand and puts market forces into action.

That means technological and social changes are intertwined. Bank customers are becoming increasingly open to digital banking. Think of innovative concepts such as online video consultation services, digital credit brokerage and the incorporation of social media into banking. Banking is still a “people business”, but it’s no longer reduced to proximate and personal relationships. So there is plenty of demand for use of the technological potential of digital banking: cheap and quick automatised processes, solutions for complex financial issues, service tailored to customers’ individual needs.

A fundamental challenge that banks now face is that in some business fields, we may expect a sudden and rapid change of the game that is being played. One rather obvious case in point is that of payment services. Service providers such as PayPal or Apple have implemented payment systems geared to consumers in a digital environment. Once customers become used to a new way of paying, competitors offering similar products will certainly have difficulties trying to convince customers to switch providers. The pioneer may have a decisive advantage.

Now, in evolutionary terms, the question is whether banks can adapt quickly enough. Banks have used IT for decades, but these fast-moving times present wholly new possibilities for its use: P2P lending becomes feasible, internet and mobile applications are sprouting up and internet giants such as Google or Facebook are cultivating “big data” methods. These enterprises have grown up with – at times – entirely new perceptions of business, work and life. And they have the appropriate staff. That may be crucial. It is one thing to build new ideas, but quite another to incorporate them into the company DNA.

Traditional banks, on the other hand, typically do not have a digital DNA. Theirs is an analogue world in which they have refined their knowledge about banking over decades and built up a customer relationship based on trust. Think of areas like investment advice and corporate finance as well as banks’ own business of generating synergies between business strands. The question now is: what part of their knowledge is still valuable and what part do banks need to reframe?

However, we cannot predict how the financial sector will look in ten years’ time. There are just too many “unknown unknowns”. Still, there is a recurring fallacy that reduces evolution to a narrow one-way street. If there are new market entrants whose businesses are well-adjusted to the digital environment, banks should be inclined to imitate their behaviour. But – to be clear – there is no one-size-fits-all strategy for digital banking. As in other industries, there will always be demand for more differentiated strategies, for example individual and personalised services as opposed to algorithm-based advice. Also, we should not be surprised to see the focus return to a key component of the banking business: establishing safety and trust.

Furthermore, the digital age does not simply redistribute market shares of a fixed revenue pie: there are also entirely new opportunities for desirable businesses.

Convenient banking is valuable. Banks could benefit from this, either through greater customer loyalty or through additional business volumes resulting from extra services. Win-win schemes are also conceivable in credit markets. “Big data” methods can generate highly informative individual risk profiles. This could enable banks to extend loans to private customers and small businesses which would otherwise not receive any financing. Even investment counselling could benefit. Video-based consulting, for example, does more than reflect modern life style of customers; it may also reduce costs for banks by rendering some branch offices unnecessary.

Other keywords of digital openings are “co-creation”, where customers participate in the development of products, and “multichannel banking”. But my aim today is not to present an all-encompassing overview on digital bank business ideas. Instead, let us move one step back and look at the bigger picture. Reshaping the financial sector doesn’t need to be left to new market entrants. This creative challenge can also be taken up by established banks. Supervisors, too, have an interest in seeing banks engage in innovation if this enhances the functionality of the financial sector and stabilises profitability in the medium and long run.

To sum up, there is an “open end” to the evolution of the digital financial sector. If you ask diehard evolutionists for a forecast of the future, they will merely point to a trial-and-error process that should eventually give us an answer. For an individual company, that is of course not helpful. As a banking supervisor, I am not inclined to attempt a market forecast. Still, there is a bottom line for banks from the line of thought I outlined earlier, namely that it is appropriate neither to blindly imitate nor to stick to old habits. The message to every player in the financial industry is simple: rather than being caught off-guard, banks have to participate actively in shaping future banking services. A new game is being played, and new strategies need to be developed and executed decisively.

3. Cyber risks – an evolutionary attachment to the digital bank

Along with the digitalisation of industries, there is another evolution that warrants our attention. It is a development that is neither intended by the visionaries and trailblazers of the digital world nor beneficial. I am referring to the evolution of cybercrime.

While we cannot predict how banking will look in ten or twenty years’ time, we can be almost certain that risks of fraud, theft and manipulation in banks through cyberspace will continue to rise. The reason is straightforward: digital channels can be used to steal a lot of assets with comparatively little effort today.

