Sydney Stock Exchange Developing Blockchain Trading System
A #stock #exchange in Australia is #developing a private equity market solution using #blockchain #technology.
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Will PSD2 and Open Banking impact the Under 18/Youth Banking market?
A consumer survey in 2014 by the UK’s Competition and Markets Authority (CMA) showed that 37% of consumers had been with their main Account Servicing PSP for more than 20 years. 57% of the consumers in the survey had been with their main Account Servicing PSP for more than 10 years. We can broadly assume that the same customer retention rates hold true across the entire European Economic Area, the scope area for PSD2.
It is not clear whether the CMA survey question started the clock for the 10 years or 20 years of retention with a single Account Servicing PSP at the point when the consumer opened a fully featured Payment Account designed for an adult or a reduced functionality account for a child. However, we can assume that a very large number of bank customers opened their first account as a child and did not switch suppliers until adulthood, if they switched suppliers at all. It is reasonable to assume that these very long periods of customer retention often started in childhood.
The first question we can ask about PSD2/Open Banking and the Youth market is whether any of the popular non-bank brands in this market segment might be attracted to the increased opportunity? The UK market has good sample data on the preferred brands for children aged 7 to 15. The top 10 brands are Walkers Crisps, The Simpsons, McDonalds, Coca Cola, Nintendo, YouTube, Maltesers, Haribo, Cadbury and Apple. We can probably eliminate the confectionary brands, as being unlikely to see Open Banking as a diversification/increased share of wallet opportunity. While “Bank of The Simpsons” has instant appeal to children of all ages, this brand also an unlikely Financial Services market entrant (the potential appointment of Chief Wiggum as Compliance Officer could also be grounds for concern).
The “tech platform” brands focused on gaming that appear at the upper end in the Youth Brand Rankings are significantly more likely to take an interest in the financial services industry. These platforms are already taking some margin from traditional #banks, in the form of cash float. Many of these youth gaming platforms have a “wallet feature”, where value transfers can be accepted from the mainstream payment platforms. In the youth market segment, there is a flow from the “Bank of Mum and Dad” through a Card platform into the in-game/in-platform wallet for youth gaming. Does this provide a starting point for a wider, life-long financial service? Nintendo seems constrained to be primarily a youth brand. Microsoft has a presence but through a subsidiary brand (Xbox). However, Apple, Facebook and Google have brand penetration in both the youth market and onwards into the older market segments.
Children in the 7 to 15 age bracket can have very active digital and social media lives. However, it is rare that they have active, self-managed and trackable financial lives in their own capacity. The “Bank of Mum and Dad” is usually the major donor, day-to-day creditor, conduct regulator and lender of last resort. Youthful account holders typically live at home, so they don’t pay rent or buy provisions. They typically don’t have a car nor pay utility bills. They don’t insure themselves nor have significant property to be insured. Their mobile credit top ups may be the mainstay of their simple expenditure patterns.
PSD2 in Plain English (Payments Landscape
for Non-Specialists) (Volume 1)PSD2 holds a broad promise of making financial behaviour data available from payment accounts to fuel competition and innovation. While youthful consumers may leave a rich footprint of behavioural data and preferences directly on social media, the “Bank of Mum and Dad” probably contains and conceals most of the the financial transactions that benefit these younger economic actors.
That said, even though the routine day-to-day account activity level is low, this does not mean that this age bracket does not have financial value. Children can be regular savers. Many youth bank accounts are likely to be savings accounts, rather than a Payment Account as defined by PSD2. PSD2 defines a Payment Account as an account held in the name of one or more payment service users which is used for the execution of payment transactions. The child who is the account holder may receive lump sum payments or recurring payments from a parent into the account, but this typically does not qualify the child as a payer using the account for a payments service. The number of savings accounts in this market segment sharply reduces the potential scope of PSD2 and reduces the addressable market for non-banks.
Nevertheless, again using the UK as a benchmark market, there are accounts for children that are used for payments rather than savings. From the age of 11, accounts are available that offer Debit Cards, Cash Cards, Direct Debits and Standing Orders. These meet the strict PSD2 definition of “Payment Account” but there is no certainty that these accounts are accessible online to the account holders. Articles 66 and 67 of PSD2 grants the customer of an Account Servicing PSP the right to use a Third Party Payment Provider (TPP) only if the payment account is “accessible online”. Many accounts for children are not accessible online. Perhaps PSD2 rules will prompt banks to ensure that they stay offline. In some cases, the child’s parent can view the account on their own Online Banking service, but they do not have a contractual right to be the payer on that account.
