The accumulation of risk in the buyside and its impact on economic growth:
In this blog, I would like to set aside convention and start with a conclusion, which is as follows: “constraining any market’s ability to manage or mitigate risk means that there will be less economic growth. Where managing risk becomes too costly – whether that cost is justifiable or not – the tendency is to withdraw, or find an alternative route”.
We recently wrote about the inglorious race to the bottom in share value in the banking sector, and the need to control balance sheets by directly relating them to the xVA-adjusted price of each transaction. Without this all-in cost, banks will never truly understand their break-even point. Without this, shareholder value in the banking sector will remain underperforming.
However, this is not a simple calculation. Moreover, it is difficult to compare and match this pre-trade price adjustment, with post-trade funding and capital costs over the lifetime of the transaction or portfolio. The cost of transaction across different routes to market is also far from obvious; intuitively, one would expect clearing to be cheaper, given the new rules on non-cleared OTC derivatives and the intention to encourage market participants to clearing. Additional margin costs, differences in MPoR and IM calculation, the increase in concentration risk and the fairly high number of CCPs, which naturally disallow netting of exposures, are discussed (and calculated) in a thoughtful paper issued by the Office of Financial Research in the US – with the conclusion that clearing is “not necessarily cheaper”.
The calculation of valuation adjustments is not clear cut either, and is dramatically impacted by new regulation, with the complexity and cost intensifying under FRTB. Meanwhile, the most advanced sell-side firms recognise the need to measure and manage these constraints, and create relative pricing methodologies on the way to market. More…
creditshelf is an online marketplace bringing together SMEs and professional investors, providing unsecured loans ranging from €100k to €2.5m with a runtime of 1-12 months. Based in Frankfurt, the CODE_n CONTEST Finalist makes sure that each accepted loan project goes through a detailed risk analysis before it is uploaded for a blind bidding process. We talked to CSO Daniel Bartsch (PhD) about his company: FinTechs, he says, naturally compete with banks – but he also tells us why this is not at all creditshelf’s goal.
What is creditshelf all about? How did you come up with the idea?
Daniel: In times of low interest rates and tighter regulation banks do increasingly refrain from serving financing needs of small and medium sized companies. Stepping into this gap creditshelf is offering short-term working capital loans to SMEs, online via a lending platform connecting borrowers directly to our network of professional investors. Using cutting edge peer-to-peer technology we make available to our investors a new asset class that was previously reserved for banks, whilst we provide quick and easy funding to SMEs at attractive rates.
The creditshelf team at the “Frankfurter Gründerpreis” winning second place as best FinTech.
The idea was born following the financial crisis. The creditshelf founder team consists of senior banking and financial services professionals. First hand in our day to day banking businesses we realized that banks are not serving the financial needs of SMEs like they did before the banking crisis. In our heads came up different models how to fill this gap. We felt it was the right time for the introduction of a disruptive business model in corporate financial services. As a consequence we founded creditshelf late 2014, and quit our banking jobs. Fast forward 18 months, we are sitting in our small new office in Frankfurt am Main, with a team comprising 20 people across sales, risk management and IT, serving SME clients. To date, we have originated a significant double-digit million EUR amount of loans to these “Mittelstand” companies that mark the backbone of the German economy. More…
In this part of our CODE_n CONTEST series, we talked to FinTech Finalist CRiskCo, an American startup revolutionizing the credit approval process. With CRiskCo, loan providers can expect help for key challenges such as financial data acquisition, response time reduction and better risk assessment. The startup’s infrastructure connects to accounting systems in a one-click process, collects relevant data, standardizes it, and sends it to the loan provider in seconds. CEO Erez Saf told us all the details!
What is CRiskCo all about? How did you come up with the idea?
Erez: CRiskCo is disrupting the credit information business, a field ruled by giants such as D&B and Experian, which lack the tools and data needed to predict or manage credit portfolios. We help businesses reduce bad debt and make good credit decisions by providing credit risk information, by predicting future defaults and by assessing risks of current and potential customers. CRiskCo’s revolutionary approach includes the use of unique Artificial Intelligence algorithms, Big Data models and a cloud based technology. CRiskCo’s goal is to enable trust between businesses worldwide and enable new credit solutions to address SMB’s needs.
