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.

If scandals don’t make us switch banks, financial technology might

From The Conversation.

An efficient market relies on rational customers being willing to change suppliers when there’s good reason to do so. But what happens when customers stay put regardless? This issue is particularly acute in the banking industry.

Even when bank customers have a very good reason to switch, behavioural economics research shows they’re often reluctant to make the move. For example, big scandals that affect banks have a weak impact on consumer behaviour. However, there is a greater propensity to act among customers who are directly impacted.

Behavioural economics also shows bank customers are often slow to switch to take advantage of better offers from competitors. In 2016, the UK’s Competition and Markets Authority lamented that only “3% of personal and 4% of business customers switch to a different bank in any year” in the country. In 2013, Canstar suggested the figure is slightly higher in Australia at 5%.

Despite the slightly higher propensity to switch banks among Australian consumers, there’s much we can learn from the UK’s use of behavioural economics to nudge customers to act in their own best interests. In particular, financial technology companies can provide information platforms to make it easier for customers to switch.

Why bank customers don’t change

Behavioural economists have shown that consumer decisions are not rational. In particular, there is a “sunk cost bias” that affects consumer decisions. That is, consumers tend to place more value on any previous effort or expenditure they’ve made rather than judging economic value when they make decisions.

If you have left a 20% deposit on an item in a store, you will probably buy it, even if you found the same item for sale at 75% of the price elsewhere. So, customers will tend to stick with the bank they’ve got, despite scandals.

Competition authorities, led by the UK’s Competition and Markets Authority, are increasingly trying the “nudge” options offered by behavioural economics as a way to help persuade an irrational consumer to do what is in their best interests. A nudge is simply a mechanism to encourage people. It might be a reminder as to the consequences of not taking the action or benefits of going ahead.

Regulators have examined ways in which nudges can be given without unintended consequences. For example, should the nudge be a carrot or a stick? And which works best? The UK’s Competition and Markets Authority’s chief economic advisor, Mike Walker, advises regulators to “test, learn and adapt”.

A critical part of any nudge is presenting information in a way that can be used easily by consumers. Intermediaries, comparison tools and other financial technology services can provide this information.

How financial technology businesses could help

One of the barriers at the moment to getting customers to switch in Australia is a lack of information on all bank products and financial technology businesses to manage this information.

Although the UK implemented services that make it easier to switch between retail bank accounts, the UK’s Competition and Markets Authority found that this didn’t improve competition in the sector. To resolve this problem, it has ensured that customers have information on other banks and their account options as part of new account-switching regulation.

The way that this works is that customers can compare their existing offering with alternatives using an app that talks to an open electronic interface to the bank. The UK’s Competition and Markets Authority has mandated that the retail banks provide this interface, known as an applications programming interface, to both consumers and to financial technology businesses.

The effect is a space for new businesses to provide comparison tools. These new financial technology businesses will not impose a significant cost on the banks. Each of the UK banks has spent around £1 million each to create these open electronic interfaces, according to the UK Open Data Institute.

The open electronic interfaces will be associated with the European Union Second Payment Services Directive, which will be implemented before Brexit takes effect. This directive will help automate parts of the switching process.

The Australian banks and the Reserve Bank under the auspices of the Australian Payments Clearing Association are trialling a New Payments Platform to try to make it easier for customers to switch. But it’s not likely to have the same degree of flexibility and consistency as the approaches adopted in the UK, as it focuses on financial institution needs, rather than consumer ones.

Regulators in Australia should use behavioural economic analysis to learn more about how consumers use any new information on bank switching or services on this offered by financial technology businesses.

We’re still waiting on evidence on how these new financial technology companies will change consumer behaviour in the UK. But it is likely that in the very least it will increase the intensity of rivalry between the retail banks, this can only be a good outcome for consumers in the UK.

This could also inform a similar implementation in Australia, particularly after a parliamentary committee’s first report on the four major banks is released.

Author: Rob Nicholls, Lecturer in Business Law, UNSW

Fintechs Eye The Mortgage Market

From Fintech Business.

Speaking at a media roundtable in Sydney this week, SocietyOne co-founder Greg Symons said there is a class of mortgages that could suit “exactly what we do”.