Aside from the low levels of financial activity in these accounts, the service providers smoothly and automatically move this youthful population through the stages of the lifecycle. The Youth Banking segment sets a pattern that attracts the attention of Competition Authorities because of concerns about “adverse effects on competition”. Bank accounts for children are like accounts for adults in that they have no contract end date. Competition Authorities can view this as a “lack of trigger points”, which means customers are not required periodically to consider if their payment account is best for them.
It is commonplace in this market segment for Account Servicing PSPs to “auto-convert” the account service to the next payment account at the next stage of the lifecycle. This means that a child can open an account aged 9 with features and benefits aimed at 7-14 years. They do not close this account when they become ineligible by age to use the features and benefits of the 7-14 account. The Account Servicing PSP will typically and automatically auto-covert this service into the 15-18 account when that birthday occurs; the same auto-convert process triggers a change to perhaps a “Student” account at age 19.
This “auto-convert” process can be seen as making the customer very passive in their engagement with the provider. One of the remedies to this lack of “trigger points” being considered by Competition Authorities is a “prompt” to customers to review their payment account provider at times when they may have a higher propensity to shop around. There will be much discussion on the potential effectiveness and timing of prompts to customers; the content of these messages; their source; and the medium of their delivery. The suitable times for these “prompts” being considered by Competition Authorities include an IT breakdown, a major dispute between a provider and a customer, a material change in the accounts terms and conditions, a branch closure or the expiry of a free banking period. Interestingly, Competition Authorities have also cited a customer’s transition from a young person’s or student account to an adult account as a good time to prompt some shopping around.
Banks may face a Conduct Risk dilemma on auto-converting Under 18 accounts to fully featured payment accounts following the implementation of the EU Payment Accounts Directive. Will banks still be able to auto-convert to a fully featured and full fees Payment Account at a certain age and ignore the potential suitability of the new “Payment Account with basic features” being implemented under the Payment Accounts Directive?
In crude conclusion, PSD2 and Open Banking may not have much impact on the Under 18/Youth market segment. Many of the strongest Youth brands are not financial in nature. Younger customers may like Apple, Google and Facebook, but their youthful financial lives are effectively managed by their parents. Banks conveniently and automatically transition the youthful customers through the life stages to fully fledged Payment Accounts, leaving few triggers to prompt the adoption of a non-bank alternative. Accounts for younger people can be savings accounts rather than payment accounts, moving them outside PSD2 and Open Banking. Even if they are payment accounts, they may not be accessible online, which is also outside PSD2 scope.
The PSD2 APIs seem far more likely to be a source of value for new competitors when consumer incomes become strong and their expenditure becomes complex. Highly active payment accounts for mature adults could show significant and diverse sources of income, which indicate a demand for savings, investments, mortgages and home improvements. The same accounts will show significant and diverse expenditure on homes, travel, cars, utilities, insurance and household expenses. The slim pickings of data from the Youth market would suggest that traditional banks will retain a very strong position in this segment. However, the long-term endowment value of this Youth market position for traditional banks could have been sharply reduced by PSD2. An Account Servicing PSP could now spend 20 years servicing a low value Payment Account from age 10, only to find a new competitor accessing data through PSD2 APIs and scooping a valuable pot of high value transactions at age 30.
[linkedinbadge URL=”https://www.linkedin.com/in/paulrohan” connections=”off” mode=”icon” liname=”Paul Rohan”] , the author of this post, is also author of “PSD2 in Plain English”.
for Non-Specialists) (Volume 1) -
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Blockchain and the First Law of Lawmodynamics.
When someone says that they’ve engineered risk out of a commercial transaction, I think about two things: mortgage backed securities and the first law of thermodynamics.
Remember 2008? Mortgage backed securities and CDOs almost made ATMs stop running. Turns out that “risk free” investments weren’t really. Marketing fell victim to reality. Many people suffered as a result.
A guy in financial services explained to me in 2006 that risk had been engineered out of MBS with insurance, tranches, and “over-collateralization”. I’d spent some time handling real estate litigation and had read through my share of loan files, so asked what to me was an obvious question: how anyone would foreclose on the collateral, as it wasn’t always clear who held it. His answer, nearly verbatim: “it’ll never happen, we’ve engineered the risk away.”[1] (I wondered, but didn’t ask: why take the collateral if you don’t think you’ll ever need it?)
