Is this the beginning of the end of commissions in financial services ?

The butterfly flapping its wings to a hurricane is an oft used analogy for change. And so, after almost 20 years of the internet becoming mainstream, will we now also start seeing the end of commissions payable on financial products. In the past month almost unnoticed, a seismic shift has occurred when the dominant Charles Schwab boldly ended charging commission on trades. Suddenly competitors were forced to adapt and a new normal was established. This change has taken almost 20 years to reach this stage.

Sellers of financial products for years managed to maintain the perceived need for fees to intermediaries. But in a single move, Schwab has signalled the future of financial services not only in equities but eventually across all asset classes including Deposits. The days of the empowered and informed buyer is closer and technology (such as bots and AI) will ultimately eliminate commissions to intermediaries. This is true in the Term Deposit space where the cost of intermediaries is less defensible in a low interest rate environment.

Digitisation in the short-term funding market has been the laggard with very little innovation and competitive solutions for a long time contrasted with lending markets where a plethora of solutions exist. In the Australian context, this has been compounded by customers reluctance to compare and change banks and it is no wonder that depositors probably lose more than $6bn interest annually. Unconflicted platforms like Likwidity simplifies the process for depositors and investors to seek additional yield and ensures that a level playing field is created for customers as well as banks. After all, that is the essence of the technology in financial services. It’s time to rethink how returns on your funds can be enhanced without the hidden commission costs. Likwidity offers the only Unconflicted Zero Commission Deposit Platform. This means that you get a commission free interest rate with Likwidity.


Deposit Platforms-Who is keeping the banks honest ?

We are all now having to cope with lower interest rates on cash funds. So how do you ensure that you achieve best practice in placing term deposits:

Transparency – Are you getting the full rate?

Any platform provider should show full transparency in their fee structures and revenue models. This includes any commissions received from the banks.
If you are using a hybrid advisor/broker/platform provider, check for details of the fees they are earning and examine whether they are providing the most optimal outcomes for you.
As the recent Banking Royal Commission highlighted, with some revenue models, there can be a lack of independence from the supplier. And in some cases no services rendered at all!
This can result in suboptimal outcomes for organisations as certain banks and financial institutions miss out on bidding for funds due to these fee structures

Conflicts of Interest – Is your TD platform provider providing you advice?

Understand that there may be potential conflicts in arrangements with advisors or brokers. There are regulations that provide guidance on segregating your advisors from your product providers.
If you’ll remember a number of councils engaged certain organisations who advised them to invest in collateralised debt obligations (CDO’s). At the same time, these advisors were manufacturing and distributing the products they were recommending. A clear conflict of interest. As a result, the risks associated with the product were never fully disclosed or understood, causing massive financial losses during the GFC.

 

Appropriate AFSL Licence

Is your provider licensed for all the services they are providing you?
It is always prudent to check that your advisor, broker and corporate treasury software provider has the appropriate regulatory licence to provide ALL the services they are providing to you.
All the above may have different AFSL licences depending on the products and services they provide.

Automation – How efficiently can you search for and transact on the best rates with multiple banks?

A good service provider will enable you to automatically request rates and transact on the best ones from a large number of Australian Deposit-Taking Institutions. They will also ensure that there is instantaneous reporting on settlements, outstanding deposits and provide a full audit trail of all operations. Always allowing you to show the steps behind every single deal.
Some service providers will even allow you to invite and transact with Banks that are not on their “panel”.

Pricing Tension – Is your platform provider creating pricing tension in the market?

A good provider will create tension in the market by ensuring all quoting banks provide their best rates. Every time. They can do this in a number of ways – the simplest of which is to create a transparent bidding process.

Data Security – How secure is your information?

You need to ensure that the service provider you select has full control over their systems to ensure data is securely protected. Onshore in Australia.
Another secondary question to ask; can they provide guarantees that there are no unauthorised access to your data?

How Is Likwidity Different?

