Banks and Fintech – Where Do They Fit?

US Fed Governor Lael Brainard spoke on “Where Do Banks Fit in the Fintech Stack?” at the Northwestern Kellogg Public-Private Interface Conference on “New Developments in Consumer Finance: Research & Practice”

In particular she explored different approaches to how banks are exposing their data in a fintech context and the regulatory implications. Smaller banks may be at a disadvantage.

Different Approaches to the Fintech Stack

Because of the high stakes, fintech firms, banks, data aggregators, consumer groups, and regulators are all still figuring out how best to do the connecting. There are a few alternative approaches in operation today, with various advantages and drawbacks.

A number of large banks have developed or are in the process of developing interfaces to allow outside developers access to their platforms under controlled conditions. Similar to Apple opening the APIs of its phones and operating systems, these financial companies are working to provide APIs to outside developers, who can then build new products on the banks’ platforms. It is worth highlighting that platform APIs generally vary in their degree of openness, even in the smartphone world. If a developer wants to use a Google Maps API to embed a map in her application, she first must create a developer account with Google, agreeing to Google’s terms and conditions. This means she will have entered a contract with the owner of the API, and the terms and conditions may differ depending on how sensitive the particular API is. Google may require only a minimum amount of information for a developer that wants to use an API to display a map. Google may, however, require more information about a developer that wants to use a different API to monitor the history of a consumer’s physical locations over the previous week. And in some cases, the competitive interests of Google and a third-party app developer may diverge over time, such that the original terms of access are no longer acceptable.

The fact that it is possible and indeed relatively common for the API provider–the platform–to require specific controls and protections over the use of that API raises complicated issues when imported to the banking world. As banks have considered how to facilitate connectivity, the considerations include not only technical issues and the associated investment, but also the important legal questions associated with operating in a highly regulated sector. The banks’ terms of access may be determined in third-party service provider agreements that may offer different degrees of access. These may affect not only what types of protections and vetting are appropriate for different types of access over consumers’ funds and data held at a bank in order to enable the bank to fulfill its obligations for data security and other consumer protections, but also the competitive position of the bank relative to third-party developers.

There is a second broad type of approach in which many banks have entered into agreements with specialized companies that essentially act as middlemen, frequently described as “data aggregators.” These banks may lack the budgets and expertise to create their own open APIs or may not see that as a key element in their business strategies. Data aggregators collect consumer financial account data from banks, on the one hand, and then provide access to that data to fintech developers, on the other hand. Data aggregators organize the data they collect from banks and other data sources and then offer their own suite of open APIs to outside developers. By partnering with data aggregators, banks can open their systems to thousands of developers, without having to invest in creating and maintaining their own open APIs. This also allows fintech developers to build their products around the APIs of two or three data aggregators, rather than 15,000 different banks and other data sources. And, if agreements between data aggregators and banks are structured as data aggregators performing outsourced services to banks, the bank should be able to conduct the appropriate due diligence of its vendors, whose services to those banks may be subject to examination by safety and soundness regulators.

Some banks have opted for a more “closed” approach to fintech developers by entering into individual agreements with specific technology providers or data aggregators. These agreements often impose specific requirements rather than simply facilitating structured data feeds. These banks negotiate for greater control over their systems by limiting who is accessing their data–often to a specific third party’s suite of products. Likewise, many banks use these agreements to limit what types of data will be shared. For instance, banks may share information about the balances in consumers’ accounts but decline to share information about fees or other pricing. While recognizing the legitimate need for vetting of third parties for purposes of the banks fulfilling their responsibilities, including for data privacy and security, some consumer groups have suggested that the standards for vetting should be commonly agreed to and transparent to ensure that banks do not restrict access for competitive reasons and that consumers should be able to decide what data to make available to third-party fintech applications.