Nowadays, a large proportion of banks’ assets and value-generating capability is stored on hard drives and servers. The technical infrastructure facilitates the managing of bank accounts and grants access to money. But it also provides access to vast sources of data. There have been several incidents recently of truly large-scale data theft. Company secrets, too, are at stake. If, for example, the trading algorithms of your bank became known to others through illegal activities, they could be exploited in the market, causing huge losses to banks. In the same way, politically motivated acts of sabotage jeopardise trust in financial functions and integrity.

Looking at those on the other side of cybercrime, the potential attackers – they often have access to far more powerful weapons than before and convenient access through the internet. Targeted attacks on IT systems can originate from anywhere in the world. Hackers often need little more than a laptop with internet access.

Why do we have to expect a continuous evolution in this field? Attack vehicles like computer viruses differ widely and may target any chink in a bank’s defence, rather as human viruses attack biological systems. Its logic follows the arms race between criminals and law enforcers that can be traced down through human history, but is now taking place with digital weapons. What makes this evolution more dangerous still is that we now face a highly complex digital world where progress is constantly being made in technologies and innovations. But, crucially, you cannot risk a trial-and-error process here. Once an easy point of attack is identified in the IT infrastructure, the word will quickly spread and criminals from all over the world will try to exploit the weakness.

On top of this, we need to bear in mind that cyber and general IT risks are not only of a technical nature. The human factor often plays a crucial part. Employees may act in gross negligence, or they may be tricked by a Trojan horse or a phishing mail. In complex IT systems, even small system errors can quickly cause enormous damage. The error-prone human factor can only be eliminated by installing an appropriate system of controls and incentives. In today’s world, this is an important management task.

4. Adaptation as a managerial task

Before IT-related problems came to affect the very core of the digital economy, they were commonly shifted to the IT department. But this approach to IT risks is outdated. Awareness of digital risks and setting up a strategy are now a leader’s duties. If your business crucially relies on digital processing, any strategic decision at the company level requires knowledge and understanding of risks. Besides, we frequently observe that banks find it difficult to reorganise their IT systems. While a complete, “big bang” overhaul may be preferable, it often meets with resistance from many parts of the company. To avoid being locked into more and more outdated structures, banks should not just consider the expected short-term benefits when designing their IT strategy.

Furthermore, the digital world demands from banks’ managers something I would describe as unbiased attentiveness towards new technologies. If banks don’t think “digitally”, they’re going to find it difficult to compete for digital customers.

They have to reassess their client relations and even rethink different lifestyles and social trends. The individual needs and wishes of customers are more pivotal than ever before. Take a look at social networks, at online shopping or even at information research – consumers are already used to having their own needs catered for. Consequently, banks will have to get into the habit of looking at things from the customer’s perspective.

Let us also bear in mind that competition is becoming more global and more transparent, the competitors more diverse. In addition to FinTech companies, other industries with a strong IT focus are only one step away from the banking world. This means that the lines between industries are becoming blurred. Now more than ever, banks need to be aware of what the competition is doing so that they can review and refine their own strategies.

From an evolutionary perspective, adaptability is another essential attribute. The digital world welcomes experimentation, is prone to sudden trends, and is constantly changing. Although the banking industry may not always be subject to all of this constant movement, adaptability is definitely becoming more important. So a flexible IT infrastructure that supports adaptability, for example, will be vital. Business models can also be more open and flexible in structure. Just think of the “digital ecosystem” strategies banks are now deploying.

5. Towards a resilient sector

As a banking supervisor, I am wholeheartedly in favour of the goal of a stable sector. But this should not be understood as adopting a static view towards stability. For a workable financial industry, it is not decisive whether services are provided offline or online, by humans or by automated services. Our yardstick needs to measure whether the sector continues to fulfil its duty towards the real economy, which is to transform risks and provide payment and other financial services. That’s what is meant by a resilient financial sector.

To that end, we have to ensure there are no “dead ends” to the digital evolution in the financial industry. I refer to IT-related risks in particular. If we rely on computers and digitalised processes, we have to make sure that they are reliable and trustworthy. Sector-wide reputation and functionality are at stake. Nowadays, a customer’s personal payment information is stored not only at the bank but at a multitude of service providers and retailers as well. How can a bank ensure the safety of its payment services against a cyber-attack on a retailer’s network or on that of a third-party vendor? Combined efforts should be seen as insurance. You never know who will be the next victim of an attack. And attacks don’t stop at borders, so cooperation of this kind is also needed at the global level. In an interconnected and therefore interdependent financial sector, strengthening the common defence should also be in the banks’ very own interest.