Likwidity is an independent AFSL licensed service provider that runs an  Unconflicted, Zero-Commission, Multi-Bank Deposit Platform in line with the latest recommendations of the Hayne Royal Commission.
The team at Likwidity pride themselves on providing a feature-rich platform that allows you to:
-Quote and transact with multiple banks in real time
-Obtain zero commission quotes. Or revenue model relies on clients paying us monthly fees to access our platform
-Invite “off platform” banks to quote on your funds. Your banks don’t need to be on some “panel” for you to invite them to quote
-Obtain a complete audit trail of every deal
-See your current and historical holdings at a glance
-Re-invest or withdraw your funds on maturity

Our services are built to ensure clients get the best rates on Cash Funds via our multi-bank quoting/transacting software platform. Our products are bank agnostic, thus creating pricing tension within the market. This, in turn, enables us to deliver competitive unconflicted rate outcomes for our clients.
Likwidity is an online platform – no software to install. It can run parallel with your current systems, as well as interface with them.


The Humble Startup

We felt compelled to share the thoughts of a true innovator and change agent.

Michael Jordaan not only ran a very large bank, but he also inspired and changed their culture to adopt innovation at scale. Even after he left the bank, he remained a catalyst for change and his new revolutionary bank should be on the watch list. But his words remain utterly important today.

You see there are few things that really create the future. Most institutions protect what is, instead of creating what should be. Of course big business and government want things to improve. But they also benefit from the status quo as long as they are making money or staying in power. The only institution that really creates dramatic change in society is the humble little start-up. This is nothing more than a small group of people with a cool new idea and a plan on how to execute it.” Michael Jordaan, Banker, Innovator, VC.

https://www.montegray.com/i-dont-want-your-money/


Yes, Even with these low rates, you still need to hold cash !

As expected, the RBA has passed another reduction in the cash rates. But unfortunately, all businesses still need a cash buffer even at these levels. So what to do.?

Its time to change the game and be realistic about returns on your organisations cash surpluses. You simply have to seek better returns and you can no longer afford to maintain the status quo or do nothing. There are now tools that enable organisations to perform this function without needing an intermediary.

Likwidity software automates the process for investors to do multi-bank, multi-currency price discovery and execution for Cash funds (Term Deposits, Notice and Call accounts). Likwidity solves this by being the 1st zero-commission pure Software as a Service (“Saas”) offering that uses easy, efficient technology to consistently get best rates using a bank RFQ process with full auditability and fixed transaction fees. Unconflicted and bank neutral, we give depositors peace of mind whilst eliminating the need for using brokers who take between 5-25 points off an already low rate, supported by full and detailed audit trails.

Take control and see the benefits in a short period.


Market Insight-Investigative Journalism

For the best investigative journalism in Australia, we found Michael West to be absolutely amazing. Keep this bookmarked.


The Right Royal Omission

Without doubt the Banking Royal Commission will dominate conversations for a while yet with both pro and against parties having valid arguments. If the law of averages is to be believed, then the report was just about right. So let me dive in and add two unsolicited observation that I believe should have been front and centre of the philosophical debate.

The proverbial elephant in the room is glaringly omitted. And that is the relative concentration of banking income and lending across the housing market. The RBA report titled The Australian Financial System in the 2000s: Dodging the Bullet by Kevin Davis shows Australian Banks loan composition to Residential at about 60%,  way above other comparable markets with e.g USA at 38% and UK at about 15%. That is almost the highest in the OECD countries and 4 times the UK and about double that of Canada. Naturally, this is concentrated across the Big4.  This would imply that banks see mortgages as easy and profitable lending and other segments like industry and small business lending less aattractive. The contra to this is concentration risk (and I guess we are starting to see some of that already) , but possibly the smarter folks have already priced this in.

Secondly, the entire causa or reason for the commission was due to “agents or intermediaries” not providing a fair service. A key part of the service provision relates to the average man in the street being overwhelmed with the apparent complexity of financial products that are available.