A third set of banks may be unable or unwilling to provide permissioned access, for reasons ranging from fears about increased competition to concerns about the cost and complexity of ensuring compliance with underlying laws and regulations. At the very least, banks may have reasonable concerns about being able to see, if not control, which third-party developers will have access to the banking data that is provided by the data aggregators. Accordingly, even banks that have previously provided structured data feeds to data aggregators may decide to limit or block access. In such cases, however, data aggregators can still move forward to collect consumer data for use by fintech developers without the permission or even potentially without the knowledge of the bank. Instead, data aggregators and fintech developers directly ask consumers to give them their online banking logins and passwords. Then, in a process commonly called “screen scraping,” data aggregators log onto banks’ online consumer websites, as if they were the actual consumers, and extract information. Some banks report that as much as 20 to 40 percent of online banking logins is attributable to data aggregators. They even assert that they have trouble distinguishing whether a computer system that is logging in multiple times a day is a consumer, a data aggregator, or a cyber attack.

For community banks with limited resources, the necessary investments in API technology and in negotiating and overseeing data-sharing agreements with data aggregators and third-party providers may be beyond their reach, especially as they usually rely on service providers for their core technology. Some fintech firms argue that screen scraping–which has drawn the most complaints about data security–may be the most effective tool for the customers of small community banks to access the financial apps they prefer–and thereby necessary to remain competitive until more effective broader industry solutions are developed.

Clearly, getting these connectivity questions right, including the need to manage the consumer protection risks, is critically important. It could make the difference between a world in which the fintech wave helps community banks become the platforms of the future, on the one hand, or, on the other hand, a world in which fintech instead further widens the gulf between community banks and the largest banks.

 

Building the Infrastructure to Realise FinTech’s Promise

An excellent speech by Mark Carney, Governor of the Bank of England which paints some useful pictures about the future of Fintech and the need to break the mould.

To its advocates, FinTech will democratise financial services. Consumers will get more choice and keener pricing. SMEs will get access to new credit. Banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience. Financial services will be more inclusive; with people better connected, more informed and increasingly empowered. And tantalisingly, FinTech could help make the system itself more resilient with greater diversity, redundancy and depth.

These possibilities are why the Bank has already taken a number of steps to encourage FinTech’s development. The PRA and the FCA have changed their authorisation processes to support new business models. The New Bank Start-Up Unit, created in 2016, works closely with firms seeking to become banks. Already, four new ‘mobile’ banks have been authorised.

The Bank also established a FinTech Accelerator last year. Since then, we have worked with a number of firms on proofs of concept ranging from strengthening our cyber security to using AI for regulatory data, and improving our understanding of distributed ledgers.

Today we are opening our 4th round of applications to the Accelerator. We are looking to work on new proofs of concept on maintaining privacy in a distributed ledger and applying a range of big data tools to support the Bank’s analysis.

More broadly, the Bank is working to ensure that this time the right hard and soft infrastructure are in place to allow innovation to thrive while keeping the system safe.

Let me expand briefly with three examples.

The Right Soft Infrastructure

First, with respect to soft infrastructure, the Bank is assessing how FinTech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.

We are disciplined. Just because something is new doesn’t mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t mean it needs to be brought inside. We apply consistent approaches to activities that give rise to the same risks regardless of whether those are undertaken by old regulated or new FinTech firms.

Some of the most important questions we are considering include:

  • Which FinTech activities constitute traditional banking activities by another name and should be regulated as such?
  • How could developments change the safety and soundness of existing regulated firms
  • How could developments change potential macroeconomic and macrofinancial dynamics including disruptions to systemically important markets? And
  • What could be the implications for the level of cyber and operational risks faced by regulated firms and the financial system as a whole?

To illustrate some of the issues, consider how FinTech is affecting the financial services value chain (Figure 1).

At present, the most significant changes are taking place at the front-end, where innovative payment service providers (PSPs) are providing new user interfaces for domestic retail and cross-border payment services through digital wallets or pre-funded eMoney.Other aspects of the customer relationships are being opened up. For example, aggregators are providing customers with ready access to price comparison and switching services. This will increase further when aggregators gain access to banks’ Application Programme Interfaces (APIs).These new entrants are capturing potentially invaluable customer data which can be used to target non-bank products and services.