“We will look at that in time, probably through a partnership of some kind,” Mr Symons said.

“The fact is it’s very cheap debt and very low capital that goes into it. The problem is the margins of play are very tight, whereas there is a second tier of mortgage lending with a lower LVR, a different form of mortgage lending that actually would fit well,” he explained.

“It is more like a syndicated loan style opportunity, which essentially is just low-volume peer-to-peer. The thing is, you’ve got to change your thinking. You’ve got to move away from this pooled investment style to something that is more individual based.”

Mr Symons said he built SocietyOne and the technology underpinning it to ensure that the company doesn’t exclude itself from certain asset classes that are a natural fit.

However, SocietyOne’s newly appointed chief investment officer John Cummins, who was also present at Wednesday’s discussion, said there is little “juice” in mortgages, echoing Mr Symons comment about tight margins.

The group has over 280 funders including Australian banks, credit unions, high net worth individuals and SMSFs.

Mr Cummins said mortgages are a difficult market to get high net worth investors into.

“The structures are really set up for institutional. To go in and nakedly invest in mortgages… I know it has been done overseas. It’s just a bit more challenging here because you have established an investment structure now that looks like an amortising structure with a whole lot of variable rate mortgages in it,” he said.

US-based online lender SoFi, which is planning an Australian mortgage market play, has successfully managed to move from a peer-to-peer lending offering student loans to a balance-sheet lender offering home loans.

The company has made clear its ambitions to grow beyond lending to provide a fuller, more holistic banking-like offering to customers including deposits, credit cards and payment solutions. It is currently preparing to launch its first mortgage securitisation deal.

SoFi this week announced the acquisition of Delaware-based mobile banking group Zenbanx, which has been pioneering ‘conversational banking’.

Faster credit decisions with real-time technology

From Fintech Business.
Credit providers will need to embrace newer technologies and real-time data processing in order to meet changing client needs, writes Experian’s Suzanne Steele.

Over the last decade, the digital transformation of the banking sector has accelerated dramatically, and the pace of change is showing no sign of slowing.

Recent research data shows more than 1.2 billion people are banking on their mobile devices today, a number set to increase to over two billion by 2021.

Competition from agile new arrivals to the market, combined with a need to enhance the customer experience, are compelling credit providers to improve their range of services and reduce the time it takes to make credit decisions.

Gone are the days when a discussion with the local bank manager was the only option.

Dissatisfaction with traditional systems that fail to meet the instantaneous needs of the modern-day customer already has some Australians looking to fintech start-ups and alternative lending sources.

Millennials report convenience anywhere, any time as the primary driver for choosing non-traditional finance providers, according to recent Telstra research.

This highlights that many of today’s consumers live in a world of digital banking and expect to be able to have their banking needs met at any time, in any place and on any device.

There are signs consumer pressure is shifting the massive cogs of Australia’s financial services industry, slowly but surely adjusting to the demands of today’s hyper competitive 24/7 global economy.

The National Payments Platform (NPP) rollout in late 2017 will provide Australian businesses and consumers with a faster, more flexible and data-rich way to transfer funds within seconds.

In the NPP world, an Australian credit shopper can receive funds from friends, family or peers almost instantly.

Australian credit providers will have the same ability to almost instantly fulfil a customer’s credit wishes, but they will also need the right tools in place to assess customer risk with the same level of immediacy.

In order for credit providers to meet the evolving demands, real-time automated decision-making must become the new norm across the credit industry, enabled by access to a variety of internal and external databases.

What are the databases and insights credit providers need at their fingertips to make well-informed decisions?

In order to accurately, quickly and confidently make a ‘yes’ decision anytime, anywhere, a credit provider needs to first answer these five fundamental questions:

  1. Is the applicant who he or she purports to be? (ID data)
  2. Will the applicant likely be fraudulent? (fraud data)
  3. Is the applicant too risky? (credit data)
  4. Can the applicant afford to repay the loan? (servicing capacity data)
  5. If the applicant has a property, is it worth what they say it’s worth? (asset value data)

Historically most credit providers have answered each of these questions separately, using disparate and unconnected systems. For example, the bank will access an existing customer’s profile on their CRM database, but will also look at external data provided by a credit bureau or a shared fraud database.