The first law of thermodynamics says energy “cannot be created or destroyed. It can, however, be transferred from one location to another and converted to and from other forms of energy.” [ 2]. Maybe the same is so of liability and damages. You can’t destroy or avoid either building a better mousetrap. You can only move it, or (arguably) move the consequences of that liability elsewhere.
What does that have to do with #blockchain, or any other new and “disruptive” #technology? Consider Judge Rakoff’s recent opinion in the Uber antitrust litigation in the Southern District of New York. Summarizing: Uber may be really, really big and the technology really cool, but that in and of itself may actually create a different kind of really, really big liability. As the court puts it: “The advancement of technological means for the orchestration of large-scale price fixing conspiracies need not leave antitrust law behind.” [3]. Innovation and disruption made a new, different and larger liability possible. Bigger opportunity, meet bigger risk.
You may think that Judge Rakoff was wrong or disagree with the Silk Road opinion, which he cites. You’re free to. This observation is hard to argue with, though, as an historical fact: “Throughout the history of the common law system there have been times when laws are applied to new scenarios. At each new stage there were undoubtedly those who questioned the flexibility of the law. But when the principles underlying a law are consistent and clear, they may accomodate new fact patterns.”[4].
Still don’t like these opinions? Try this: autonomous vehicles may reduce driver liability and the need for auto insurance . . . but that risk and damage will move to products liability and related lines of insurance coverage.
So maybe you can more efficiently distribute participation, ownership, and governance though a blockchain based application . . . you may also do the same thing with liability and responsibility for damage. The liability isn’t destroyed: it goes somewhere, or a new kind of liability or damage created.[5]
Of course a physical law may be more absolute than a legal or risk management principle. So there may be a limit to my analogy. Still, if you think you’ve engineered risk out of your innovative blockchain application, ask yourself this: where did it go? Maybe it’s gone for good, in which case, congratulations! But before celebrating, it maybe wise to recall the first law of lawmodynamics and check under your chair one last time.
** Disclaimer: these are my personal opinions only and may not be shared by past, present or future clients, or any law firm with which I’m affiliated. And while I happen to be a lawyer, none of this should be seen as legal advice or expression of a legal opinion. Don’t take legal advice from blog posts or tweets!
[1]. I certainly did not enjoy being right. This had a direct role in causing a wonderful and nearly century old law firm that I was a part of to collapse.
[2]. http://www.livescience.com/50881-first-law-thermodynamics.html.
[3]. http://motherboard.vice.com/read/a-federal-judge-compared-uber-to-silk-road. (A copy of the opinion is embedded in the article).
[4].http://www.leagle.com/decision/In%20FDCO%2020140710C65/U.S.%20v.%20ULBRICHT
[5]. See, e.g., https://blogs.mcafee.com/mcafee-labs/blockchain-transactions-create-risks-financial-services/; http://www.rmmagazine.com/2016/03/01/the-risks-and-rewards-of-blockchain-technology/.
[linkedinbadge URL=”https://www.linkedin.com/in/stephendpalley” connections=”off” mode=”icon” liname=”Stephen Palley”], the author of this post, is a lawyer focused on Construction, Insurance, and Compliance Driven Software Development. @palleylaw
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Nasdaq Explores How Blockchain Could Fuel Solar Energy Market
During a demonstration today, #Nasdaq unveiled a service that lets #solar power generators sell certificates using its Linq #blockchain service.
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FASB Topic 832 Timeline – Infographic
Regulators are creating increasingly complex compliance requirements for corporations on an annual basis. Many of these new regulations apply to broad industry groups – not just FinServ – as is the case with the Financial Accounting Standards Board (FASB). Larger enterprises understand the need to adopt new #technology in order to more efficiently comply with new regulatory requirements. As a result, they are looking to startups in the #FinTech or RegTech space to help them with these challenges.
[linkedinbadge URL=”https://www.linkedin.com/in/scottnelsonbigcontrols” connections=”off” mode=”icon” liname=”Scott Nelson”] , the author of this post, is a RegTech Innovator, FASB Topic 832 Thought Leader , Founder & CEO at BIGcontrols
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‘Blockchain Revolution’ Comes to Wall Street at Nasdaq Event
The authors of “#Blockchain #Revolution” spoke this morning about their latest published work at an #event hosted by #Nasdaq.
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On Blockchain Disillusionment and Bitcoin’s Big Bad Wolves
Beneath the headlines, there’s arguably been the early stirrings of a sea change in the #blockchain industry.