In their current form, these innovations are simply a new front-end to the banking system where FinTech providers take a slice of customer revenue and loyalty but none of the associated risks.They have generally avoided undertaking traditional banking activities. So for now, absent a substantive change in business models or scale of activities, the FPC is unlikely to want to bring these firms into the regulatory perimeter.The changes to customer relationships resulting from FinTech competition could, however, reduce customer loyalty and the stability of funding of incumbent banks. If this happens, the Bank of England would need to ensure prudential standards and resolution regimes for the affected banks are sufficiently robust to these risks.

The Right Hard Infrastructure

A second, related example is how the Bank is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe.Specifically, the Bank is widening access to some of its systems to include PSPs in order to boost both competition and system resilience.

The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.That’s important because the Bank operates the UK’s high-value payment system ’RTGS’ which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.

Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.

The Bank has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks. The Bank of England is now working with the FCA and HMT to make this a reality, and we will issue our new blueprint for RTGS in early May.

Coordinated Developments in Hard and Soft Infrastructure

My third example of the Bank’s efforts to realise FinTech’s promise is our work with industry to help coordinate advances in hard and soft infrastructure.New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.

Securities settlement seems particularly ripe for innovation. A typical settlement chain involves many intermediaries, making it comparatively slow and keeping operational risks high. Industry has begun to work together to determine how distributed ledger technologies could be used to solve these issues at scale.The Bank is participating in several related initiatives. To help distinguish distributed ledger’s potential from its hype, we have completed our own Proof of Concept. We are a member of Hyperledger along with private market participants and tech firms. And we will make our next generation RTGS compatible with settlement in a distributed ledger.

It is not clear, however, that that the only challenges are technological. Indeed, the FCA highlighted earlier this week that settlement times could also be cut using existing technologies. This requires market participants to change their collective practices as it takes more than one intermediary in a chain to compress settlement times.

Conclusion

FinTech’s promise springs from its potential to unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital.

This possibility is being realised by new entrants – payment service providers, aggregators and robo advisors, peer-to-peer lenders, and innovative trading platforms. And it is being influenced by incumbents who are adopting new technologies to reinforce the economies of scale and scope of their business models.

FinTech could deliver significant benefits to households and businesses across this country and across the world. FinTech can widen access to financial services and bring new sources of credit. It can connect customers better with their finances and empower them more in the process. And new technologies can deliver faster service, greater choice and keener pricing.

As it does, risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning.

At the same time, the resilience of the system could also be built, through greater diversity in provision of financial services as well as increased redundancy. A host of applications could reduce costs, improve capital efficiency and strengthen operational resilience.

The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society.

We are ideally positioned to realise FinTech’s promise in the UK.The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions.

Fintechs cash in on bank lending limits to curb property boom

From Australian Fintech.

As regulators weigh new limits on bank lending to cool the housing boom, their impact may be muted as tech-savvy borrowers turn to fintechs to access cheaper rates offered by non-bank lenders.

Hashching is raising $6 million of fresh equity on the Neu Capital fundraising platform in a deal valuing the Sydney-based start-up – which gives borrowers access to the best interest rates negotiated by mortgage brokers – at $40 million.

Since it was set up in August 2015, Hashching has received applications for $5 billion of home loans, which has doubled in the last five months. Around 20 per cent of loans are made to property investors.

On the platform, borrowers are increasingly turning to loans from non-bank lenders who are undercutting the big banks on price, said Hashching co-founder Mandeep Sodhi.

Last year, 65 per cent of borrowers were choosing products from one of the big four banks, but over the past six months, the share of the big four has dropped 38 per cent, he said.

Big banks have been been forced to raise interest rates to curb growth in their investor lending portfolios due to APRA’s caps; owner-occupier rates are also moving up due to higher funding costs.

‘There are new deals every week’

Borrowers have access to 60 lenders through Hashching, including non-bank lenders like Liberty Financial, Pepper Group, Resimac and La Trobe Financial, and foreign banks like Citigroup.

“We are seeing that even though the big four have tightened investor lending, smaller banks and non-banks are going more aggressive,” Mr Sodhi said.