And therein lays the crux of the matter. Why are these financial products overly complex. If we use the normal curve, then the majority of financial products within the 90 percentile could be standardised products and reasonably simple to understand and comprehend. If not, then who are they aimed at ?  So why are the providers making what should be a standard product more complex.

It’s Simple. Confusion creates opportunities to clip the ticket. Add layers of complexity and you add layers of costs and participants who are all laying into the slice of cake.

If one is brutally honest, then many financial products can be digested into an easy to use standardised application, and by extension, many other products too fall within the normal curve. Term Deposits are another example of being a bewildering array of options that are often too confusing for the man in the street to fully appreciate. I am not implying all products can be simpified, but I am guessing that many can. This is not anti-capitalism but merely a way vital financial decisions can be more accessible and easier to understand and also promote a level playing field, untainted by the size of the marketing budget.

According to Graham Hand, there were many other areas that were overlooked and its possible that the opportunity to make changes to the Financial sector may not present itself for a long while or when the next Commission is called. He did an excellent summary and raised some vitally important points in his brilliant piece 8 problems the Royal Commission missed.  

An example he mentions “Take the example of the way banks price their products. Why do the banks rollover the term deposits of existing customers at sub-market rates, forcing loyal customers to make a phone call to achieve a better rate? The vast majority can’t be bothered or don’t know the benefits, and what banks call ‘retail inertia’ makes a major contribution to interest margins.”

Its time to declutter the language and limit the marketers sense of obtuse differentiation and keep it simple.

Linley Scorgie, 6 Feb 2019.

The Australian Financial System in the 2000s: Dodging the Bullet by Kevin Davis, notes that residential loans made up close to 60 per cent of
Australian banks’ total loan portfolios in 2009, but less than 40 per cent in the United States and Canada, and 15 per cent in the United Kingdom. The focus on housing lending has, in part, reflected a substantial increase in household sector leverage in Australia over the 1990s and early 2000s to a level consistent with that in most other advanced economies


Royal ? Productivity Report

It's all in the Productivity Commission

Amongst the plethora of reporting around the Banking Royal Commission (“RC”) in 2018, another substantive report battled to receive the media attention it deserved. In some ways, it was almost as if the conclusion of the RC was already written before the actual commission was held, almost prescient. It is well worth reading and can be found on the Productivity Commission website.

The report titled Competition in the Australian Financial System was prepared by the Australian Productivity Commission and covered the overall Financial market including banking, insurance and broking.

Amongst some of the conclusion are gems like this ..."

  • But the larger financial institutions, particularly but not only in banking, have the ability to exercise market power over their competitors and consumers.
  • Many of the highly profitable financial institutions have achieved that state with persistently opaque pricing; conflicted advice and remuneration arrangements; layers of public policy and regulatory requirements that support larger incumbents; and a lack of easily accessible information, inducing unaware customers to maintain loyalty to unsuitable products.

And please note that this report was produced 29 June 2018, almost before the RC really got interesting. So it cannot come as a surprise to customers of these institutions (and that pretty much means almost everybody) that you have been paying a high price for the artificial state of Financial Services for a long time. The unfortunate reality of this is that the average consumer is aware of this but the cost and inconvenience of changing is simply too great. Inertia…

There are other instances of abuse of market power and all too often it not get the attention it deserves. See the latest example with CBA

Regulators should accelerate the ability of customers to switch providers  as easy as porting your mobile number. In theory that is. The practice may be utterly different,  and why I predict many institutions will drag their feet to fully embrace Open Banking. One of the culprits in delivering change is the complexity and inbuilt roadblocks that come from the KYC/AML process. It would be a gamechanger if the KYC/AML process could be radically simplified. It could be the turbo boost needed for genuine competition and consumers will have less hurdles in switching providers to achieve better outcomes. Level the playing field.