The result is a lengthy process that delays credit decisions and results in a poor customer experience. In an increasingly saturated market, consumers’ ability to access credit seamlessly will likely be a key differentiator.

A one-stop shop

Emerging technologies promise a faster and more customer-friendly alternative to these clunky systems of old, offering access to a wide range of separate databases on demand and as part of a singular process.

As banks up the ante in their adoption of cloud-based services, a more flexible, collaborative technology ecosystem is emerging.

These technologies enrich a bank’s own customer data with third-party credit data, identity information, fraud insights and property data, and make it all available online and in real time.

With integrated workflow and decisioning processes, banks can fast track applications from existing customers and prompt a request for more data from new customers.

This enables credit providers to deliver a credit decision within seconds, reducing the number of customers who drop-off midway through the application process due to the lengthy questions and delays.

However, it also ensures credit offers are more accurate, based on a holistic approach to a customer’s financial situation. For the bank, this reduces risk, streamlines operations, and enables it to offer efficient and competitive products and services.

A digitised approach also addresses an ongoing concern for credit providers.

In 2009, to meet ASIC’s responsible lending guidelines, the onus was put on lenders to request evidence such as pay slips or financial statements, to support credit applications.

This process significantly delays the processing of applications. However, by applying the same principles in data integration, banks can now automatically access bank statements to fast track their evaluation of the ability of a consumer to service a loan.

Developing an effective data hub with real-time decisioning software future-proofs a bank, enabling an agile response to both future regulatory changes and transformations to the market.

Such a capability results in a more positive experience for customers and delivers much improved efficiencies and business performance for credit providers.

Suzanne Steele is the managing director of Experian for Australia and New Zealand.

More lessons on fintech to come for Scott Morrison

From The Conversation.

This week, Treasurer Scott Morrison will be in Germany, as part of the run up to this year’s G-20 Summit, talking to other finance ministers about “Digitising finance, financial inclusion and financial literacy”. The Treasurer is due to give a keynote speech on “Developments and challenges of fintech with a focus on Australia”.

Just before Christmas, ASIC released a document with the new rules on how new fintech businesses can test certain services without holding an Australian financial services or credit licence. The waivers provide a “sandbox” for new fintech start-ups to play in without incurring the wrath of the regulator.

However, the restrictions for playing in the sandbox are actually quite onerous. First, and probably the biggest hurdle, is that would-be Warren Buffets must be a member of “one or more ASIC – approved external dispute resolution (EDR) schemes”, such asthe Financial Ombudsman Service (FOS). The budding billionaires must also organise some professional indemnity insurance cover, of at least A$1 million. Not too many small firms will have the sort of money lying around to do both of those.

The things that the startups are allowed to do are fairly restrictive, with limits on the products that they may offer and the money they can manage with a “total customer exposure of no more than A$5 million”.

When in Europe the Treasurer will also visit London, where among other visits, he is due to meet with Internet royalty – none other than Sir Tim Berners Lee. He’s the inventor of the World Wide Web (www) and head of a new UK government initiative, called the Open Data Institute(ODI).

Among many areas that Berners-Lee and the ODI are looking at is Finance and particularly something called the Open Banking Standard. This standard has the lofty goal of:

Unlocking the potential of open banking to improve competition, efficiency and stimulate innovation.

ODI describes the rationale for the standard:

The European Union is rapidly advancing legislation that will, upon implementation in the next two years, require UK banks (subject to consent from individuals and businesses) to open access to their customer data and payments capabilities.

It means the banks will be required to make (some of their) data available, or “open”, to all. But it won’t be everything, the example ODI gives is “financial product information”, basically the pamphlets that are available in bank branches today. But it’s a start.

Other data is considered “closed” or “shared” such as personal bank details or a company’s transaction data. Access to such sensitive data would, according to ODI, be subject to the consent of the individual or business to whom the data belongs and specific governance related to that. Access to the data would be through standardised application programming interfaces (APIs) and, subject to privacy constraints, data could be made available to banks and fintech developers.

