An AFSL licensing robo-advice will have huge compliance problems, and will probably be un-insurable, writes Dover’s Terry McMaster.
The rise of fintech has spurred an innovation arms race in financial services.
New entrants are reshaping and improving the way we interact with the financial system upon which we all rely. In response, incumbents are seeking to leverage their scale, distribution and market position to retain customer ownership and maintain leadership across the industry. In this context, new entrants have leveraged digital technology, free from legacy systems and bureaucratic hierarchies, to target points of high friction and high value to disrupt the financial services industry.
“Fintech is all about stimulating technological innovation so that financial markets and systems can become more efficient and consumer‑focused.” – Scott Morrison, Treasurer
This has resulted in a continuously evolving innovation landscape as incumbents, start-ups, regulators and service providers interact to create and deliver new value for customers. Currently, there are three key observations driving the innovation landscape in financial services:
- While funding levels have dropped off since the heights of 2015, there have been significant developments in the global and Australian fintech ecosystem, including new innovations and regulatory improvements;
- There has been a flurry of activity in Australian financial services in specific pockets of disruption such as payments, lending, cryptocurrency/distributed ledger technology and investments/wealth, however we are also seeing emerging interest and activity in the RegTech and insurance sector; and
- Incumbents are responding to the continuing rate of innovation in multiple ways, including cultural transformations, embedding innovation capabilities through internal teams and partnerships, and establishing corporate venturing funds.
1. Funding levels have dropped off, but progress is still positive
Since reaching the dizzying funding and hype levels in 2015, the global fintech landscape has continued to evolve. The chart below demonstrates the significant change in funding levels both globally and in Australia.
Five-year fintech funding (PE + VC, USD billion)
While funding levels have generally dropped off since 2015, we have recently seen positive deal growth in the US. Asia, on the other hand, has emerged as a competitive geography in the 12 months leading up to July 2017.
Funding flows (US$b, 12 months to 1 July 2017)
Despite the decreased deal flow in Oceania, there has been a wave of momentum led by start-ups across a broad spectrum of categories, including:
- Financial advice
- Investments and wealth
- Big data/analytics
- Personal financial management
- Cryptocurrency and distributed ledger technology
2. Pockets of disruption
In Australia, our analysis suggests that most of the short-term disruption is likely to be driven in areas such as payments, lending, cryptocurrency and investments/wealth, with popular names raising significant capital and successfully delivering concepts to market.
While these segments provide the most fertile opportunity for short-term disruption, we are witnessing emerging areas of interest in two verticals: regulatory/compliance technology (i.e. RegTech) and insurance technology.
Globally, RegTech companies have raised close to US$3 billion since 2012, with major deals in document transmission, capital confirmation and vendor risk management software in 2016. As the compliance burden continues to grow in financial services, it is expected that large incumbents will continue to look towards start-ups to rapidly build efficient, scalable and novel solutions to address specific compliance challenges. This could range from monitoring disclosures and other compliance requirements across market-facing channels to efficient know your customer (KYC) solutions. The RegTech sector is continuing to grow in Australia, with the establishment of the RegTech Association in April 2017, aiming to drive collaboration between key stakeholders and overcome bureaucracy and slow decision-making behind traditional compliance transformations.
Insurance technology (InsurTech)
Global insurance technology funding peaked in 2015 (~$2.7 billion) and managed to maintain healthy volumes in 2016 (~$2 billion). While investment in this vertical has been traditionally restrained in Australia, large incumbents are starting to recognise the value in partnering with the start-up world. QBE has signalled an intent to invest in tech start-ups to the tune of $50 million, IAG has launched a $75 million venture fund and Suncorp has recently invested in micro-insurance start-up Trov. These actions support our previous prediction in the World Economic Forum paper that suggested insurance would be the biggest source of disruption in financial services.
