Category: banking

Deeper in data and debt

Data tools are getting more powerful as the information collected about us grows. It presents us with some important choices

Data collection agency Experian’s deal with Finicity to collect and process borrower information is an example of the how Big Data is being used by the financial services sector.

Recently I wrote a piece for Fairfax Media on the Science of Money which included some quotes from Experian’s Australian managers. They were quite explicit about their use of data.

That a company like Experian is adopting more advanced analytics isn’t surprising given the power of the tools available. What’s also driving the adoption is the proliferation of devices available to track people.

Notable among those devices are personal assistants, as David Pogue writes in Scientific American, household technologies like Amazon Alexa, Google Home and Apple Siri are vacuuming up huge amounts of data on our behaviour, likes and dislikes.

Increasingly all of this is being fed into machines that determine our suitability for marketing campaigns, credit and financial services.

For companies like Experian this is a massive opportunity although the focus on credit suitability betrays a mindset more suited to the 1980s finance boom than the more complex times of the early 21st century.

It’s hard though not to think that given a choice the finance sector will happily use these tools to take us into another subprime lending crisis which would be a shame as these technologies’ potential for allowing us to make better decisions is immense.

How we use these tools will define our businesses, economies and communities over the next thirty years. We need to be careful about some of the choices we make.

When the robots came for the financial planners

Automation of financial services threatens both jobs and profits at traditional banks

Then the robots came for the wealth managers…

While much of the focus on the effects of automation in the workforce falls upon manual, skilled and lower level clerical jobs, much of the impact of the next wave of automation will fall on higher level roles.

The rise of the robot financial advisor is a good example of this, as Finextra reports, Well Fargo bank has teamed up with fintech startup SigFig to automate wealth management.

Wealth management has been a lucrative field for banks in recent years however it has come with a reputational risk as poorly trained, incompetent or unethical advisors have pushed customers into investments more aligned with the staffs’ commission structures than the clients’ interests.

Given the costs and risks of employing well paid financial advisors, it’s understandable banks would be attracted to automating the function.

The problem for the banks is automated tools will commoditise the marketplace and almost certainly drive down margins.

So, along with the well paid jobs, the river of gold that was wealth management dries up for the banking sector.

Freeing business investment

Funding the businesses of the future will be critical to addressing the automation driven shifts in employment, how we fund them is one of today’s challenges.

What would happen if the world’s richest people invested in startup businesses? Bloomberg Business ran an interesting, if flawed, thought experiment looking at how many nascent companies each country’s richest individuals could invest in.

It’s surprising how low those numbers are and, if anything, the result underscore how the 1980s and 90s banking sector ‘reforms’ caused the world’s financial system to pivot from its historical purpose of funding commercial enterprises into speculation, rent seeking and manipulating markets.

Apart from a smattering of venture capital not much has replaced the banks in funding the SME and entrepreneurial sectors, if anything it has been those ultra high net wealth individuals who have been financing the investment funds providing capital to entrepreneurs.

How the finance industry evolves in the face of the fintech boom and a world that’s slowly becoming less indulgent of the industry’s greed will be one of the defining things of next decade’s business environment. For the small business and startup sectors getting the funding right will also be a key factor.

The biggest question though is job creation, being able to fund new and innovative investments will be one a critical concern for societies dealing with the effects of an increasingly automated economy.

Entering an era of surpluses

Negative interest rates are part of a period of surplus resources that will test many businesses

With the global Zero Interest Rate Policy experiment failing, we’re now entering the era of negative interest rates with a quarter of the world’s central banks charging savers.

The world is flooded with money, but we also have surpluses in manufacturing, a surplus in most commodities, of energy and an increasing surplus of labor.

From Shanghai to Barcelona, the surplus of labor is beginning to be felt as industries become increasingly mechanised and the consequences of short sighted economic policies over the last thirty years begins to be felt.

That labor surplus is also driving the political shifts in Europe and North America as workforces are finding their living standards being pressured and their economic prospects dwindling. As a consequence, voters are looking for scapegoats – immigrants in Europe, the EU in Britain and Mexicans in the US.

