What is banking? Is it investing or is it delivering customer value..hang on are they not the same things, but on opposite sides of the same coin? When I returned to Australia 4 years ago, I immediately noticed how uncompetitive the Big 4 Australian banks were, versus their global peers. They operate as an Oligopoly. Please let me explain how I began to think, invest and break those ancient models down. The punch line is in the detail and the last two paragraphs...but there in is the joining of the dots and value creation that we create as Alchemy! A picture paints a thousand words, but the devil is in the detail. The value creation is in the strategy and forward thinking which aligns several markets - property, finance and technology, the underbelly of the Australian economy. I will get to Agtech soon...
Pricing and processes are far in excess of any bank on the planet. The easiest way to analyse this is to look at the ROE for all four banks. It is double digit, when every other bank in the world is single digit. Who benefits from this? Well the regulator and shareholders would say all stakeholders. However, as consumers we all pay in excess of what we could be paying.
So I began my journey re-entering the Australian market and setting out to achieve something disruptive. When I co-founded Brickx the vision was to build a fractional real estate investment platform, but with a view that this could be extended into other financial services products. The idea was to create real time trading accounts, and fractionalise property investing, so as to allow milennials to get on the property ladder. This combined my passion for technology, property and breaking down a bank. #crushingit
However, what we were really doing, was attempting to gear the unit trusts, so as to provide greater retrurns to our customers and investors, and thus bypass the non-existence of crowd funding legislation in Australia at the time.
From here, we could then bolt on additional products - credit cards, bank accounts etc. The cost of customer acquisition and the initial #hook were differentiated. This has since been validated with the investment by Reinventure and Nab Ventures into Brickx. It offers a millenial lead gen for their traditional operations, as well as a way to promote and distribute products, and acquire a new customer set in a non-traditional way.
Starting a bank by taking deposits is the same fundamental business model Medici used in 1397 when he started his bank, and the grain traders before him. I had seen this from the UK, where the government actively promoted "People's Banks". Special deposit taking licenses which allowed startup banks to be capitalised with as little as £50 Million on the balance sheet.
All that differentiated these "new banks" from the incumbents was their use of Amazon Web Services and Facebook, to serve and communicate with their customers, whilst running their core banking systems (Not SAP) in the cloud. The fundamental principal of taking money in, and lending out at a margin, remained unchanged.
Now there is one of these banks starting up in Australia, and another that I know of about to start, but with traditional bankers founding it! They shall remain nameless.
Next in my journey came my personal investment in Republic Wealth Management and Spitfire, a Robo Advice Platform. What became the Two Up Labs team, who had helped me build BrickX, built this automated trading and investment engine. It leveraged the rise in the use of ETF's for passive investment to generate better returns than active managers, having been a product set which was not widely adopted in Australia. Traditional active managers, owned by the big banks and super funds, were charging ridiculous management fees, for normalised returns.
Again, we were looking to build on this inital product start and move further down the the financial services product set. Republic and Spitfire continue to evolve and compete. There have been several successful listings in this space targeting the Superannuation funds.
Since the inception of Alchemy, I have continued to retain these investment themes and passions - Property, Technology and taking down a bank!
I personally invested in Local Agent Finder, a unique lead generation business for finding a real estate agent to manage or sell your property. This product set has now been accepted as the earliest indicator of an intention to re-finance or obtain a mortgage. This has been validated by the recent partnership between Local Agent Finder and the Commonwealth Bank. We further see that automation and pure internet lead generation for financial products will become the norm in Australia, through the ongoing royal commission attempting to curb the outdated and expensive traditional banking model of using brokers. Not only is it expensive, it is not transparent or the motivations and incentives aligned with good banking principles. I should note, that brokers disappeared at least in Europe quite some time ago as a preferred sales channel for financial products.
In a personal capacity I joined the board of (ASX:PCH) Property Connect Holdings, initially as an Executive Director and advisor to the CEO. Two Up Labs joined to help build the platform. Now I am CEO and Executive Director. PCH started life as a rental management platform in the US, bringing transparency and efficiencies to the rental market space. Now it is beginning to extend the product set into online property auctions. You can read more about my views on efficient property markets
The benefit of this model over traditional property sales, will be tested first with off the plan developments. This segment of the property market is subject to cyclical movements, driven not only by local demand, but also offshore demand, and changes in banking lending practises. Using an automated and online platform facilitates AML/KYC and FIRB requirements for property investment, but also facilitates project sell through. I have experienced declining property markets in places like India, where developers give cars away to promote their appartments.
As Alchemy, we have made a couple of investments which have been strategic and align these themes in what I would call a natural product set and sales pipeline, or enabling co-adjacent businesses, with disruptive business models to take down a bank! #crushinit
First came Grapple, a B2B, fractionalised marketplace for Invoices. It is not Invoice factoring!! Steve the founder would be very upset if he heard anyone call it that!
Then came Clearmatch, a B2B, real time APRA approved lending engine, which powers the B2C consumer lending business Society One. The recent "spin out" and investment into Clearmatch, means that Clearmatch is now focused on building a range of product sets in the financial services sector, which can then be fractionalised. Today these range from in part powering products like Society One, Insurance Premiunm Financing, Rental Bonds and in the future things like construction development finance and residential mortgages. Capital asset financing is another product to consider.
What is unique about this model from a traditional bank or any of the "new banks", is that the P2P and fractionalisation provides opportunities for High Networth Investors to "Be the Bank". A lot of these investors are offshore and they build and develop property onshore in Australia. As the banks start to reign back their CDF and residential investment lending, this creates additional opportunity for platforms like Clearmatch and these investors to fund their own projects, but to also diversify and spread the risk through the use of the fractionalised lending engine.
The cost of capital to fund and provide liquidity in this environment, and the returns generated are completely outside the traditional banking and bond issuance mechanisms. This creates a range of possibilities in terms of competitiveness and differentiation. Most other financial startups in the market today are reliant upon a Tier 2 or a Tier 1 for their capital, and this inherently is the failing point in their models and ability to execute. You cannot disrupt when you are beholden to a traditional model, you are simply a product feature, not a business.
Now bundle in the property element and Property Connect's LiveOffer auction engine. Investors have the ability to attend an auction and obtain a real-time APRA approved lending decision as the auction is conducted. This is a truly unique proposition, not only for the property market, but also for the disruption of a traditional bank and lender.
In short, this is the way we at Alchemy like to invest. We join the dots, have long term objectives and themes, then we place our bets and actively work to align markets, products and our investments to build a #revolutionary #ecosystem which hopefully generates exceptional returns for our investors.
Note: The views expressed in this blog are the personal views of the author, and not the businesses mentioned. Nor do they reflect or imply any commercial relationship between any of the businesses mentioned. The ideas and concepts expressed are simply to articulate an investment thesis and methodolgy. They are based upon ideas and concepts of the author only.