Snapshot of Market Data

With limited available time, we have attempted to provide a quick overview with links to what we think is relevant and interesting data influencing liquidity. This is mainly extracted from external sources and links are provided

Australian Banks Profitability (This includes banks interest margins, capital ratios and Major sources of banks funding)

Business Sectors (overview of business investment by sector and funding)

Monthly Banking Statistics (reflecting assets and liabilities per bank)

Quarterly Authorised Deposit-taking Institution Property Exposures (highlights key trends and property exposure of bank sector)

Lessons and Questions from the GFC (Speech by Guy Debelle RBA Deputy Governor)

 

 

 


The definition of Cash may surprise you !

What is cash ? If that seems like a silly question, then consider this.

In an effort to increase yields, many funds and asset managers have expanded their “cash” holdings to include hybrid instruments and other instruments that have a higher rate of return, and this is disclosed as Cash on their holdings. Not acceptable says APRA.

Under the reasonable expectations principles as set out in SPS 530 Investment Governance, APRA considers that a superannuation fund member would understand that exposure to a

‘cash’ investment option or product will be readily accessible (for withdrawal or transfer) without change in value.

This aligns with APRA’s definition of cash under Superannuation
Reporting Standard (SRS) 530 Investments (drawn from AASB 107) which states that ‘cash’:
Represents cash on hand and demand deposits, as well as cash equivalents.
Cash equivalents represent short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.’

So, when considering investments in non cash equivalents, the key question to consider would appear to be: will my cash be  readily accessible (for withdrawal or transfer) WITHOUT change in value !!!

i.e what circumstances will cause the nominal value to change, e.g equity markets, interest rates etc.

 

Source: https://www.apra.gov.au/sites/default/files/letter_cash_investments_options_non-cash_holdings_industry_guidance_june_2018.pdf


How Free is "Free"

Commissions must have been introduced a few seconds after the big bang. It certainly seems as old as time itself, and is a fixture of life. Or is it. ?

If anything came from the Banking Royal Commission, it would seem to be that the pursuit of commission was a key factor in driving unchecked greed and questionable behaviour. Look through almost any corruption or tainted financial scandal and commission would be at the centre. The reason is because of its hidden nature. Prices are not transparent and product choice is often vague or overwhelming.  Those who advise and assist customers face conflicting, unclear incentives

In the majority of cases where commission is involved, then buyers are not fully appraised of the total cost of ownership. And therein lies the beauty and the danger of commissions (also called “soft dollars” because it is usually built into the final price) . It is nearly invisible and designed to not show up in the buyers face at all. An innocuous occurrence. But left unchecked it will over time erode your performance.

There are many cases where commissions are genuinely deserving and are a reward for creating or bringing value.

The question that must be asked is this. ” How relevant is commission in a digital age ?” where technologies have reduced transaction costs by multiple factors. Older transaction processes may have justified deep commissions but no longer. Digital channel like the internet have transformed commerce, and one of the key benefits of these channels is access to information. The internet’s power lies in its ability to disintermediate knowledge and deliver that same knowledge to all participants. It is exactly that power that will surely diminish the need for large commissions in doing everyday transactions where no new knowledge or benefit is gained. It is all about efficiencies and processes becoming commoditised and fees must reflect this in future.

Is it maybe time for commissions to come out of the darkness and be more fully disclosed. This way buyers and sellers are on an equal footing and all parties have full disclosure. As a depositor/investor, take this test to see how “free” your service is.


Australian banking over the last 30 years

The sorry tale of our big banks

This is a really interesting insight into Australian banking over the last few decades. It highlights that all market corrections tend to swing back to the norm very quickly and that the public have fickle and short memories.

Luta continua


Comparison of Ratings agencies

An overview of the ratings per ratings agency

Credit ratings

 

Moody’s Standard & Poors Fitch
Investment grade Strongest Aaa AAA AAA
Aa AA AA
A A A
Baa BBB BBB
Non-investment grade Weakest Ba BB BB
B B B
Caa CCC CCC
Ca CC CC
C C C
C D D
  1. These credit ratings are reflective of obligations with long-term maturities 

Source: Reuters. Treasury Today (http://treasurytoday.com/2018/09/time-to-get-rated-ttb2b)


Is the storm about to break? When will bank customers change?