Regardless of which scapegoat you choose to blame for the global economy’s uncertainty, the fact remains we are in a time where scarcity can’t be assumed.

This means business models that are based upon restricted supply are, in most sectors, under threat. The whole economics of scarcity becomes irrelevant when there are no shortage of suppliers around the globe.

In some fields, such as energy, technological change is seeing the dominant positions of oil companies, electricity generators and distributors being challenged in ways that wouldn’t have been thought possible a few years ago.

Even regulated industries where government licenses artificially controlled supply – like taxis, broadcasting and telecommunications – increasingly new distribution methods are changing the economics of those industries. No longer is buying a government license a sure fire way to big profits.

Right now, the imperative for businesses to find the areas where there is scarcity and supply constraints. For many industries that may be too difficult a transition.

Negative interest rates though take us into uncharted territory. How the global economy responds to virtually free and unlimited money is going to be an interesting experiment.

Probing the weakest links of the banking system

The Bangladeshi bank hack was a lucky escape but it is an early warning about securing our networks.

The breach of the Bangladeshi banking network has been shocking on a number of levels, not least for the allegations the institutions were using second hand network equipment with no security precautions.

Fortunately for the Bangladesh financial system the hackers could spell and so only got away with a fraction of what they could have.

Now there are claims the SWIFT international funds transfer system may have been compromised by the breach, which shows the fragility of global networks and how they are only as strong as the weakest link.

As the growth of the internet shows, it’s almost impossible to build a totally secure global communications network. As connected devices, intelligent systems and algorithms become integral parts of our lives, trusting information is going to become even more critical.

The Bangladeshi bank hack was a lucky escape but it is an early warning about securing our networks.

Update: It appears the hackers were successful in getting malware onto the network according to Reuters but, like their main efforts, were somewhat crude and easily detected. One wonders how many sophisticated bad actors have quietly exploited these weaknesses.

Africa’s mobile payments shift

Somalia’s EVCPlus shows how African economies are adapting to the mobile economy

One of the greatest profitable accidents of the last twenty years was SMS messaging that delivered telecoms companies huge revenues for a service that cost them almost nothing.

In Somalia, we may be seeing phone companies leading the way in cashless transactions as the economy moves towards mobile payments on the back of service intended by one of the nation’s leading cellphone providers for a completely different purpose.

The Hormuud Telecommunication Company set up EVCPlus to deal with account payments but in an unstable and risky economy the service has proved an efficient way to deal with daily transactions

“It’s not safe to carry cash money here,” said Dhublawe Ibrahim Aden, 25, a hawker who sells shoes and clothes. “If someone has to buy my shoes and bungles [necklaces] then he has to pay me through my cellphone. I don’t accept cash money from clients.”

Like Kenya’s M-PESA, EVCPlus is showing how slower and more basic connections aren’t a barrier to African economies leading the world in some online services. Sometimes having access to basic services isn’t an impediment.

How banks will survive the fintech onslaught

Fintech startups threaten to disrupt the banking system but the banks are well placed to survive and prosper

Earlier this week the Financial Times reported how the eleven biggest North American and European banks had shed 100,000 jobs this year, so it when I was asked to do a segment on the future of banking for radio station ABC666 in Canberra I was more than delighted.

The ABC producer’s interest had been piqued by an Ovum research paper detailing the IT spending of banks and their increasing focus on security.

Rethinking payments

In Ovum’s view much of the banking industry’s security  comes from the diverse range of payment options coming onto the marketplace. Another factor in the increased spend are the US credit cards moving to contactless payments.

Certainly the increased focus on payments security is being driven by the range of new devices with smartphones, wearable technologies and the Internet of Things opening up a whole new range of commercial channels. This is something driving the development of services like Apple’s and Google’s payment system and part of a wider battle over who controls those channels.

Underpinning much of the security focus is the interest in blockchain technologies which move the authentication records off central ledgers – historically one of the core functions of banking – onto a distributed network of databases.