3. Incumbents are responding
The evolving innovation landscape is continuing to force the innovation imperative onto incumbents. In response, existing organisations have explored multiple avenues to embed an ‘innovative’ culture, build new capabilities and offer new services to customers. Three responses have gathered recent attention:
a. Cultural transformation: Shifting organisational structures, cultural norms and incentives to drive a more innovative, agile and flexible approach to work that highlights creativity and customer-centricity
An incumbent’s operating model has often been cited as a core barrier to its ability to respond to change in a flexible and nimble manner. ING has long been the global benchmark for embedding ‘agile at scale’ for many years, reorganising internal capabilities around problems to be solved. A recent announcement from ANZ indicates that they intend to adopt the same approach. Breaking down corporate bureaucracy and red-tape and increasing speed-to-market is critical for incumbents to maintain their competitive advantage.
b. Innovation capability uplift: Investing in core capabilities that support innovation, such as design methodologies, dedicated innovation spaces and technology experiments, has become common across major financial institutions in Australia
CBA is proud of their ‘Innovation Lab’, while NAB has NAB Labs and Westpac has The Garage and other innovation environments. These investments have been supported by key partnerships with non-traditional institutions such as Telstra, Apple and Google, while also establishing relationships with fintechs such as Prospa and Ripple. While internal vehicles have a tendency to deliver ‘sustaining’ innovation rather than ‘disruptive’ innovation and enable incumbents to solve issues at their core, they still serve a valuable purpose by signalling a shift in attitude within the organisation.
c. Corporate venturing: Some incumbents have invested in corporate venture funds that invest in start-ups to generate returns, build new capabilities and deliver new services to customers.
Typically, Corporate Venture funds can move faster than an R&D department to help a firm respond to impending changes. It has the benefit of accelerating a path to market as well as generating return on investment. However, there is the risk that the fund is caught up in corporate bureaucracy and is not afforded the time needed to realise value. Westpac’s Reinventure fund has made a range of investments, mainly focusing on payments and lending start-ups. NAB’s corporate venture fund has made a few initial investments across payments, data and an HR platform. These efforts enable a faster response to emerging technologies, a better understanding of threats, a channel to market through established distribution arms and an avenue to stimulate demand.
While funding levels have reduced since 2015, the threat of disruption has not subsided, requiring incumbents to continuously sense, scan and scout the local and global market for opportunities and threats. The increasing rate of innovation provides opportunities to source distinct capabilities from external sources through acquisitions and partnerships as a method of accelerating an incumbent’s strategic ambition. For fintechs, the critical success factors reside in an ability to create compelling solutions that target the intersection of highest customer friction and large value pools to gain traction and accelerate growth in an increasingly competitive environment. As the pace of innovation continues to accelerate in the face of exponential technologies, we expect to see continued disruption in the way financial services are delivered and consumed, requiring a response from all participants in the ecosystem.
Ben Krowitz is a consultant in the Strategy and Operations Sydney Consulting practice at Deloitte.
Rahul Puri is m
Chris Wilson is partner, consulting at Deloitte.
The trend for more documents to be ‘signed’ online has grown substantially in recent years. Online signatures are a natural extension of the interconnected world facing advisers who often have many documents, deeds, application forms to transact with time-poor clients.
Against this fast-growing move to online documents is the speed bump that is the common law. Although legislators have taken some steps to legitimise online documents in the face of the natural conservatism of the legal framework, the common law remains a real halter on the universal adoption of online documentation in Australia.
Signing documents electronically should be approached with extreme caution, as the legal implications of signing a document electronically could render that document invalid. Whether a document can be signed electronically depends on:
- Whether the document can legally exist electronically in the first place (or does it at law have to be printed on paper);
- Whether the jurisdiction’s Electronic Transactions Act applies to permit electronic signing; and
- Whether any other legislation or the common law applies to permit the electronic signing.
While a number of jurisdictions have amended the definition of a ‘deed’ to enable a deed to exist in electronic format, the majority of jurisdictions have not and so the common law requirement that a deed exist on ‘paper, parchment or vellum’ still exists to make electronic deeds in those jurisdictions invalid.
Many jurisdictions have legislation amending the common law requirements for execution of a deed. Where a witness is fundamental to the execution of a deed, in those jurisdictions that have excluded witnessing from their Electronic Transactions Act it would be necessary to show that an electronic witnessing of the document is permitted under the common law.