“There are new deals every week. They are going hard on rates. They are wanting to increase investor lending. We have been seeing this trend since November where discounts last for two or four weeks then jack back up again. But then when one lender stops their discount, someone else steps right in.

“It’s the non-bank lenders taking the market share.”

Mr Sodhi said that if the Council of Financial Regulators put additional macroprudential limits on the banking sector as expected, this would increase volumes on Hashching because it could make the interest rate differential between banks and non-bank lenders even larger.

Last year, some brokers on Hashching were able to access rates from big banks as low as 3.5 per cent per annum but at present none of the big banks are offering rates below 4.5 per cent. But some brokers have secured prices from foreign banks and non-bank lenders at below 4 per cent.

AFG, the country’s largest mortgage aggregator, has also pointed to growing market share from smaller lenders undercutting the big four.

“AFG’s data today shows flows to the non-majors are increasing quarter on quarter and are up to 35 per cent of our flows,” said AFG interim CEO David Bailey this week.

Pepper said in February it would look to raise at least $1.5 billion in residential mortgage backed securities (RMBS) in 2017 to fund its growth as demand booms, with mortgage applications hitting the highest level in the company’s 15-year history in January and February.

Fintech—A Brave New World for the Financial Sector?

From iMFdirect.

From smartphones to cloud computing, technology is rapidly changing virtually every facet of society, including communications, business and government. The financial world is no exception.

As a result, the financial world stands at a critical juncture. Yes, the widespread adoption of new technologies, such as blockchain-based systems, offers many potential benefits. But it also gives rise to new risks, including risks to financial stability. That causes challenges for financial regulators, a subject I addressed at the 2017 World Government Summit in Dubai.

For example, we need to define the legal status of a virtual currency, or digital token. We need to combat money laundering and terrorist financing by figuring out how best to perform customer due diligence on virtual currency transfers. Fintech also has macroeconomic implications that need to be better understood as we develop policies to help the Fund’s member countries navigate this rapidly changing environment.

Soaring investment

Financial technology, or fintech—a term that encompasses products, developers and operators of alternative financial systems—is challenging traditional business models. And it is growing rapidly. According to one recent estimate, fintech investment quadrupled from 2010 to 2015, to $19 billion annually.

Fintech innovation has come in many shapes and forms—from peer-to-peer lending, to high-frequency trading, to big data and robotics. There are many success stories. Think of cell phone-based banking in Kenya and China, which is bringing millions of people—previously “unbanked”—into the mainstream financial system. Think of the virtual currency exchanges that allow people in developing countries to transfer money across borders quickly and cheaply.

All this calls for more creative thinking. How exactly will these technologies change the financial world? Will they completely transform it? Will banks be replaced by blockchain-based systems that facilitate peer-to-peer transactions? Will artificial intelligence reduce the need for trained professionals? And if so, can smart machines provide better financial advice to investors?

The truth is: we do not know yet. Significant investment is going into fintech, but most of its real-world applications are still being tested.

Regulatory challenges

And the regulatory challenges are just emerging. For instance, cryptocurrencies like Bitcoin can be used to make anonymous cross-border transfers—which increases the risk of money laundering and terrorist financing.

Another risk—over the medium term—is the potential impact on financial stability brought about by the entry of new types of financial services providers into the market.

Questions abound. Should we regulate in some way the algorithms that underlie the new technologies? Or should we—at least for now—hit the regulatory pause button, giving new technologies more time to develop and allowing the forces of innovation to help reduce the risks and maximize the benefits?

Some jurisdictions are taking a creative and far-sighted approach to regulation—by establishing “fintech sandboxes,” such as the “Regulatory Laboratory” in Abu Dhabi and the “Fintech Supervisory Sandbox” in Hong Kong.

These initiatives are designed to promote innovation by allowing new technologies to be developed and tested in a closely supervised environment.

Here at the IMF, we are closely monitoring fintech developments. Last year, we published a paper on virtual currencies, focusing on the regulatory, financial, and monetary implications. We have since broadened our focus to cover blockchain applications more generally. And we have recently established a High-level Advisory Panel of Leaders in Fintech to help us understand developments in the field. We expect to publish a new study on fintech in May.