Core challenges

That shift in record keeping is just one of changes affected the banking industry’s core functions, crowd funding and peer to peer lending threaten to displace banks from being the main providers of business capital, one of the fundamental reasons for the banking sectors existence.

It should be noted though the banks have largely stepped away from being the providers of small business capital over recent decades as the ill conceived ‘reforms’ of the 1980s and 90s saw the finance sector being more focused on housing lending and doing mega M&A deals with the big end of town.

The Financial Times report notes a decline in M&A deals is one of the drivers for the staff lay offs at the major banks, it’s notable that technology is changing that business function as much of the due diligence can be better done by artificial intelligence and algorithms rather than highly paid corporate lawyers and bankers.

Where have the bankers gone?

As the banks lay off senior staff, it’s notable many are finding their way to fintech companies. The Wall Street Journal however describes the relationship between incumbent banks and their would be disrupters as far more complex than it seems.

Increasingly banks are buying or taking stakes in promising startups along with establishing their own investment arms and running hackathons to identify potential disruptors. Many in the banking industry are quite aware of the changes happening.

That the banks are adopting the new technologies and identifying the threats shouldn’t be surprising, over the past fifty years the sector has been adept at applying technology from batch processing on mainframe computers through to deploying Automatic Teller Machines and rolling out credit cards to improve their business operations. Banking is one sector that’s proved itself fast to identify and adopt technological changes.

Are the banks going away?

So with fintech startups snapping at their heels, is it likely today’s banks are heading for extinction? Probably not suggests the CEO of fintech startup Currency Cloud, Mike Laven who describes such talk as being part of the “Level 39 bubble”, referring to the financial services startup hub based in London’s Canary Wharf.

Laven’s view is some banks will evolve while others won’t do so well and historically that’s what we’ve seen with other technological shifts – some of the incumbents adapt and reinvent themselves while others are not so adept and wither away.

Some of the bigger threats to banking may be social and economic change. Today’s rising of interest rates by the US Federal Reserve may mark the end of the last decade’s ‘free money’ mentality that’s been so profitable for them in recent times. The end of the consumerist era also challenges those financial institutions basing their business models on a never ending growth of consumer spending and household debt.

Almost certainly the banking industry is not going to vanish, however it is going to be a very different – most definitely a much leaner – beast in a few years time. What is certain though is the days of banks as we’ve known them in the second half of the Twentieth Century are undergoing dramatic change in the face of technological and social change.

Ending the banking era

As technology changes the finance industry we could be seeing the end of a powerful banking sector

The industry that benefited most from the economic reforms of the last twenty years of the 20th Century was the banking industry.

With the elections of Margaret Thatcher and Ronald Reagan three decades of good times began for the banking sector.

Now the good times are drawing to a close warns former Barclays boss Antony Jenkins who told a London audience how the banking industry faces an ‘Uber moment’.

While Jenkins focused on the fortunes of branches and frontline staff, the technological change facing almost all aspects of banking from tellers to risk analysts and upper management are all facing massive changes as artificial intelligence moves into fields that a few years ago most believed couldn’t be automated.

For the incumbent banks shareholders this is mixed news, on one hand it makes their existing operations vastly more profitable – the One Percent become the .001%.

On the other hand for the incumbents, the market is opening up new competitors and as Jenkins points out some of these disruptors will be the banks of the future. At the moment though established banks will do all they can to interfere with new entrants.

While interference will only go so far, the real challenge is to get ahead of the changes which is why financial technologies (fintech) has become such a hot topic in the last three years with major banks sponsoring or opening their own incubators, accelerators and hackathons.

Another important aspect in a changing environment is that of regulation and with the banks winning from the deregulations of the 1980s and 90s it may well be that we’re going to see a tightening on their powers as technology changes the playing field.

One thing is for sure, bankers are about to find times as exciting and challenging as many of the industries they displaced late in the Twentieth Century.

Winning the global fintech race

Winning the global fintech race – why history and focus matter

One of the things that strikes you when wandering around London’s Docklands district is the sheer amount of advertising for financial technology companies.

That London has established this position should surprise no-one, its civic and national leaders have been aggressive in maintaining the city’s position as technology has swept through the banking sector.