6. Conclusion

Let me restate my views on “digital Darwinism”. Adaptation to a digitalised financial world does not simply require banks to develop new and ground-breaking ideas. It has more to do with a well-adjusted strategy – which means that it’s not just a race between development departments, but between leaders. As a supervisor, I therefore urge that we do not interpret digital competition as a race merely for the most advanced technologies, but for the right mix. This is why I am not in favour of comparing banks to dinosaurs. Traditional banks may typically have a pre-digital DNA, but they are capable of learning, adapting to a digital landscape and cooperating with technological pioneers. And each bank needs to find its own strategy. Banking business itself is as irreplaceable as ever before.

So what will not change? Business success will continue to hinge on entrepreneurial skills. In an increasingly digital finance sector, the role of banking will still be to serve the real economy. And banking is based on trust. To keep this in mind will be key to ensuring a thriving and stable financial sector.

APRA May Cease Point of Presence Statistics

APRA has released a discussion document on the future of the Points of Presence statistics which they currently produce. The data provides useful industry level information on channel behaviour and usage, and is highly relevant in the context of digital disruption and migration. The paper suggests modification of the reporting, or possibly a cessation. We believe the POP data is highly relevant and useful and attempts to stop reporting should be resisted.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurers, friendly societies, and most of the superannuation industry. APRA collects a broad range of financial and risk data from regulated institutions as inputs to its supervisory assessments. Data collected from regulated and unregulated institutions also assist the Reserve Bank of Australia (RBA), the Australian Bureau of Statistics (ABS) and other financial sector agencies to perform their roles. APRA also collects some data to enable APRA to publish information about regulated institutions, and in other cases, to assist the Minister to formulate financial policy. Much of the data APRA collects are used for multiple purposes to reduce the burden of reporting.

APRA publishes as much of the data collected as are considered useful and as resources permit, subject to APRA’s confidentiality obligations with respect to individual institutions’ data. Publication of industry-level statistics enhances understanding of the industries regulated by APRA, aids public discussion on policy issues, and supports well-informed decision-making by regulated institutions, policy-makers, market analysts and researchers. Publication of institution-level data, where possible, is also consistent with promoting the understanding of the financial soundness of regulated institutions.

APRA observes international statistical standards in developing, producing and managing its statistics (except in the few cases where doing so would conflict with APRA’s primary role as a prudential regulator). By doing so, APRA helps protect commercially-sensitive information provided by institutions, whilst providing statistics that are useful and reliable, and that meet the needs of users.

APRA publishes detailed banking services provided within Australia by Authorised Deposit-taking Institutions (ADI) in its ADI Points of Presence (PoP) statistics. APRA is reviewing the PoP statistics to ensure that the statistics remain relevant and useful.

This paper focuses on two options for the future of the PoP statistics and data collection:
1. streamline the PoP statistics and data collection; or
2. cease the PoP statistics and data collection.

APRA is seeking feedback on the proposed changes. Written submissions should be forwarded by 18 November 2015, preferably by email to:
Manager, Banking Statistics,
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001

The Future of Capital Markets in a Digital Economy – Blockchain Disruption

In a speech by Greg Medcraft, Chairman, Australian Securities and Investments Commission he discusses digital disruption in capital markets. He rightly identifies blockchain technology as one of the most significant disruptive elements of all.

Regulators globally are facing new challenges brought by structural change and digital disruption. There are both opportunities and challenges posed – it is about harnessing the opportunities while mitigating the risks.
I believe that the great drawcard of digital disruption is the opportunity it brings. The markets are seeing this with global investment in fintech ventures tripling to US$12.2 billion in 2014, from US$4 billion in 2013.
It is nothing new when you think about innovations like credit cards and ATMs, which were developed by banks to facilitate customer access. But now, new developments are going beyond the banking system directly to the customer.Businesses have seen the potential for new ways of directly creating and sharing value with technologically savvy investors and consumers. Examples include:

  1. peer-to-peer lending and market-place lending
  2. robo-financial or digital advice
  3. crowdfunding
  4. payments infrastructures (e.g. digital currencies, Apple Pay).
  5. In the future, we will likely see further developments in insurance priced to reflect deeper understanding of individual risk characteristics, in areas such as home, life and car insurance (such as the use of telematics by QBE’s Insurance Box).
  6. Importantly, there is much work going on globally exploring the potential of blockchain technology.