Example Credit Report (CRiskCo)
In my former role as CTO for a SAP Partner and an SME consultant, I had developed ad hock solutions for businesses to manage and control their credit customers’ portfolios. I personally witnessed businesses deal with dozens of poor clients, who defaulted or displayed sporadic payment behavior. A couple of years later as the CIO of eLoan.co.il, a P2P lending platform, I was exposed to some great tools and innovative ideas for managing individual’s credit portfolios, which I noticed that the SME community lacked. This is what drove me to start CRiskCo. More…
Curious to find out what’s the story behind the terms “Trusted Web” and “Web x.0”? Find it out in the next part of our blog series, introducing our “Applied FinTech” finalists of the CODE_n CONTEST. With their innovative solution, the German FinTech Blockchain Helix overcomes the problem of anonymous vs. legally secure transactions. Oliver Naegele, Founder & CEO, told us more!
Oliver, what is Blockchain Helix all about? How did you come up with the idea?
Oliver Naegele: Blockchain Helix is a Blockchain architecture that overcomes the problem of anonymous vs. legally secure transactions. We do this, by introducing an Identity management that handles privacy. We can streamline any KYC process and manage the user accounts with our technology.
We are driven by the fact, that Web 2.0 has data leakages and loss of data self-determination. Internet nowadays is not suitable for an internet of values and transactions. That´s why we need an approach to give back trust and our long work with blockchain and portal-solutions leads to this.
“Digital Disruption“ – that’s the motto of this year’s CODE_n CONTEST. What makes your solution innovative, what makes it disruptive?
Oliver Naegele: We are working on a technology that we call “Trusted Web“ or “Web x.0“. Our Helix technology gives us the capabilities to have privacy and security by design. Blockchain is a true gamechanger and the way we want to introduce it for everyday and everybody use and hide the disturbing wallet-usage is disruptive.
You’re one of the 13 finalists in the Applied FinTech contest cluster. Which challenges do you think young companies have to face in this sector? How do you handle these challenges?
Oliver Naegele: FinTech Startups more than any other sector (besides biotech) have to be more serious in business and has to deal with a very slow moving industry. This is a challenge as well as an advantage. Our very special challenge is that we are exploring the capabilities on a very early stage. Every Blockchain Technology like Hyperledger, Ethereum is public beta and evolving fast. This leads to higher development demands and workarounds. To overcome the fear of a new technology we do Blockchain events at our office and run the BlockchainLAB as an open dialogue platform. More…
The global financial services industry is currently undergoing a period of upheaval. New technologies are threatening old structures. Digital banking is booming – especially mobile banking. The innovative strength of FinTechs is shaking things up. Based on new, digital customer demands, they are forcing banks to rise to the challenge of digitalisation.
Just two years ago, FinTechs were still being ridiculed. Things have since changed. The innovative financial solutions and ideas of young tech companies are playing an increasingly important role and are about to completely change the way we handle our money. From instant payments, to paying via QR code, peer-to-peer lending, blockchain applications or even being advised by robots and robotrading – FinTechs and their technologies are laying siege to all aspects of payment transactions.
The basis of success: the customer.
Especially in retail banking – which was long neglected by many banks, leading to a loss of trust among their clients. There are now around 400 FinTechs in Germany. And the new services being offered by these start-ups are groundbreaking. According to the Association of German Banks (BdB), the services most likely to succeed at present involve digital mobile payments and transfers.
The pressure on established banks is growing accordingly. They are opening up more and more, entering into collaborations with the young guns or launching their own initiatives. Deutsche Bank, for example, has opened “Innovation Labs” in London, Palo Alto and Berlin and plans to create 400 new jobs on the topic of digitalisation at its digital factory in Frankfurt am Main. “We are building a digital think-tank,” reported Deutsche Bank manager Dr Patrik Pohl at the recent FinTech Talk in Frankfurt, initiated by GFT and Deutsche Bank. In other words: new blood is needed, preferably personalities with digital DNA and new ideas. The latest initiative of the Frankfurt-based bank may seem anachronistic – coming as it does 17 years after the launch of US online payment pioneer Paypal – but Deutsche Bank is demonstrating that even the megaships of the global monetary system are slowly changing course. More…