One of the notable things when interviewing the Chief Executive of London and Partners, Gordon Innes, two years ago was how engaged both the city’s business and political leaders were in the development of the town’s technology sector and the financial industry was a natural focus.

An example Innes gave of that engagement was the co-operation between the offices of the Prime Minister and the London Mayor where staffers meet on a monthly basis to agree on business and technology policy, which is then put into action by Westminster and the UK Parliament.

Poaching the Aussies

The benefits of that co-ordination and focus are global, with the London fintech sector attracting startups from as far as Australia.

Australia’s experience, or lack of it, in the fintech sector is notable. As the story linked above mentions, the UK Trade and Investment agency actively scouts out promising businesses while the local state and Federal equivalents sit on the sidelines (disclaimer: I worked for the New South Wales government on its digital economy strategy).

For Australia, the late entry into fintech doesn’t bode well. The country’s financial sector is overwhelmingly weighted towards domestic property speculation – a structural weakness seen as a strength by most Australians – and the country’s high costs make it tough for startups.

Defining a competitive advantage

High costs in themselves aren’t a barrier to a city’s success – London, New York and San Francisco themselves would be among the highest cost places to do business on the planet.

To justify those costs a city needs a competitive advantage and there’s little to suggest Sydney or Melbourne have anything compelling as a financial centre beyond a bloated domestic banking industry fixated on residential property.

Two of the arguments used to support Australia’s claims are it is on the doorstep of Asia and it is in the same timezone as the growing East Asian powerhouses.

Timezone myths

If timezones do matter in modern business, the sad truth for the Aussies is the powerhouses themselves – specifically Shanghai, Hong Kong and Singapore – are in roughly the same longitudes so any time differentials aren’t great.

Being on the doorstep of Asia is probably one of the greatest Australian myths of all – it’s actually quicker to fly from Beijing to London than it is to Sydney. London might be on the edge of Europe – one US entrepreneur once told me how they can get Spanish developers into the UK in an afternoon – and New York is the gateway to the United States however there’s little reason to go Down Under for any other reason than to visit Australia.

The power of history and focus

Comparing London to Sydney is useful though as it shows the power of history and trade routes. London became a global financial centre because it was the financial centre of a global empire just as New York is today and possibly Shanghai in the not too distant future.

For the Aussies, the trade routes aren’t so encouraging in indicating the country has a future as a financial sector. Even ignoring history, the commitments of governments and local corporations are at best half-hearted compared to their global competitors – as we see with London poaching Australian businesses.

One of the strengths in those global centres is a constant re-invention and the ability to adapt to changing circumstances – how China adapts to a rebalanced economy will define whether it remains a global economic power – and in the UK the government is looking at the next big things in biotech and the Internet of Things, two areas where it has strengths and can attract global investment and skills.

For countries and regions aspiring to be global players, they need not just to be playing to their own strengths but also to where the future lies and not be late entrants into the current investment fad.

Learning the tools of online business

Accountants are faced with a great opportunity, but they have to learn the tools of online business

The accounting and professional services industries are uniquely positioned as the economy goes digital, while their own sectors are undergoing radical change so too are their clients.

Given the changes facing the accounting industry, the invitation to host last week’s CPA Australia Technology Accounting Forum‘s second day in Sydney was a good opportunity to see how the profession and its clients are dealing with major shifts in their industry.

The accounting profession has been one of the big winners of the Twentieth Century’s shift to a services economy. Last week’s story on how the workforce has been changing illustrates this with a chart showing how the occupation has grown over the past 140 years.

accountants-employed-the-uk

In many respects accountants should be well placed to benefit in a data driven economy given the training and skills they posses. The big challenge for existing practitioners is to shift with the times.

The transition from what’s been lucrative work in the past will be a challenge for some in the profession. Many of the manual tasks accountants previously did are now being automated with direct data links increasingly seeing operations like reconciliations and filing financial returns being done in real time without the need for any human intervention.

In private practice, the shift to cloud computing and direct APIs has stripped out more revenues with useful earners like selling boxed software petering away as services like Xero and Saasu arrived and established players like Intuit, Sage and MYOB moved to online models.