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Former State Street Blockchain Lead Launches Post-Trade Startup
#State #Street’s #former #blockchain #lead has launched a new #startup focused on using the tech to “redesign” the securities services industry.
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UK Regulator fosters innovative collaboration in financial services
Last month and after many weeks of planning, my company supported the FCA to design and deliver a highly collaborative two day hackathon focused on improving access to financial services. You can look this up on Twitter using the hashtag FCAsprint. To our knowledge, this was the first event of its kind by any regulator worldwide and saw big name brands come together with a shared purpose including KPMG, Visa Europe, Funding Circle, Lloyds Banking Group, the Post Office, iProov, HCL Financial Services, Fidor and the Financial Services Consumer Panel.
Chris Woolard, Director of Strategy and Competition at the FCA had this to say:
“The TechSprint was a new way of working for the FCA. Over the course of two days participants came together to generate solutions and foster innovation at pace”.
“The enthusiasm, energy and creativity shown during the event demonstrates that there is huge potential for collaboration between the #FinTech community and those more established within the industry”.
This event was lively, the energy in each room and across twitter was inspiring. The friendly competition between break out teams, within the context of everyone being in it together, was a truly unique experience. Post event I remain inspired by how individuals broke down their usual barriers to work together. Could it be that the interaction between companies who may otherwise consider themselves competitors was the genuine innovation?
“Competition makes us faster. Collaboration makes us better.”
Collaboration between different organisation types can yield benefits if managed well. Small Fintechs are attributed with being agile and more open to taking risks, however they can be held back by the financial complications of such an approach. Small and large working together leverages the best of both, with the small Fintechs having the financial backing of the large established organisation to take the chance.
There are great examples of large organisations utilising the benefits of small agile start-ups to test and grow an idea before sweeping in with the scale and customer base to make it commercially viable. BBVA Compass announced their strategic partnership with Atom in 2015, in order to utilise their digital banking services to serve a growing demand in the UK. Atom has the right product in the right place, and BBVA the experience and stature to drive growth in line with changing customers’ demands. Early in 2016 JP Morgan announced their new service Chase, which through their partnership with alternative lender OnDeck, enabled them to break in to the online lending market.
It is not just finance organisations enjoying the fruits of collaboration to improve customer experience. For instance, I hear of fashion designers working alongside publishers to directly link consumers from the clothes they see in glossy magazines to a retailer with the item in stock. This mutual effort gives the consumer a fantastic experience they will not forget.
When the time is right
Designing collaboration into strategic ventures from day one is where I see innovation actually transcending. Currently we have cash rich established firms with the route to market taking quick wins from start-ups who have developed their innovation far enough to get noticed. Innovation labs and accelerators have tried to start these relationships earlier by offering mentoring and support for businesses. Take for example, Lab 126 that enabled Amazon to bring products such as the Kindle and in the US the Amazon Dash Button to market.
Taking this further could potentially see traditional competitors working side by side on developments that will see industry benefit. All parties come to the table with open books and share responsibility and results from their research. Together these teams develop a solution that is better than would be produced working in isolation. I can think of a few opportunities in financial services where this makes sense.
Stop, collaborate and listen
By collaborating organisations and industries stand a better chance of finding the innovative solutions to the issues they face. This isn’t as easy as putting two groups of people in to a room and letting them get on with it. It requires a shift in attitude by employees who are more comfortable keeping developments closely guarded until they are ready for launch. The decision to be open needs to filter throughout from board to project team members. Individuals who share make learning faster and better for the teams around them. Individuals on teams created with innovation in mind need to understand their common goal and what they and those around them bring to the table. Teams need to respect each other’s contributions and be open to their ideas being developed, dropped, changed, reworked and critiqued. Facilitators employed within teams can help make the interactions happen; they understand who is doing what and who can help them, and bring the two parts together.
It’s more than an office
Moving from a large corporate machine to managing my own business this year has exposed just how different these environments are. To be effective however, leaders must find a way to merge different organisations to create an environment conducive to stimulating the minds of the team. The physical space can be an enormous influence. Innovation rarely happens around a conference room table in a boardroom. Space needs to inspire and be flexible enough to encourage and facilitate interaction. Budgets need to be considered, along with the governance and process to draw down funds quickly, it is possible to alienate individuals from smaller organisations by expecting them to have the same processes seen within large companies.
Finally, having the right tools to enable effective sharing of documents and test ideas safely and seamlessly is essential. There is no bigger barrier to collaboration than systems fighting each other. If sharing becomes laborious it stops and in turn, collaboration breaks down. Simple systems that can be accessed by all are essential. These may require an adjustment to traditional procedures for some companies, but finding a secure process everybody is comfortable with will make or break collaboration.