As I see it, all this amounts to a “brave new world” for the financial sector. For some, a brave new world means a frightening vision of the future—much like the world described in Aldous Huxley’s famous novel.

But one could also think of Shakespeare’s evocation of this brave new world in The Tempest: “O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world.”

By Christine Lagarde

The BBC Does Fintech

Interesting programme from the BBC looking at UK developments in Fintech. The discussion centered on how mobile devices are fundamentally changing banking and why incumbents are struggling to respond. Listen to the programme, or download it here.

The UK is a world leader in financial services technology, otherwise known as fintech.

Presenter Evan Davis asks how Britain has beaten Silicon Valley and what challenges fintech poses to traditional banking?

Guests:
Antony Jenkins, Founder and Executive Chairman, 10x Future Technologies
Ishaan Malhi, Founder, Trussle.com
Eileen Burbidge, Co-founder, Passion Capital

Bank of England FinTech Accelerator latest proofs of concept

As announced in the Governor’s June Mansion House speech the Bank of England has set up a FinTech Accelerator, working in partnership with new technology firms to help harness FinTech innovations for central banking.

In return, it offers firms the chance to demonstrate their solutions for real issues facing us as policymakers, together with the valuable ‘first client’ reference that comes with it.

The Accelerator is building a network of firms working in this space.

Firms we are currently working with:

  • MindBridge AI: MindBridge’s AI Auditor detects anomalies in financial transactions and reports using data science, machine learning and artificial intelligence technologies. Using a small set of anonymised regulatory data the Bank is using MindBridge’s AI Auditor to explore the benefit of machine learning technology in analysing the quality of regulatory data input.
  • Ripple: Ripple’s solution is built around the open and neutral Interledger Protocol and serves to power interoperable payments across different ledgers and networks. We are conducting a PoC with Ripple to demonstrate the synchronised movement of two different currencies across two different RTGS systems in particular to show how this kind of synchronisation might lower settlement risk and improve the speed and efficiency of cross-border payments.
  • Enforcd: In this proof of concept, we are using an analytic platform designed specifically to assess and draw out trends on regulatory enforcement action using publicly available information.

Firms we have worked with in the past:

  • BMLL:  This machine learning platform provides access to historic full depth limit order book data. The BMLL platform aims to facilitate analysis and anomaly detection. We have agreed to test their alpha version for this Proof of Concept.
  • Threat intelligence: As part of the Bank’s wider information security and threat intelligence work we partnered with two firms – Anomali and ThreatConnect – that provide innovative technologies to collect, correlate, categorise and integrate security threat data. For these projects, we asked them to offer a solution to consolidate threat intelligence into a searchable repository that can optimise information collation, enrichment and sharing in support of a proactive intelligence-led defence strategy.
  • BitSight: In this PoC we used a tool that assesses a firm’s cyber resilience based on publicly available bulk data to assess firms’ cyber resilience. As part of the PoC, we asked BitSight to evaluate the Bank’s own resilience and to assess the benefit of this service as one of the range of information security tools that we use. More detail on this work is provided in the BitSight publication, published 9 November 2016.
  • Privitar: As part of our Proof of Concept, we tested the software on a manufactured dataset to examine the analytical value of the desensitised data to establish if this could allow us to provide wider access to data for researchers within the Bank.
  • PwC: We invested in understanding the technology of Blockchain and distributed ledger, working with PWC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled us to better comprehend the resiliency benefits and practical limitations of the technology. These are detailed further in the PwC publication, published 17 June 2016.

Areas of Interest

Examples of priority areas for the next cohort are listed below, but we also welcome expressions of interest from firms working in other areas of FinTech.

We are interested in Metadata management tools; and new tools to manage and harvest business rules (including rule languages) that are embedded in systems and data collections. We also have an interest in security tools that protect data at rest and in transit. Further, we are looking for innovative tools for data cleansing, for example for text strings, and anomaly, trend or changing behaviour detection, particularly in transaction reporting data sets.

Our Fintech Accelerator has launched a new community which brings together fintech-related organisations.