In January 2017 I wrote this article after listening to a number of fintech’s views on how customers don’t like change. This was before the Banking Commission was a twinkle in the eye. It is now October 2018 shortly after the release of the preliminary commission report, and this article is still valid. “When will banking/insurance/wealth etc customers realise that in many cases, they have not received fair value for their service.”. Does this mean that customers will change. Time will tell, but for now, I feel that this article is somewhat prescient.

Hot steamy summer afternoons when you are waiting for the storms to break and provide the respite needed and sometimes it just does not break.

Is that what Fintech success will be like? Just waiting for the pending momentum to reach tipping point? Is the tipping point going to be a wake-up by consumers and businesses that they cannot and should not maintain the status quo? The harsh truth is that most fintech start-ups are hamstrung by potential customers not wanting to change from, e.g their bank or mortgage provider.

Research has indicated that most consumers and businesses are generally dissatisfied with existing banking/ insurance service providers, and yet it is the least likely segment to switch service providers. Loyalty and allegiance to incumbents is particularly strong in Australia and the UK.

This is particularly important as the majority of Fintech activity appears to be in lending/ or related areas and this is the sector that have embedded dominance by the larger institutions.

Even the 2nd tier banking institutions have experienced this reluctance to change and for many it means pedestrian growth and limited inroad into lucrative products and segments.

Some articles have suggested that consumer switching is a vital part of the modern economy and leads to innovation and better use of resources.

So why is it so hard.? Regrettably I am not qualified to offer any answers. Some will suggest that its simply better service or product will drive new customers. But that is too simplistic. Part of the factors are steeped in cultural or national psychology and that will be hard to overcome in the short term.

Too often I see very promising and innovative start-ups with genuinely good products but their size and scale just does not permit them to endure long sales cycles to make a meaningful difference.

Interesting, this subject is not new but has been covered regularly and even resulted in a detailed research report for the Treasurer in 2011. (It will be interesting to see what movement or momentum has occurred since then.)

So is it maybe time to think out of the box and as a fledgling industry maybe embark on a national movement that sells the key message of change and alternatives and propel consumers and business to fairly evaluate alternatives. This was not entirely feasible a few years ago, but with the clear power of digital channels (see Donald J Trump), this could possibly be a much easier task now. That’s the challenge.

References

https://www.businessthink.unsw.edu.au/Pages/Why-switching-banks-to-get-a-better-deal-is-essential-for-the-economy.aspx

http://www.roymorgan.com/findings/5094-16-4-billion-up-for-grabs-201308270110

http://banking.treasury.gov.au/content/reports/switching/downloads/switchingarrangements_aug2011.pdf

https://www.thesenior.com.au/financial/bank-switching-heating-up-ubs-survey/

http://media.wix.com/ugd/06c9a1_f604028f07c34d71b3fe136a6979cc83.pdf


About the Deposit Market

A quick background on term deposits and interest rates in Australia. I promise, I will keep it short.

  1. There are more than 140 banks in Australia. Yes… It sounds crazy, but its true!
  2. Each bank sets their own interest rates depending on many factors
  3. As a saver, you would get different interest rates from different banks on your money
  4. The Australian Government provides a guarantee of up to $250,000 for your money invested in almost all Australian Bank.
  5. Since 2009, interest rates on savings and deposits have declined significantly and is now almost less than inflation, meaning unless you hunt down better interest rates, you are essentially losing capital, let alone interest.!

All this means is that interest you earn on your savings can differ quite considerably. Often by as much as 50%. 

Yes – I can hear you saying that it’s an ordeal to search for and find these rates. It’s a headache to keep up to date with all the changes in the market. It is much simpler to just keep it all with your current Bank. That is perfectly OK. 