All these innovations have the potential to change the way that investors and financial consumers interact with financial products and payments. But many of these activities may not fit neatly within existing regulatory frameworks or policy. The challenge for us will be to ensure that we continue to deliver on the priorities I mentioned earlier – investor and consumer trust and confidence and fair, orderly, transparent and efficient markets – in the face of these developments.

Potential that these developments have for capital markets – To help understand what this challenge means to us, I’d like to talk in more detail about blockchain technology. This technology – if it takes off as I think it will – has the potential to fundamentally change our markets and our financial system.

What is blockchain technology? Chances are you have heard about bitcoin – the digital currency. ‘Blockchain’ is the algorithm behind bitcoin that allows it to be traded without a centralised ledger. In basic terms, it is an electronic ledger of digital events – one that’s ‘distributed’ or shared between many different parties. And it maintains a continuously growing list of data records. It has three key features:

First, it is a vehicle for transferring value and holding records – each transaction or record is evidenced by a unique data set or ‘block’ that attaches to the continuously growing blockchain.

Second, it does not involve a central authority or third-party intermediary overseeing it or deciding what goes into it. The computers that store the blockchain are decentralised and are not controlled or owned by any single entity.

Third, every block in the ledger is connected to the prior one in a digital chain algorithm. So the record of every transaction lives on the computers of anyone who has interacted with it, and is updated with each entry. The continual replication and decentralised nature makes it secure.

How can blockchain transform capital markets? – I see four reasons.

First, efficiency and speed. At present, when investors buy and sell debt and equity securities or transact derivatives, they generally rely on settlement and registration systems that take sometimes several days to settle trades. It can take even longer, sometimes, where the trade involves cross-border parties. Blockchain holds potential to automate this whole process.

Second, disintermediation. Blockchain automates trust; it eliminates the need for ‘trusted’ third-party intermediaries. In the traditional market, buyers and sellers can’t automatically trust each other, so they use intermediaries to help give them the comfort they need. With blockchain, the decentralised ledger offers this trust. Investors can deal with each other and with issuers in private markets directly.

Third, reduced transaction costs. By eliminating the need to use settlement and registration systems and other intermediaries, there is significant potential to reduce transaction costs for investors and issuers. A June report backed by Santander InnoVentures, the Spanish bank’s fintech investment fund, estimated that blockchain could save lenders up to $20 billion annually in settlement, regulatory, and crossborder payment costs.

Fourth, improved market access. Because of the global nature of blockchain, global markets have the potential to become even more easily accessible to investors and issuers; therefore making it easier for investors and for issuers to invest in and issue debt and equity securities.

Naturally, harnessing this potential will depend on the integrity, capacity and stability of blockchain technology and processes. It will also depend on industry’s willingness to invest in, and make use of, new ways of settling and registering transactions. The potential is, nonetheless, enormous. Industry is seeing that potential and is looking to see how it and the markets might benefit.

Blockchain developments – Let me touch on four areas where the benefits of blockchain are being explored:

The first is in share, loan and derivative trades. A series of start-ups are looking to use blockchain to execute and settle securities and derivative trades.

The second is in private equity transactions. The US stock exchange, NASDAQ, is experimenting with using blockchain technology as a way of recording private equity transactions. In doing so, it hopes to provide ‘extensive integrity, audit ability, governance and transfer of ownership capabilities’.

The third is in government bond trades. A US firm is developing a way to use blockchain to record and settle short-term government bond trades on a distributed ledger.

The fourth is in money transfer. In Mexico City a firm has developed an app that lets migrants send money via the blockchain to Mexico and withdraw cash from ATMs.

How regulators are responding – I have talked about the opportunities blockchain offers. But, as I have said, these opportunities can also threaten our strategic priorities of investor trust and confidence and fair, orderly, transparent and efficient markets.  Right now, we don’t know exactly how blockchain or other disruptive technologies will evolve. But, for now, it is fair to say that they will. Blockchain potentially has profound implications for our markets and for how we regulate. As regulators and policymakers, we need to ensure what we do is about harnessing the opportunities and the broader economic benefits – not standing in the way of innovation and development. At the same time, we need to mitigate the risks these developments pose to our objectives. We also need to ensure those who benefit from the technology trust it. And, at the end of the day, we are working to ensure that investors and issuers can continue to have trust and confidence in the market.