The community has three aims:

1. To share developments, trends and insights.
2. To make sure the Bank is engaging with different fintech firms from across the sector.
3. To enable firms with an interest in fintech to network, supporting the development of the sector.

Community members will be invited to meet us two to four times a year to share updates on trends and developments in the sector. We will also hold quarterly networking and knowledge-sharing events, and publish summaries of the topics discussed.

 

Asia Pacific leads digital wallet adoption

Asia Pacific leads the world when it comes to digital wallet usage via mobile and smart devices as revealed in the 2017 Mastercard Digital Payments study. Payments via ewallet tops 83% of APAC conversations compared to 75% of global conversations tracked in the 2017 study.

Consumers are also showing an increased interest in the application of new technologies to make shopping faster, easier and more secure. The topic of virtual reality generated the most positive sentiment globally and in Asia Pacific (100% positive) among emerging technology topics, as shoppers imagine completing a purchase with the simple nod of their head.

“Technology is making the promise and the potential of a less-cash life a reality for more people every day,” said Marcy Cohen, vice president of digital communications at Mastercard. “This year’s study notes a change in the level of interest for new ways to shop and pay that only a few years ago would have seemed farfetched.”

Embracing emerging technologies

The increased acceptance of digital wallets in-store, online and in-app generated more than 2 million mentions, with 84% of them taking place on Twitter. Beyond the payment, consumers looked forward to additional functionality like storing loyalty cards and supporting closed-loop public transportation systems.

Technologies like artificial intelligence and smart home assistants were the second most discussed payment topic throughout 2016. These new ways to pay generated particularly strong consumer interest in the fourth quarter, as people discussed how they might shop with newer, smarter devices.

In Asia Pacific, 93% of surveyed consumers spoke positive of wearables as a potential payment channel.

Smart assistants, virtual reality and artificial intelligence also emerged as new payment technology interests. Consumers across North America showed an increased interest throughout the year in the simplicity of sending and receiving mobile payments with one comment to a smart assistant.

The Internet of Things was a hot topic with the majority of conversations taking place in North America (44%) and Europe (34%). Discussion centered on the Internet of Things becoming the Internet of Payments where payments could be enabled in any connected device.

In their conversations, people continually noted that the success of new technologies and new ways to pay will be dependent on the security and protections delivered beyond what’s available today.

Forty-five percent of consumers in Asia Pacific are interested in biometrics and other forms of authentication to deliver enhanced security, reduce fraud and move beyond traditional passwords. Facial recognition, fingerprint and touch authentication topped 66% of conversations. The region appeared more open to these emerging technologies compared to the global average of 43% and 51% respectively.

The study also revealed frustration over activities involving the use of conventional passwords, including entering, forgetting and resetting passwords and expressed interested in getting rid of passwords altogether with easier, improved authentication.

Prospa Seeks $500m in SME Loans After Raising

From Smart Company.

Small business lender Prospa is gearing up to hire an additional 100 employees in its next stage of expansion, after this week securing a $25 million cash injection in what is believed to be the largest fintech venture capital investment in an Australian business.

The 2016 Smart50 winner says the investment round, led by Australian venture capital firm AirTree Ventures, will shore up the company’s ability to dominate the small business lending landscape on its path to writing more than $500 million in loans.

“It’s a great story for Australian VCs, and really just cements the general market awareness of how Australia can build great tech companies,” co-chief executive Beau Bertoli tells SmartCompany.

Prospa will be using the funds to further develop the technology side of the business, and with several new projects on the go, Bertoli says the funding injection will also allow the business to keep investing in people.

“It does require a lot of people—the costs are going to be in hiring, we’re going to be looking to hire about 100 over the next year. We’ve put a lot of thought and planning into it this year—it’s not the first time we’ve tried it,” he says on hiring big cohorts of staff at once once.

The Prospa platform, which allows small businesses to apply for unsecured loans of up to $25,000, launched in 2011 and previously raised $60 million in capital in September 2015.

The lender has written more than $250 million in loans, and recorded revenue of $22 million for the 2016 financial year. The current valuation of the business is $235 million, says Bertoli, and while that’s a “substantial” number for an Australian fintech operation, he believes there’s still plenty of room to grow.