The ODI approach promotes fintech development by allowing start-ups to develop new services and products that can access bank data directly rather than having to suck data out of banks and massage it locally. The data remains with the banks and customers, but the logic moves to the fintech developer.

The banks, in the UK or Australia, are not going to be happy. For example, a fintech could write a program to extract a customer’s data from their bank or credit card accounts and run a program to see how much better the customer would be if they moved their accounts to another bank, using real data rather than marketing promises. Customers, for example, could also set up alerts on their account balances not at the simple overdraft level but also using real rules taking into account upcoming expenses, such as holidays.

On the subject of bank accounts, the Treasurer should take note of how the UK banking system is actually implementing bank account number portability rather than still talking about it as in Canberra.

But while fintech is a fascinating subject, I suspect other topics in global finance might just take up some of the visit, such as the reversal of the global trade agenda and Brexit both of which could be considered financial exclusion rather than inclusion.

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

The Bank of England On Fintech

Mark Carney,  Governor of the Bank of England, spoke on ‘The Promise of Fintech.” Specifically, he looked across the banking value chain, and highlighted how digital transformation may be applied across it, as well as the risks which may emerge is so doing and how regulators need to respond.

To its advocates, this wave of innovation promises a FinTech revolution that will democratise financial services.

  • Consumers will get more choice, better-targeted services and keener pricing.
  • Small and medium sized businesses will get access to new credit.
  • Banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience.
  • The financial system itself will become more resilient with greater diversity, redundancy and depth.
  • And most fundamentally, financial services will be more inclusive; with people better connected, more informed and increasingly empowered.

With hundreds of millions now entering the digital financial system every year, could higher economic growth and a quantum leap in social equity be on the horizon? Or will the range of new financial technologies primarily make existing institutions and markets more efficient and effective? No small prize but hardly a transformation.

FinTech’s true 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 driven 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 in an effort to reinforce the economies of scale and scope of their business models.

In this process, systemic 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. A host of applications and new infrastructure could reduce costs, probably improve capital efficiency and possibly create new critical economic functions.

The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society. After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts.

Conduct regulators are in the lead in addressing regulatory issues posed by payment services innovations. This is both because, at least in advanced economies, FinTech payment service providers have not chosen to undertake banking activities and individual providers have not yet reached the scale that might be considered systemic.

Looking ahead, it is possible that virtual currencies and FinTech-based providers, particularly where they gain direct membership to central bank payment systems, could begin to displace traditional bank-based payment services and systems. Such diversification could be positive for stability; after all the existing tiered and highly concentrated system has created single point of failure risks. At the same time, regulators would need to monitor such changes for any new concentrations.

In this regard, with a view to such future proofing, the Digital Economy Bill in the UK proposes to extend the definition of a payment system beyond those that are inter-bank, to include any that become systemically important. If these are so designated by HMT, they would be supervised by the Bank. This would be akin to the recent recognition by HMT of Visa Europe and Link.

Changes to payments and customer relationships may have more fundamental implications for financial stability.

Specifically, while FinTech may make conventional banking more contestable, improving efficiency and customer choice, the opening up of the customer interface and payment services business, could, in time, signal the end of universal banking as we know it. If today’s universal banks lose the loyalty I saw on the Canadian prairie and instead have less stable funding and weaker, more arms-length client relationships, the volatility of their deposits and liquidity risk could increase. In addition, with weaker customer ties, cross-selling (my old preserve as a teller) could be less prevalent, hitting profitability. The system as a whole wouldn’t necessarily be riskier, but prudential standards and resolution regimes for banks may need to be adjusted.

The diversity in funding brought by market-based finance, as an alternative to retail banking, means that peer-to-peer lending has potential to provide some consumers and small businesses with affordable credit, when retail banks cannot. At the same time, this implies that borrowers in some segments may be placing increased reliance on this source of funding. How stable this funding will prove through-the-cycle is not yet clear, as the sector’s underwriting standards, and lenders’ tolerance to losses, have not been tested by a downturn.