All of this assumes the right leadership to begin with and as I reflect back on our FCASprint, it strikes me that our real success was the innovation in how things get done. A handful of people wanted to try something new and in communicating this, many others volunteered their time and resources to make it happen. This begins with visionary leadership, pulling your head up to see past today and towards a future more compelling for your customers and employees. Click here to watch the FCASprint video!
[linkedinbadge URL=”https://www.linkedin.com/in/darylwilkinson” connections=”off” mode=”icon” liname=”Daryl Wilkinson”] is Managing Director, DWC.
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Old days at the branches, new days at the app
Last week I attended the Revolution Banking 2016 in Madrid, a conference where many bankers, Tech vendors and #FinTech founders gathered to see the latest trends in retail banking, payments and customer experience. It was an incredible opportunity to listen first hand to top executives from the different financial institutions, explaining how they managed to turn obstacles into opportunities for success.
It’s clear that #banks drove many of the innovations brought to the Spanish market. All the big ones were there to share what they’ve done lately and their plans to keep bringing more and more products and services to delight their customers:
However the most interesting panel of all was reserved to the very last. The topic? To understand how a “bunch” of guys from Germany have broken the market: Number26. The presentation was called “Revolutionizing the banking experience”.
The room was full of bankers, in fact there were many people standing, as everyone wanted to know how this FinTech startup managed to get 160.000 customers in 8 countries!! Incredible figures but the most important thing they’ve brought back to banking is how users can find banking appealing and exciting. I even saw bankers recording the session like if it was one of the brilliant keynote from Steve Jobs announcing one of the new gadget.It was indeed the very first time Number26 gave a speech in Spain. And it’s Nicolas Koop (Business Manager) the responsible to explain how CX is driving the market today and how companies from different sectors are pursuing the ultimate goal of delighting their customers by offering the very best experience regardless of the service provided.
As slides went by some of the core principles of this new challenger bank were presented:
- Bring back trust and excitement to banking
- Recognize the services they can improve and do better, simpler and easier
- Partnerships with other FinTech firms (e.g. TransferWise) who are already disrupting another vertical in banking (http://venturebeat.com/2016/02/25/the-bank-that-fintech-built-number26-and-transferwise-team-up-to-re-invent-banking/)
- Understand customers lifestyles and develop the services from there
- Being creative by pushing the boundaries of regulation and leveraging #technology to delight customers
- Or how they have managed to deploy more “branches” (where their customers can deposit cash) than the biggest bank in Germany (http://techcrunch.com/2015/10/21/number26-turns-retail-shops-into-bank-branches-for-its-bank-of-the-future/)
The minute Nicolas finished and left the stage, he was surrounded by a bunch of “groupies” (a.k.a. bankers) handing him business cards and requesting follow up meetings.
Are bankers really so desperate for answers? Has Number26 demonstrated that a new banking is possible? Is it so disruptive? And why hasn’t there been a Spanish startup able to do this? Is this a good thing? Does the Spanish market deserve a stronger Fintech presence?
There is no need to be an expert to see that banks are struggling to get the same level of loyalty and respect for their firms so many years since the crisis began (fines, penalties, miss-selling products, etc.). Now these small players are trying to recover the trust lost and win over thousands of customers that are desperate to get a fresh new brand to deal with. Someone who really understand their needs and day-to-day problems instead of selling the promotional product based on the marketing campaign.
Nothing the banks didn’t excel at, when branches were the only channel. People trusted their branch manager because they understood their financial needs. They knew everything about their customers life (wife’s name, number of kids, where they worked, etc…). Not anymore.
This radical shift to digital channels has made banks caught them off-balance. They are struggling to keep the pace their customers are demanding (product tailored to them -nor the other way around-, transparency, simplicity, device-agnostic,…).
Nicolas used a Steve Jobs’ quote to explain their idea of how to approach customers:
Now banks have to turn data into insights to ensure they cultivate a fair and non-intrusive way of serving their customers. Until that day comes; bankers will have to mimic the way these challenger banks are smashing the market (doubling the number of customers in 6 months and having a waiting list for new customers). Things incumbent banks can only dream off.
[linkedinbadge URL=”https://www.linkedin.com/in/davidjimenezmaireles” connections=”off” mode=”icon” liname=”David Jimenez Maireles”] is the author of this post and originally published it on linkedin
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