“We’ve got a really long way to go,” he says.

“It all comes back to the customer problems, and they can all use capital at different times.”

Prospa has developed a number of strategic partnerships with the likes of Westpac and Mortgage Choice, but Bertoli says the company’s connection to smaller operations has also contributed significantly to its growing the loan base.“We work with around 4,000 partners around Australia, from Westpac to small little accounting firms,” he says.

“That gives us access to well over half of Australia’s small business customers. We’re able to work with lots of [those partners] and get access to their customers.”

Aussie fintech investment defies global dip

From Fintech Business.

Investment in Australian fintech companies remained strong in 2016, despite an almost 50 per cent decline in global investment figures, according to KPMG.

KPMG’s Pulse of Fintech report, released today, found an overall investment of US$656 million into Australian fintech in 2016 across 25 deals, up from $185 million across 23 deals in 2015.

Successful funding rounds by Tyro and Prospa were listed as factors resulting in a strong year for Australian fintech, alongside the acquisition of Pepperstone by CHAMP Private Equity.

The figures present a stark contrast to global investment in fintech companies, which was found to be US $24.7 billion, down from US $46.7 billion in 2015.

However, the report also made clear that the total global funding figures are “still significant compared to pre-2015 investment levels”, indicating 2016 saw a particularly pointed spike for fintech investment, rather than a new normal.

Reduced M&A activity and private equity deals were said to be the main factor in the global decline, while venture capital investment remained strong, actually reaching a new high of US $13.6 billion, up from $12.7 billion in 2015.

“In just five years, Australia has seen the creation of a healthy and active fintech sector, from an extremely low base of just $51 million of fintech investment in

2012 to exceed $600m in 2016,” said Ian Pollari, global co-Leader of fintech at KPMG, commenting on the findings.

“While mega deals result in peaks and troughs in overall figures, the trend is clear and demonstrates increasing interest and investment activity in fintech.”

Apple claims banks want digital wallets as a new revenue source

From Australian Fintech.

Apple says three of the big four banks are pushing to pass the costs of Apple Pay on to their customers as a way to “condition the market” into paying extra fees when using a mobile phone to make a ‘tap and go’ payment.

One of the issues in the long-running battle between Apple and Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corp and Bendigo and Adelaide Bank is whether the banks can pass through to their customers the fee that Apple will require them to pay to use the iPhone infrastructure.

But Apple has described the argument as a “trojan horse”. In a submission published by the Australian Competition and Consumer Commission on Friday, Apple suggests this issue of fees, rather than the bank’s other demand for access to the iPhone’s communication antenna, is motivating the banks, who are all developing their own digital wallets to compete against Apple’s. Digital wallets allow mobile phones to be used to pay through contactless payment terminals.

“Put simply, the applicant banks have the means, notice and opportunity to disadvantage Apple Pay by pricing Apple Pay transactions above transactions made using their own proprietary issuer digital wallets to dissuade cardholders from using Apple Pay,” Apple said. The banks have an “incentive to charge fees to consumers for using Apple Pay to steer customers towards their proprietary payment apps”.

Once the market became accustomed to being charged for using Apple Pay instead of a card, Apple says the banks would be “setting a precedent for charging for mobile payments on other digital wallets, in the future, including the banks’ own proprietary wallets”. The banks could “tacitly extend the imposition of those fees to any digital wallet transaction as a new revenue source,” Apple added.

ANZ deal

ANZ Banking Group broke ranks with the other banks to offer Apple Pay last year; the fee ANZ is paying to Apple has not been confirmed but is understood to be a few cents per $100 of transactions. But ANZ is prevented by its contract with Apple from charging customers for using the service.

The banks’ final submission to the ACCC will be published this week, ahead of the regulator making a decision on the authorisation request, which is expected next month.

Apple said that if authorisation is granted, it will merely provide “cover” for the banks. “The incentive to compete away these fees at the retail level is reduced or removed if there is an ACCC authorised ability to impose Apple Pay transaction fees which provides shelter for their own fees,” Apple said.