Due to its small scale and business models, the P2P lending sector does not, for now, appear to pose material systemic risks. That said, as a general rule, it always pays to monitor closely fast-growing sources of credit for slippages in underwriting standards and the promotion of excessive borrowing. Moreover, it is not clear the extent to which P2P lending can grow without business models evolving in ways that introduce conventional risks, including maturity transformation, leverage and liquidity mismatch, or through the use of originate and distribute models such as those seen in securitisation in the 2000s. Were these changes to occur, regulators would be expected to address such emerging vulnerabilities.

In wholesale banking and markets, robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated. Similarly, although algorithmic traders have become a more important source of market liquidity in many important financial markets, they tend to be more active during periods of low volatility giving an illusion of plentiful liquidity that may subsequently be withdrawn during periods of market disruption when it is needed most.

FinTech innovations, such as distributed ledgers, are being trialled for use within, or as a substitute to, existing wholesale payment, clearing and settlement infrastructure, will need to meet the highest standards of resilience, reliability, privacy and scalability.

For all financial firms, the advent of FinTech materially changes operational and cyber risks. Regulators need to be alert to new single point of failure risks such as if banks come to rely on common hosts of online banking or providers of cloud computing services.

In recent years, the cyber threat to the system has grown as financial institutions have become more reliant on interconnected IT systems. As the FinTech future envisages the sharing of data across a wider set of parties, coupled with greater speed and automaticity in executing transactions, the challenges around protecting data and the integrity of the system are likely to increase. One sign of this is a growing preoccupation in the insurance industry with how best to underwrite such risks.

Recognising the vital importance of learning from international experience, in late 2016 the G20 called upon the FSB to stock-take existing cyber security regulation, as a basis for developing best practices in the medium-term.

While only private sector ingenuity will make these gains possible, authorities have essential, supporting roles in reinforcing them and managing the associated risks to financial stability. To help realise FinTech’s promise, we should refresh our supervisory approaches in a few ways.

First, regulatory sandboxes can allow businesses to test innovative products, services, business models and delivery mechanisms in a live environment and with proportionate regulatory requirements. This supports innovation and learning by developers and regulators. The FCA was an early mover launching Project Innovate in 2014.21 The G20 might consider the extent to which such approaches should be adopted more widely.

Second, existing authorisation processes can also be adapted to ensure they do not unnecessarily block new business models and approaches. This is why in the UK, the PRA and FCA now work closely with all firms seeking new authorisation as banks.

Third, the Bank of England is expanding access to central bank money to non-bank payments service providers (“PSPs”). Allowing access to the Bank’s Real Time Gross Settlement System allows PSPs to compete directly with banks, and so supports innovation, competition and financial stability.

Fourth, a number of authorities, including the Bank of England with its FinTech accelerator, are developing Proofs of Concepts with new enabling technologies from machine learning to distributed ledgers. And, to explore what could be genuinely new under the sun, we are researching the policy and technical issues posed by Central Bank Digital Currencies. On some levels this is appealing; people would have direct access to the ultimate risk-free asset. In the extreme, however, it could fundamentally reshape banking including by sharply increasing liquidity risk for traditional banks

This last point underscores that, in order for FinTech’s potential to be realised, authorities must manage its impact on financial stability. On the positive side, FinTech could reduce systemic risks by delivering a more diverse and resilient system where incumbents and new entrants compete along the value chain. At the same time, some innovations could generate systemic risks through increased interconnectedness and complexity, greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage.

As those risks emerge, authorities can be expected to pursue a more intense focus on the regulatory perimeter, more dynamic settings of prudential requirements, a broader commitment to resolution regimes, and a more disciplined management of operational and cyber risks. And we will be alert to potential impacts on the existing core of the system, including through business model analysis and market impact assessments.
By enabling technologies and managing risks, we can help create a new financial system for a new age… under the same sun.



Digital Finance and Fintch – Benefits and Risks

Dr Jens Weidmann President of the Deutsche Bundesbank spoke on “Digital finance – Reaping the benefits without neglecting the risks“, drawing  important links to financial literacy, financial stability and fintech.

