For most of us money walks, limps and staggers into our lives. It then seems to magically grow wings and fly away from us in the blink of an eye. What if, we could make our money self driving? We would still have to earn money, however money’s journey through our lives could become more self driving in the future.
This is very much an area of development in the Financial Sector. Exactly what will exist in the future is still unclear, however there is a lot of investment and development taking place.
This week I will have a look a few of the companies that are working to change the way that we have to deal with money.
Digital Banks
A new wave of Neo-Banks or Digital Banks are entering the Australian banking ecosystem. These banks operate from an App rather than from a physical branch. Some examples in Australia include 86400, Volt, Archa, Up, Xinja, Judo and Revolut. Most of these banks provide transaction accounts, all are online only and some specialize in specific sectors. No doubt their offerings will broaden in the future. Athena is a completely online Mortgage provider. It is early days however it is already obvious that the banking landscape is changing.
Payday Lending
Approximately 70% of Americans and 50% of Australians live from pay cheque to pay cheque. Most of those people can not fund an emergency payment of $400. They essentially have no savings. Many of these people find themselves turning to payday lenders to tide them over till the next payday. Payday lending (i.e. a short term unsecured loan) is the most expensive (legal) form of lending that people resort to in times of desperate need (annualized cost is from 50% to 120% including interest and fees, huge when you can get a mortgage for under 3%). There are a few US companies and at least 2 Australian companies trying to put these predatory lenders out of business.
Traditionally we are paid weekly, fortnightly or monthly out of convenience (for the employer). This made sense when people were paid in cash. Cash is expensive to transport due to the high security needed and it was labor intensive to distribute. In today’s world of very cheap electronic money transfers why not pay people as soon as they earn their salary or wage? It is possible to pay anyone on a fixed wage at the end of each day (with fortnightly or monthly adjustments for any additional payments or deductions such as overtime).
Earnd is an Australian startup that is helping employees avoid debt, late fees and expensive predatory lending by providing a company’s employees with access to income as it has been earned. Integrating with payroll systems, Earnd allows employees to set their pay schedule to work for them. Earnd focuses on providing their product via employers.
Cheq is another Australian Startup that allows early access to pay. It focuses more on the employee, also allowing early access to pay but assisting with budgeting and planning for upcoming bills.
Buying Stocks on the StockMarket
Robinhood is a US startup that provides commission free trades in stocks, funds and options. They are introducing a Cash Management account that will move cash to the banks paying the most attractive interest rates (banks are vetted and need to be part of the RobinHood program). RobinHood is coming to Australia in the near future (you can pre register on their website).
There are a growing range of investment funds that are passive Index Funds rather than actively managed funds. Index funds buy all the stocks in a Stock Market Index (e.g S&P 200 or Dow Jones or the All Ordinaries) in the same proportion that the stocks make up the index. Here is a more detailed explanation of Index Funds. These funds are very cheap to operate (buying and selling can be automated) in comparison to actively managed funds. Active Funds employ lots of expensive stock analysts and brokers to determine what shares to buy and sell. The majority of active funds don’t perform as well as simple Index Funds.
Transferring Money
One of the most expensive things we can do as consumers and small businesses is transfer money overseas. The banks charge 2% plus margin on the exchange rate plus transfer fees. Providers such as PayPal and Stripe can charge much more. Services such as Airwallex (already an Australian Unicorn) provide an alternative to transfer money and change currencies. They also provide the ability for small business to hold and transact in multiple currencies.
There are several startups developing FX transfer services that are significantly cheaper than the banks. These services are instantaneous transfers rather versus bank transfers that will take a week or more. One example is Flash-FX, an Australian startup that uses the Ripple internet protocol to instantly transfer money internationally.
Virtual Corporate Credit Cards
An Australian startup, Divpay has developed a virtual corporate credit card for SME’s. A budget is created for any team in your organization, spending rules are set, the individual uses the Divpay mobile app to access the virtual credit card, they pay in store or online and snap a photo of the receipt. Expense reports are automated and Divpay integrates with the major accounting packages (Xero, Quickbooks etc.). A dashboard gives managers insight into spending and instant alerts show how and where money is being spent. Budgets are tracked in real time. Divpay uses the Mastercard payment network so the app is widely accepted. Airwallex is releasing a multi currency virtual card for payments in the near future.
What will the future hold?
Automated Financial Advice
Sometimes called robo-advice there is a growing range of automated financial advice platforms. Currently the computer algorithms used to provide these services tend to be programmed to deliver pre-determined outcomes based on the data used. However, looking ahead there is an opportunity for artificially-intelligent learning algorithms to enable automated systems to respond to a broader range of more complex scenarios. One of the biggest mistakes most of us make in managing our money is that we use emotion rather than reason to make investment decisions. A well trained algorithm will eliminate that error. For most of us this will be a better way. A leader in this space in the US is Wealthfront. This Deloitte paper talks about the future of Automated Financial Advice in the UK.
Self Driving Mortgages
Much of the current work in this area is focused around automating the application and credit assessment process. However over time our income changes, our circumstances change and our ability and desire to borrow changes. It is not too far fetched to envisage an AI that will understand our circumstances and seek out a better deal for us and present it for consideration. The current Open Banking initiative in Australia will make this type of change easier in the future.
An AI that works for me not the bank
There are companies that are developing AI bots that will operate on behalf of the individual not a company. One example is Akin. They work to create personal AI, able to handle complex tasks, be long-duration companions and optimize an environment for the user. In the future this type of bot will most likely manage our money, pay our bills, save for our retirement and invest anything that is left over. The key is that the AI acts in my interest. This will truly be “Self Driving Money”.
The Future of Money is a massive subject and there are a huge range of companies working hard to disrupt the current system. No doubt this is an area which we will regularly revisit. I have barely scratched the surface today. Please note that, nothing contained in this week’s newsletter represents Financial Advice. Please consult your own personal robot or expensive Human Financial Adviser.
Paying it Forward
If you have a start-up or know of a start-up that has a product, ready for market please let me know. I would be happy to have a look and give the start-up a shout out to my readers if it is something that I think they could use. If you have any questions or comments please email me via my website craigcarlyon.com
I would also appreciate it if you could forward this newsletter to anyone that you think might be interested.
Till next week.