 You may however be losing a significant amount of interest. And when you compound this interest you are essentially foregoing year after year, it would add up to a quite a sum. Albert Einstein is said to have called “the power of compound interest the most powerful force in the universe.”

So to get to the point. Likwidity is a smart deposit platform to efficiently source and execute deposit transactions with multiple banks in 1-click.  

  1. Customers tell us how much you wish to invest in Call, Notice or Term Deposits, and for how long
  2. We go and source the best available market rates from participating banks on our platform who bid for your business
  3. The process happens in a fast, easy, straight forward manner
  4. Our system selects the best rates and presents to you for confirmation and settlement.
  5. You invest your money at the best rate possible.
  6. At maturity, we actively remind you and you can withdraw or roll the term deposit over and go again using the same parameters you supplied initially. One click convenience means no downtime. Your money is always working for you.
  7. You have a management dashboard to manage your deposits across all the banks

Very importantly, we DO NOT have access to your funds. The money side is strictly between you and the bank you selected.

For this service, we charge a flat rate per user/transaction.

 OK so how do you benefit?

  1. Time – we save you lots and lots of time
  2. You get the best available rates. The power of compounding means the difference between best and also ran can add up to a tidy sum
  3. Full transparency. No hidden fees. No camouflaged commissions
  4. Peace of mind. We help make sure that your funds are working for you.

I encourage you to give Likwidity a try and see for yourself. We are part of the new generation of financial service providers that believes in giving investors better control and no hidden fees. 


Capital Decay

Investopedia defines Capital Decay as “ Capital decay is an economic term referring to the amount of revenue that is lost by a company due to obsolete technology or outdated business practices. Revenue is lost because a firm loses its competitive standing due to old practices and clients to elsewhere. Capital decay is a growing problem for firms, as the rate of technological development continues to increase. This financial malady can cause firms without current technology to struggle to keep up with competitors.”

Technology changes and adaptations in business is no longer a major event requiring long projects and decision making, it has become an everyday adoption and discarding of technology much like consumables. In this process organisations can tweak and find an optimal process with the ultimate goal of creating business efficiencies and growth.

The advance and widespread adoption of platforms is one such phenomena that continues apace and the very cornerstone of platforms is the simplification and scale that it brings to manual or inefficient processes. In the financial markets (banking, wealth and insurance) platforms have long ago reached critical mass and will increasingly account for the majority of volumes in the future. Ae there a few hidden business areas where platforms have not yet encroached. Yes. Although the opportunities are getting scarcer and scarcer. Savings and Deposits is the next beachhead for platforms. Who will stake out this segment. At $2,2trn, it is not to be sniffed at and may be a strategic entry point into other aligned volume opportunities.

Is Likwidity that model. ?


How to source the optimal deposit interest rate easily and transparently.

Conflicting stories abound regarding the future of deposit and cash rates and combined with the plethora of bank deposit products, it is very challenging for organisations to find the correct deposit product. With more than 15 key banks and interest rates often differing by more 50%, it takes time and effort it takes to find the right investment destination for your cash.

If you are managing your organisations cash or looking after client funds, the additional responsibility to remain compliant and transparent means that the old and traditional way of calling different banks with limited auditability may no longer going to be acceptable.

The continued digitisation of financial products is now also available for the Deposit market with the Likwidity Multi Bank platform offering depositors a single platform that provides depositors with an easy to use and completely transparent deposit platform to achieve multiple rates within a fraction of the time compared to calling around and with full audit trail and transparency around pricing and rates.


Bank Funding (WIP)

Davis (2011) notes that residential loans made up close to 60 per cent of
Australian banks’ total loan portfolios in 2009, but less than 40 per cent in the United States and Canada, and 15 per cent in the United Kingdom. The focus on housing lending has, in part, reflected a substantial increase in household sector leverage in Australia over the 1990s and early 2000s to a level consistent with that in most other advanced economies