More than 20 years have passed since Bill Gates famously said that “Banking is necessary, banks are not”.

While banks still exist – and I am sure they will continue to do so -, recent developments have shown that non-banks are just as capable of providing bank services. And that is not least due to the huge strides made in the field of information and communications technology (ICT), which has opened up a whole new world of possibilities for designing and distributing financial services.

And this has even transformed traditional banking business. Online banking, for example, has become the main point of access for many bank customers.

Digital finance, and the fintech industry in particular, have experienced very rapid growth in recent years on the back of both supply-side and demand-side forces.

On the supply side, technological progress plays an important role, but so, too, do efforts to drive down the costs of financial services. These forces are being propelled by the increasing availability of ICT infrastructure, the provision of unique access points to financial services, and the growing number of digital natives.

And on the demand side, “always on” customers are increasingly expecting to be able to bank with a minimum of fuss, whenever and wherever they like.

Digital finance opens up a host of opportunities, but we should not neglect the risks it entails. But how can we capitalise on these opportunities without losing sight of the potential risks? That is a key question of this conference – one that will be addressed by a panel discussion and also by Bank of England governor Mark Carney in his keynote speech this afternoon.

From an economic point of view, digital finance can deliver a wealth of benefits. First of all, digital financial services can bring about significant efficiency gains. Digitalisation can also stoke competition within the financial system and raise the contestability of financial markets. Some commentators even argue that digitalisation has the potential to revolutionise financial services and infrastructure.

The key buzzword here is “disruptive”. And many believe the most disruptive potential is to be found in blockchain or distributed ledger technology, which promises to allow payment transactions and securities settlement to bypass banks and central counterparties altogether.

Originally developed for the bitcoin virtual currency, this distributed ledger technology, it would appear, has turned out to be a multi-purpose tool. And even central banks – which aren’t typically known for being early adopters of new technologies – are currently doing experimental research on the potential use of blockchain.

The Bundesbank, for example, has recently launched a joint project with Deutsche Börse to develop a blockchain-based prototype of a securities settlement system.

But even apart from radically transforming the payments and securities settlement infrastructure, digitalisation enables newcomers to mount a challenge against incumbent market players.

Data-driven technologies can boost the transparency of the financial system and thus reduce information asymmetries. Big data analysis, for example, can improve the estimation of default risks even in the absence of a longstanding bank-customer relationship.

An increasing number of suppliers of financial services is particularly good news for households and enterprises lacking access to traditional sources of finance. In the end, this might drive up the number of projects that receive financing.

Online crowdfunding or peer-to-peer lending platforms might enable investment projects which would otherwise be too risky or too small for traditional banks, to go ahead.

In general, digital finance facilitates access to financial services. And this benefit is not confined to tech-savvy consumers in advanced economies. Indeed, digital technologies can be key drivers of financial inclusion in less developed countries, too.

In Kenya, for example, the share of people with a financial account rose from 42 % in 2011 to 75 % in 2014. Over the same period, the respective global figure rose from 51 % to 61 %.

In tandem with the mounting ubiquity of cell phones, mobile money accounts have gained popularity, particularly in Sub-Saharan Africa. In some countries, there are even more adults with a mobile money account than a conventional bank account.

Financial inclusion is thought to be conducive to promoting economic growth and lowering inequality. Financially included people are in a better position to start and develop businesses, to invest in their children’s education, to manage risks, and to absorb financial shocks.

On the other hand, there is a trade-off between financial inclusion and financial stability. Expanding access to financial services – especially to credit – at too fast a pace and with too little control exposes economies to stability risks, and households to the risk of over-indebtedness. The Indian microfinance crisis in 2010 showed us what can happen if too many households have access to credit despite being subprime borrowers.

And that is why financial literacy is so crucial. People with access to finance need a basic understanding of financial concepts like compound interest and risk diversification.

Surveys, however, provide some worrying results. According to an International Survey of Adult Financial Literacy Competencies, which was commissioned by the G20 and published by the OECD, overall levels of financial literacy, as indicated by knowledge, attitudes and behaviour, are relatively low.