The ability to execute a will by electronic signature is not available in any state or territory in Australia except the ACT, because all those states and territories have either excluded wills from their local electronic transactions legislation or have laws banning the electronic signing of documents by witnesses (witnessing being an absolute necessity for compliance with the formal requirements for wills). A document that has been ‘signed’ electronically and ‘witnessed’ electronically could be admitted to probate as an ‘informal will’, but not until after a lengthy and expensive court application.
As advisers and accountants work with more digital transactions, they need to know what kind of signatures they are collecting. So, what is difference between an electronic signature and a digital signature? And what is the importance of that difference?
While over half of all businesses now place orders via the internet, electronic signature usage in Australia has had a relatively low adoption rate. However, a recent report predicts that by 2020 more than 100 million e-signature transactions will be made annually.
An electronic signature is any method of electronically indicating that a person has ‘signed’ an electronic or online document. While a scanned signature inserted into a Word document is an electronic signature, it is effectively an electronic ‘picture’ of a person’s signature that can be readily inserted into a document.
A digital signature, on the other hand, is a type of electronic signature that can be verified using a specific process that validates and connects the signature to a specific person.
Like a handwritten signature, which can be forged, a digital signature can also be forged if the person does not protect their personal key, thereby allowing unauthorised use and the ability to impersonate the alleged signatory.
The distinction between a simple electronic signature and a digital signature rests in the verification process, a process that some laws require in order for the ‘signature’ to meet the necessary legislative benchmarks to be effective.
Verification is another skill set that the advice industry is mastering in the online world, and a recent court case brought to a head the need to validate whose signature could be applied online. This NSW case highlights difficulties associated with electronic signatures when all parties are not on the same page.
Electronic signatures: Court action has begun
A director’s electronic signature placed on a guarantee without his knowledge led to court action by a company seeking recovery of a debt from the director personally.
In Williams Group Australia Pty Ltd v Crocker  NSWCA 265, Mr Crocker was one of three directors of a company that supplied building modules. His company filled in and completed a credit application to Williams Group Australia Pty Ltd, which provided building materials to the company.
The credit application contained the electronic signatures of all three directors of the company and was also accompanied by a guarantee that contained the same three electronic signatures. The electronic signatures were applied to the documents via an online system where users receive login details and are able to upload their electronic signatures in order to apply it to documents.
During all relevant times, Mr Crocker did not change his initial password that was given to him, so anyone who knew or had access to his original login details could have accessed and affixed an electronic signature on any document on behalf of him. It was not until the company went into liquidation and Williams Group sought recovery of money owed to them that Mr Crocker became aware that his electronic signature had been applied on the credit application and guarantee.
The Supreme Court held that Mr Crocker was not liable under the guarantee as his electronic signature was placed on the documents without his knowledge and authority.
On appeal, Williams Group accepted that there was no actual authority given by Mr Crocker to another person in the company to affix his signature to the document, however, Williams Group argued that person had ‘ostensible authority’ (i.e. Mr Crocker held out to Williams Group that whoever placed his electronic signatures on the documents and forwarded them to Williams Group was authorised by him to do so).
The judges on appeal held that the failure of Mr Crocker to change his password in relation to the online system and Mr Crocker’s use of that system on a number of other occasions did not amount to authorisation of another person to use his electronic signature to bind him to the obligations under the credit application and guarantee.
The use of electronic signatures may seem to offer an efficient and convenient way to have documents or agreements signed and returned to another party. However, the desire for expediency must be balanced against the need to protect and treat electronic signatures as if they were your real signature. The potential for fraudulent misuse may be greater than simple forgery of a signature.
Advice professionals should treat electronic signing carefully and be aware that in NSW it is not permitted to witness a document by electronic signature.
Peter Townsend is the Principal at Townsends Business & Corporate Lawyers
In a market where many competitors have left Millennials in the too hard (or too poor) basket, progressive wealth managers have an opportunity to stake their claim.
Fear of missing out, aka FOMO, is a constant in life for Millennials. Several social media platforms provide a steady stream of proof that other people are out there, doing fun things that they’re not. But does this apply to investing? Do Millennials feel like they are not being serviced according to their needs and preferences? For what we know, this seems to be the case.