Shifting to the cloud

That shift has already happened with the presenter in one breakout session asking the audience how many practitioners used exclusively desktop software, purely cloud service or a hybrid of the two. Of the twenty in the room, the vast majority were using a combination with three being purely online and one sole operator still stuck with a desktop system.

For accountants the message from all of the sessions was clear; the future is online and businesses based around paper based models are doomed. The question though for them is how will they make the transition to being professional advisers.

Strangely, the big challenge for accountants in private practice may be their clients. A number of panel participants pointed out small business owners are slow to adopt new technologies and this holds both them and their service providers back. Divorcing tardy customers may be one of the more difficult tasks facing professional advisors.

The Technology, Accounting and Finance Forum showed the potential for accountants and professional services providers to be the trusted advisors in an online world, the task now is for practitioners and their clients to learn and understand those tools.

Stripe joins the unicorns

Payments company Stripe takes a big step with its investment from credit card giant Visa

Payment service Stripe joins the unicorn club as credit card company Visa becomes the latest investor reports the Re/Code website.

Two years ago this site interviewed John Collison, one of the Irish twins who founded Stripe about their mission to bring the payments industry in the 21st Century.

With the Visa investment it now means two of the world’s three major credit card companies are investors in Stripe, the other being American Express, and this shows the incumbent players are acutely aware of the changes happening in the payments world.

That credit card companies are investing in the businesses that threaten to disrupt their industry indicates the incumbents’ savvy management; while there are cultural and ethical barriers in trying to undercut the existing profitable products, having a stake in the new competitors gives companies like Visa and AmEx to remain relevant in a post credit card world.

For Stripe, investment from what could have been their major competitors not only takes some of the pressure off the the business but also opens opportunities for technology sharing and access to bigger markets.

Probably the most important thing for Strip with the Amex and Visa investments is they legitimise the business and the entire payments startup sector. It’s an important vote of confidence in the technologies and market.

For the Collison twins it also helps build better businesses, as John told Decoding the New Economy two years ago, “if we just building a business to take transactions from PayPal and get them onto Stripe, that’s not that interesting. What is interesting is if we can create new types of transactions that would not have existed otherwise.”

“By providing better infrastructure for anyone to build a global business. That will change the kind of things people will build.”

Now more people will be looking at what they can build on these payment platforms.

Data driven lending

Square enters the small business lending space, will be they successful in a very competitive field?

Banking has always been a data driven business, understanding borrowers and the risks they present is one of the essential skills in making money from lending.

The new wave of payment startups present a new way for lenders to analyse risks; with real time data aggregated across businesses and regions, lenders can quickly decide wether a borrower is likely to able to pay the money back with the conditions asked for.

Payments company Square in its latest pivot has partnered with Victory Park Capital and claims to have extended more than $100 million in capital to more than 20,000 merchants writes the New York Times.

Like other payment companies that have entered this market, Square uses their own deep understanding of their customers’ incomes to be able to make a data based decision on the creditworthiness of applicants.

Square also offers ancillary data-driven products created for small businesses. The new instant deposit product, which is still in testing and will be fully available in the spring, will give businesses faster access to money they put into a debit account. And the company’s new charge-back protection service will cover some disputes between consumers and merchants.

Those products also rely on data that Square has collected. They will be available only to small businesses that have a solid financial track record, based on a history of accepting payments with Square.

Square is by no means the first business to do this, last year we wrote of PayPal’s move into small business lending and Point of Sale hardware manufacturer Verifone retreated from the market two years ago calling it ‘fundamentally unprofitable.’

The competition in the space and the fact assessing financial risks isn’t exactly a core competence of Silicon Valley start ups indicate Square’s and other companies may find small business lending a tough business as well.

Despite that, small business lending is a field that is overdue for disruption. With companies like Apple, Google and Amazon all offering payment services, the logical expansion is into evaluating risk and profit.

It may not be Square, Verifone or PayPal who ultimately redefines the sector, but it will be one of today’s tech businesses that does.