And another study, the S&P Global Financial Literacy Survey, which was supported by the World Bank, reveals that two out of three adults are not financially literate, albeit with major variations across countries. While more than half of adults are financially literate in most of the advanced economies, that goes for fewer than one-fifth of people in some developing or transformation countries.

There are, of course, other aspects of digital finance which have a bearing on financial stability.

Herding behaviour, for example, could be amplified by automated advisory services in portfolio management. Robo advisors might exacerbate financial volatility and pro-cyclicality if the assets under management reach a significant level, which is not yet the case.

Traditional banks in many countries are currently suffering from dwindling profitability due, most notably, to the low-interest-rate environment. Disintermediation, however, could intensify the problems of narrow profit margins. This might be the flipside of the mounting competition unleashed by the more widespread use of digitised financing.

And decentralisation might make it more difficult to tell who is exposed to whom, and to detect where financial risks ultimately lie.

Another point worth noting is that fintech business models have not yet run through an entire credit cycle. Experience with digital finance in economic downturns is very limited.

That being said, it is quite obvious that regulating fintechs and the entire digital financial industry smartly without hindering financial innovation is warranted. That’s why the objectives of the German G20 presidency include taking stock of the different regulatory approaches. Our aim is to develop a set of common criteria for the regulatory treatment of fintechs.

Fintechs should not base their business models on regulatory loopholes. Using lax regulation to attract business is a mistake that was already made before the latest financial crisis. Whatever we do, we need to avoid a regulatory race to the bottom. Rather, we should go for a level playing field.

To quote the words of the former ECB President Jean-Claude Trichet who said in 2010: “(…) “the crisis has exposed the risk of regulatory arbitrage, shedding a more negative light on the competition among different systems and rules.””

Getting a clearer picture of fintechs’ business activities is essential if we are to better understand whether and in what way they might pose a threat to financial stability. It is therefore an important endeavour of the Financial Stability Board to further investigate and promote data availability. Without reliable data, any assessment of risks is unfeasible.

Another threat – and certainly not just to financial stability – comes from cyber risks.

The more market infrastructures rely on digital technologies, the more vulnerable our interconnected global financial system becomes to criminal attacks, be it from computer hackers, cyber saboteurs or even terrorists.

Cyber criminals have repeatedly targeted financial institutions around the world, including central banks. There are plenty of financial institutions I could name whose defences have been successfully breached. The damage unleashed by successful attacks goes beyond the financial loss incurred. Cyber-attacks can potentially undermine peoples’ trust in the financial system.

So to avoid jeopardising the positive impact of digital finance, it will be crucial to address these risks and for banks to manage their IT and cyber risks with as much diligence as they do their traditional banking risks.

Cybersecurity risks will be a major item in a talk this afternoon with Thomas de Maizière, German Federal Minister of the Interior. And a research dialogue tomorrow will also address the topic of cyber security.

US fintech eyes Australian mortgage space

From Australian Broker.

US financial technology company SoFi has hinted at its plans to launch an Australian branch that offers mortgages and changes the banking world.

The firm, which is based in San Francisco, has recently put out a LinkedIn job advertisement for a manager of mortgage operations in Sydney. It is also looking to hire a marketing manager and an operations manager.

This would be the fintech’s first office outside of the US where it has funded more than US$7 billion in student loan refinancing, personal loans and mortgages, reported the Australian Financial Review.

The job ad says the new hire would preferably have non-bank lending experience and would “be responsible for building out an in-house mortgage customer service and underwriting operation to serve SoFi’s new mortgage business line”.

This will include developing the operations, processing and underwriting functions as well as supervising mortgage originations at or ahead of target.

SoFi recently raised US$1 billion of funding and has grown its staff from 150 to more than 600 over the past year. It offers a range of its own mortgage products which can be applied for directly via smartphone, reported The Economist in an article last year.

Borrowers – or ‘members’ as the fintech refers to them – are also showered with a range of other services. This includes being invited to parties to network, using SoFi’s offices for investor meetings and even tapping into the firm’s network to find employment.

When contacted by Australian Broker, a SoFi spokesperson declined to comment about the company’s future plans for Australia and its expansion into the local mortgage market.