According to a Deloitte study on wealth management and Millennials, nearly six in 10 people of this generation would change his or her bank relationship for a better technology platform solution. In a different report, by Telstra, researchers found that 67 per cent of this generation prefer to receive advice on financial products and services via a digital platform.
Taken together, these two statistics provide two important insights for wealth management services in Australia: one, there’s a big gap in the market at the moment to service the needs of Millennials and, two, there’s an appetite for digital engagement coming from the same group.
Why the appetite? Older generations often want to ‘eyeball’ the person they’re handing their savings to in order to build trust. But if you’ve ever dealt with anyone under 35, you’d know their preference for texting rather than actual phone calls – so a face-to-face meeting is probably not appealing.
Having grown up handing over their data, photos and friendships to digital companies, Millennials don’t need to shake your hand to feel a level of trust.
Why the gap? For most wealth managers, the numbers don’t stack up. With only a small amount to invest (compared to their parents’ generation), the potential revenue from Millennials doesn’t make the cost-per-acquisition worth it.
Moreover, convincing Millennials to part with thousands of dollars for advice is a challenge, when more than two in three don’t own their home and are struggling to save for a deposit.
This hardly comes as a surprise, considering the limited opportunities this generation has to invest beyond a savings account. Minimum investments and management fees are generally too high for them. Plus, the ‘one size fits all’ products hardly ever adapt to their reality.
What’s the solution? In a market where many competitors have left Millennials in the too hard (or too poor) basket, progressive wealth managers have an opportunity to stake their claim.
Quantifeed’s B2B wealth management technology helps banks, brokers and wealth managers target the burgeoning mass-affluent market of Millennials, providing the best possible solutions in a scalable, lower-cost model, so that the numbers do stack up.
With a combination of low-cost quantitative portfolios, a goal-based investment approach and engagement technology, Quantifeed is helping financial institutions across Asia-Pacific to better service this market segment. Millennials now have an opportunity to invest in a range of assets that may speed up their saving for a home deposit.
To seize the opportunity, here are a couple of ways wealth managers in Australia can ride the coming wave of millennial wealth:
1. Look at the long game – While Millennials are struggling to balance their savings, side-hustles and smashed avocado today, that won’t always be the case. By 2020, their wealth is expected to double from present levels across the globe. Digital advice allows wealth managers to start building relationships with customers today, rather than try to win their trust once their wealth has increased.
2. Focus on the user experience – Clunky design and websites that don’t work on mobiles are the fastest way to turn off younger investors. Nine out of 10 Millennials check their smartphone as soon as they wake up, so it’s crucial to design your platform functionality with a tiny screen in mind. These types of decisions are where many financial service providers come unstuck, and it’s why we have built our business on providing highly configurable mobile friendly white-label technology – ensuring a rich user-experience no matter whether your platform is used on a smart phone, tablet or desktop computer.
Graeme Brant is the senior executive strategic partnerships at Quantifeed.
If you and your business are in a profession that charges a fee or a commission for exchange of knowledge, then one of the gorillas is coming after you.
Technology behemoths are disrupting the financial services sector and it’s only a matter of time before a lack of preparation puts advisers in serious trouble.
Facebook, Amazon, Alibaba, Alphabet aka FAAA…k.
Never in our history have we had such massive, powerful, global business units. Never have such businesses been run as these are, more or less, like dictatorships. These companies are still all run (for better or worse) by their founders. If one of these founders/owners wants blue to be black then black it goes. Board room meetings? Yes – but everyone would know who is in charge (normally the one that owns the most voting stock/shares).
Total market cap of combined $1.9 TRILLION+ $$$
Cash on hand $320 BILLION+ $$$
Borrowing capacity $BILLIONS+
Why they are coming after you? EASY MONEY!
Accountants, financial advisers, mortgage aggregators, brokers all charge too much for knowledge that is readily available for (in a lot of instances) free on the popular WWW. Fact.