How ASIC is responding to digital disruption? – ASIC’s role in ensuring that we harness the opportunities while mitigating the risks covers five key areas:

First, education. We are supporting investors and financial consumers in understanding the opportunities and the risks of participating in the digital economy. For example, our MoneySmart website, which last year received over 5 million visits.

Second, guidance. We are engaging with and providing guidance to industry in these areas. I want to mention two particular activities:
– The first is our cyber resilience work. We have undertaken significant work in the area of cyber resilience. Cyber resilience is the ability to prepare for,
respond to and recover from a cyber attack. In March this year, we published guidance for businesses to help in their efforts to improve cyber resilience and manage their cyber risks.
– The second is our Innovation Hub – we launched this last year. Much innovation in financial services comes from start-ups and from outside the regulated sector. The Innovation Hub is designed to make it quicker and easier for innovative start-ups and fintech businesses to navigate the regulatory system we administer. The Innovation Hub – which also includes our new industry-led Digital Finance Advisory Committee – also provides us with important information about the developments that are on the horizon, and how they might fit into the current regulatory framework.

Third, surveillance. We monitor the market and understand how investors use technology and financial products and the risks that arise. We undertake continual scans of the landscape, including developments overseas, to better understand new developments, the pace of change and emerging risks that may be posed by structural change driven by digital disruption. In the case of blockchain, there is a need for regulators to focus on and understand a number of issues, including:
– how blockchain security might be compromised
– who should be accountable for the services that make the blockchain technology work
– how transactions using blockchain can be reported to and used by the relevant regulator.

Fourth, enforcement. Of course, where we detect misconduct by our gatekeepers, we will take action. Our challenge here will be to understand how regulatory action can be taken where a transaction entered into here or overseas is recorded in the blockchain.

Fifth, policy advice. Ensuring the right regulation is in place to protect investors and keep them confident and informed, while also not interfering with innovation.

We also need to ensure that rules are globally consistent and regulators can rely on each other in supervision and enforcement with such developments. We will continue to review the current regulatory framework, analyse how new developments, such as blockchain, may fit into the framework and identify where changes may be required.

How IOSCO is responding – IOSCO too has a key role to play in this area, especially in ensuring that there is a global strategy in place and that cooperation between regulators is in place – in order to meet the challenge of addressing issues arising from cross-border transactions. IOSCO’s work plan this year in this area includes the following four priorities:

The first is working to identify and understand risks flowing from digital disruption to business models. In fact, the IOSCO Board will be holding a stakeholder
roundtable next month in Toronto to discuss financial technology developments and regulatory responses.

The second is in the international policy space. This is about designing regulatory toolkits and responses that are flexible, creative, and provide incentives for financial technology innovation that drive growth without undermining investor and financial consumer trust and confidence in our markets.An example of this is work we are considering on crowdfunding.

The third is in the area of cyber resilience. We are working with the Committee for Payments and Market Infrastructures to develop guidance that will help strengthen the cyber resilience of financial market intermediaries.
We expect this guidance to be finalised next year.

The fourth is on strengthening cooperation. We are working on enhancements to IOSCO’s Multilateral Memorandum of Understanding – or MMOU – to deal with the new technological environment in which we are operating.
The MMOU is a cooperation arrangement that enables 105 regulators to share information to combat cross-border fraud and misconduct. These enhancements will make it easier for us to take action in relation to cross-border transactions.

The Future of Cash – a UK Perspective

The Bank of England says those claiming “the death of cash” is imminent, are mistaken. They do so in a pre-released an article from its Quarterly Bulletin 2015 Q3 – How has cash usage evolved in recent decades? What might drive demand in the future?

The issuance of banknotes is probably the most recognisable function of the Bank of England. Banknotes are a form of physical money that people use as a store of value and as a medium of exchange when buying or selling goods and services. The Bank of England seeks to ensure that demand for its banknotes is met, and that the public retains confidence in those banknotes.

The payments landscape has changed considerably in recent decades. People can now make payments using debit and credit cards (including contactless technology), internet banking, mobile ‘wallets’, and smartphone apps.

Yet despite these developments, cash continues to be important in the United Kingdom, with demand for Bank of England notes growing faster than nominal GDP.

BOE-CashThere is now the equivalent of around £1,000 in banknotes in circulation for each person in the United Kingdom.

The growth in demand for banknotes has been driven by three different markets:

  • The evidence available indicates that no more than half of Bank of England notes in circulation are likely to be held for use within the domestic economy for legitimate purposes. This includes cash used for transactions and for ‘hoarding’.
  • The remainder is likely to be held overseas or for use in the shadow economy. However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.