These tech behemoths can give knowledge to your clients/customers for free. Not only that, they can correlate that knowledge specifically targeted for the individual. They can give detailed, accurate information based on real live data to place your clients in a better position than you generally can, all in the blink of an eye.
Don’t worry about these companies not being able to monetise this free knowledge either – they will and can. Their ability to scale a micro payment into hugely profitable business is mind blowing.
My pick of the top 4 and why
- Alibaba. When a company is going to change itself into an economy you know it’s big and growing. Subsidiary Ant Financial is a monster acquiring or eating up cash flow finance business and making new business models in insurance and mortgages and payments with better outcomes for customers and services. The Ant is already in Australia thanks to the Commonwealth Bank – maybe a case of the Commonwealth Bank keeping friends close but enemy’s closer. Alibaba is hungry, very hungry.
- Amazon. The boss of an ex hedge fund manager knows money and how to make it work. A business that used to sell just books, then a few years later forked out billions to buy Wholefoods Ltd (like Coles/Woolworths only bigger) to do food better than any one else. Amazon now has the power to bully people out of the market and Amazon can do this in financial services with the possible buy out of Capital One – the third largest credit card provider in the US. The CEO stated that they have the ability to systemise and digitise and better service clients than current companies and give possible better rates to customers.
- Alphabet. Google knows where your client gets their advice and who gives that advice. Google knows more about your client and their habits and needs than you do. Will Google get into payments insurance offerings lending? I bet if they don’t, the data they have will be sold to one of their friends.
- Facebook. Facebook has already moved into payments P2P via messenger. Within the Facebook ecosystem lies most of your clients. Think about it – how quickly could Facebook offer robo-advice on the simple transactions and advice you give at a micro payment compared to what you charge. People trust their favourite social brands over you. Facebook can censor and control what flows into your clients worlds. If Facebook says that financial advisers charge too much (via clever advertising) your business is in big trouble. A person will delete their adviser before their Facebook account.
Why are these cloud-based service machines not after your clients today?
It comes down to a lack of people and time. They are all after the biggest fish first, they have the capacity to go big first.
They also do not have enough coders and programmers – which are jobs experiencing a global shortage.
However, this will change over the next 5-10 years and as the big playes get gobbled up, the smaller businesses and individuals become a better target.
What to do
The only point of difference we have is ourselves, face and personality.
A chat bot may mirror a personality type best suited to you so you feel comfortable, however a real face and person will always be best.
Future proof your business. Within the next period look at the technology package that gives you the ability to have efficacy when you need it.
Find communication and work tools that allow benefits to you and your clients in saving time and travel.
Don’t wait until that day comes where a client says “I can get that service much cheaper online”. At that point it will be too late.
Tech is your friend not your foe.
Troy Penney is the digital engagement consultant at Suitebox Solutions
Multi-channel advice technologies like robo and AI do not run the risk of dehumanising financial advice but rather possess the potential to increase consumer trust with financial services.
Speaking recently at a conference on the changing nature of interactions with consumers of financial services, I was asked whether multi-channel advice technologies like robo and AI run the risk of dehumanising financial advice at unnecessary expense. Quite to the contrary, digital advice solutions, when designed as part of a seamless multi-channel offering, have the potential to make financial advice a far more human experience.
They possess the potential to increase trust between consumers and their financial institution. They help consumers act in a time and channel more convenient to them. And they can play the role of the trusted adviser in times of crisis or human fallibility.
Building trust through digital interactions
One of the biggest issues facing the financial services industry right now is customer trust. In the past, leaders of financial institutions have faced the Asian financial crisis and the global financial crisis. But, as ANZ CEO Shayne Elliott has observed, banking leaders today are facing a new style of crisis as they seek to regain community trust. Whereas CEOs responding to financial crisis knew which levers to pull to manage the risks, responding to a reputation crisis lacks such a well-defined playbook.
Deloitte research into customer trust has highlighted some important nuances for solving this crisis of trust. Customers still perceive Australia’s major financial institutions as the repository ‘least likely to fail’ and remain the preferred supplier for savings and loans. The nature of the trust deficit more specifically relates to whether the customer believes the institution will put the interests of the customer ahead of their own.