The future rate of growth in demand for cash is uncertain and will depend on a number of factors including alternative payment technologies, retailer and financial institution preferences, government intervention, and socio-economic developments. Finally — and probably most importantly — it will depend on the public’s attitude towards cash. Over the next few years, consumers are likely to use cash for a smaller proportion of the payments they make. Even so, given consumer preferences and the wider uses of cash, overall demand is likely to remain resilient. Cash is not likely to die out any time soon.

As such, the Bank continues to work with the cash industry, and to invest in banknotes. The next few years will see the launch of new banknotes for the £5, £10, and £20 denominations. The new notes will be made of a polymer substrate — a cleaner and more durable material — and will incorporate leading-edge security features that will strengthen their resilience against the threat of counterfeiting.

They also released a short video on the topic.

Why personality tests for bank loans are a bad idea

From The Conversation.

Lending money is a risky business. Since 2010, Bank of England figures reveal that lenders have written off an average of £13.2 billion a year in bad loans. You can never be 100% sure that you will ever get your money back.

One way of mitigating that risk is to know as much as possible about the person you are lending to. Indeed, some financial managers reportedly are now considering the use of personality tests to assess the suitability of borrowers seeking loans or credit agreements.

A new model developed by the University of Edinburgh’s Business School, for example, asks borrowers questions designed to reveal their trustworthiness. But could such tests, already used in various forms by some businesses to assess the suitability of potential employees, really work for lenders?

Predicting the future

The conventional way to assess the likelihood that someone might default is to look at their income and expenditure, their assets and their commitments, and make predictions on the basis of their financial circumstances. We also know that a person’s “credit history” is important – it is useful to know if a person has defaulted on loans before, or has other credit problems in their past.

This is all psychologically valid. It’s a well-known principle that the best predictor of future behaviour is past behaviour. But how do you make predictions where someone has little or no credit history?

Lenders are looking at new ways to assess potential borrowers, CC BY

This is where psychological tests could come in, and there is some superficial attractiveness here. If – and the word “if” is important – a person’s likelihood to default on a loan was related to their “personality”, and if (again) that was a measurable trait, and if (yet again) that trait could be measured in a way that was impervious to fraud or manipulation, and if – finally – such a questionnaire was asking questions that were something other than the obvious (or the spurious), then they could indeed be a useful tool.

Gaming the system

But there are problems. We learned recently that psychological science is good, but it’s a long way from infallible. In an attempt to replicate key psychological experiments, scientists found that they could substantiate the findings in only about half the studies examined. That may not mean we should lose faith in all psychologists, but it does mean that we should be a little sceptical when we’re told that a particular set of questions can predict loan defaulters.

Indeed, looking at the reported questionnaires, there seem to be a curious mix of questions, including: “I believe others try to do the right thing”, “I believe in human goodness” and “I pay attention to small details”. There may well be links between people’s typical responses to these questions and financial soundness, but the evidence would have to be convincing.

It’s much more likely that, if people want a loan, they will try and game the system. There is a strong chance they would give the answers that they think reflect a better credit trustworthiness: “I definitely pay attention to financial details. I am perhaps, if anything, too cautious.” As opposed to: “Oh, I don’t care, just give me the cash.” Any psychological assessment scheme would have to be robust to such game-playing, perhaps by asking more opaque questions.

Real data

But there’s a more insidious problem. According to the proponents of this approach, the idea is to protect a lender’s assets by assessing “how trustworthy, reliable, emotionally stable and conscientious a customer might be”. First, there is the very real difficulty of assessing these things, as pointed out by, among others, James Daley, of the consumer group Fairer Finance: “If banks think they can psychologically screen bad debt risks, they are deluding themselves.” But, more than this, very many trustworthy, reliable, emotionally stable and conscientious customers find themselves in financial difficulties, often as a result of economic forces entirely outside their control.

Past behaviour is the best predictor of future behaviour. Where there is very little data to go on, it’s then usually the case that people’s behaviour is best explained by looking at the circumstances of their lives. Doing this through personality tests, however, is clearly very tricky.

I am a professional psychologist, and proud to be one. I believe that my profession has much to offer, in the world of mental health and even in the world of politics.

But I also believe that very little of the potential of psychological science is revealed by “personality tests” that purport to address problems that, in truth, are better addressed through other means.

Author: Peter Kinderman, Professor of Clinical Psychology at University of Liverpool