The good news is that there are some simple remedies to help alleviate these trust ailments. Our research highlighted that the more frequently the institution interacts with its customers, the more trusted they are likely to be.
Contrary to the belief that digital solutions may disintermediate the relationship between advisers and their clients, digital communications can help strengthen the relationship. Digital offers the opportunity to increase the number of personalised interactions, and in doing so, the level of trust. It’s akin to the adage of not educating staff for fear they may leave, or worse not educating them and knowing the uneducated may stay.
This is not to advocate a flood of spam. Digital interactions must be tailored to fit the customer’s personal context. Digital interactions can be designed to progressively educate consumers. Digital interactions can demonstrate a deferral of self-interest. All of which are essential factors to overcoming a trust deficit.
Engaging and exploring – anytime, anywhere
Time poor consumers need incremental points of progressive engagement. The human experience of exploring, learning and developing the comfort to act on significant decisions about your financial future occurs progressively over time. It may start with 15 minutes on the train, however all the information required to complete the advice tools and calculators is unlikely to be readily on hand. So it may require another 30 minutes after the children have gone to bed, and some more another day following discussions with their partner.
Rather than expecting a small number of direct interactions culminating in a statement of advice to be an adequate advice experience, digital advice tools allow new customers to progressively learn and build confidence. This progressive development is more reflective of the natural human experience. However it is critical that the design of these interactions carry the customer’s content and context across channels. The information entered in any session or channel must be preserved, protected and presented back in each future session.
So this doesn’t mean that human advisers are no longer required or won’t be able to deliver value through direct interaction. Quite the opposite. Having invested an incrementally significant amount of effort in the digital environment, a sunk cost bias begins to embed in the customer’s subconscious. They have become more informed, more brand aware and more attached to the brand.
Guidance when it’s needed
When markets inevitably enter periods of significant volatility, advisers are challenged to contact vast numbers of clients in a short period to provide them with appropriate actions and assurance. During the GFC, some nascent digital advisers demonstrated a distinct advantage. Digital advisers were able to rapidly deliver large volumes of clients with email, SMS and even social media direct message communications articulating the actions that had already been taken or recommended on their portfolios to account for market movement. Thanks to the power of goals-based rule engines, portfolio rebalancing capabilities and marketing automation tools, this rapid action can expediently act to assure customers.
From the perspective of the customer, this immediacy of knowledge that their advice provider had evaluated and addressed their personal situation proved a very human experience, irrespective of the fact that machines automated the vast majority of the interaction. Naturally some customers still wish to continue the conversation with their adviser, which from the outset is accelerated on the basis of the rich information and context that has been digitally shared.
This same scenario exists with the daily implementation of well-prepared financial plans. While the plan may be of high quality and exceptionally well prepared, it depends on a human with imperfect abilities to implement that plan. As humans, we are fallible. We have imperfect knowledge of our retirement needs or complex insurance coverage terms. We defer our allocation of time to resolve these issues in favour of activities with more immediate gratification. We suffer from temptations to spend monies we had notionally allocated to longer term goals.
An emerging set of multi-channel advice and guidance platforms are helping consumers overcome their failings and achieve their underlying intentions. Providers like Acorns, CloverGrow Super provide pre-commitment devices to help customers enact on savings plans. Platforms like HelloWallet employ social proofing techniques to highlight positive behaviours demonstrated by peers to motivate action on the longer-term structuring of financial affairs. Locally, our behavioural design team has been working on an array of engagement strategies aimed at helping customers fulfil their intentions, through first hand qualitative research, analysis of transactions and developing behavioural triggers and rules into marketing automation platforms and mobile applications. These solutions are designed to account for human nature and help customers define and fulfil their personal goals.
This is not solely a selflessly motivated exercise in building trust. The revenue opportunities from these activities are significant ranging from increased Funds Under Management, increased occurrence of supplementary advice, increased new product referrals and for some software models additional licensing fees. Together with increased adviser efficiency and service digitisation cost savings, the resulting economic models can be as compelling as the positive impact on customer perceptions and trust.
David Johnson is the director, strategy & innovation at Deloitte Consulting