Wave of bond issuances relying on longship processes

Bond issuance exploded as government debt offices and corporate treasurers ran to sure up their cash piles. The wave of issuance is frequently relying on longboat style technology. There are newer “boat” styles and manual rowing can be replaced with technology, plus a wider range of funders, by allowing retail investors to have a bite of the bonds being issued.

The process of issuing bonds is unbelievably slow and largely manual. we understand that is can take an average 30 stages with human intervention between multiple parties and intermediaries to issue a bond. The use of PDF and paper-based processes in issuance that are then carried into trading and settlement need to be improved. technology has improved the trading of currency and equities but the bond market appears to be in the dark ages.

The opportunity of digitalisation, fractionation to retail customers and automated workflow should be the way to ride the bond waves, not longboats. It does need Viking hardiness though as its not a simple task to undertake and a journey we’ve been on for many years.

30 year paper technology still central to bond markets

The Portable Document Format (PDF) was created in the early 1990s by Adobe Systems, introduced at the Windows and OS|2 Conference in January 1993. This 30 years old technology remains central in a paper-based ecosystem of bond issuing, trading and settling. With cash piles burning rapidly for governments and corporations a more effective borrowing method is needed for this capital market instrument and a wider investor base to support corporate borrowing. 

COVID19 has increased needs for cash for business and government. Companies are short of cash. We want to replace the offline PDF-based approach to lending, trading, offering, register and cashflows management for borrowers and lenders. Chiefly reduce friction and pain for financial institutions and grow the number of participants that can join a borrowing. 

With companies and treasury departments rushing to issue bonds a technology that opens a similar digital method and also widens the pool of funders should be attractive. Bondsmart is trying to simplify and open wholesale borrowing markets and bond activity. 

The humble PDF started off on the dream of a paperless office, as the pet project of one of Adobe’s founders, John Warnock in a project called Camelot. Initially, it was an internal project at Adobe to create a file format so documents could be spread throughout the company and displayed on any computer using any operating system.

Nowadays the PDF is central to many operations of financial services. In Japan, for example, the clearance and settlement system appears to have limited interest in corporate bonds, because it was a decentralized, paper-based system. The United Kingdom’s paper-based system which has only recently been modernized. PDFs are the predominant model of paper-based
disclosure regimes that have underpinned the development of many European disclosure requirements (e.g. the provision of KIDs in PRIIPs and KIIDs in UCITS). 

Bondsmart are delivering an architecture to replace offline PDF based lending, trading, offering, register and cashflows for corporate borrowers and financial institutions when doing lending. Increase financial inclusion too with the admission of retail customers to be involved in lending too.

The need:
• Financial inclusion. Current market the preserve of the super wealthy
• Investors want to know the return on their investment
• Unique instrument that fits a financial need – income and security
• To fill a market gap
• Improve operation from a PDF and paper-based ecosystem to more electronic.

Current options for consumers:
• Options for an investor today:
o Need $200,000 to buy a single bond
o Mutual funds do not meet all the requirements of investors
o No control of bond, no known income level, no known maturity, etc

Case study: Small things can grow to powerful titans

bondsmart has an international perspective and works across many markets. We often come across an interesting story that fits with our mission and has had an interesting impact not known widely.

Yu’e Bao (pronounced “Yoo Uh Bow”) arrived in 2013 and has turned cash management into a serious business. The business is connected to AliPay, the huge payment gateway in China. When you understand the name in English the business case becomes obvious. Yu’e Bao means “leftover treasures” because it was originally promoted as a way to invest money left in the AliPay wallet into a fund to earn interest. It became the world’s largest money market fund in 2017. Its humble beginnings are what led us to consider looking back to its start to reflect how its immense growth led to policy changes and altered the net interest margin game for conventional banks in China all by adding a new product into a financial app.

Spare cash was the aim at the beginning. It offered an interest rate that was better than a deposit account and easy switching led Chinese consumers to begin to use it like a checking account. Proposition = micro transactions into a pooled vehicle to earn better returns on your spare money. China has a massive saving ratio so the top down demand for such a product was easy to see. Cash deposits are a vanilla asset with no bells or whistles but the friction to move it from one account to another and shop around for the best rates of returns make it difficult for any entrant to achieve any success. Though designing a superior investment product then creating ease to access it are at the centre of its tremendous growth. The high-interest rates that it offered were possible due to money market diversification rules in China that allowed more higher-yielding assets. China’s regulators and policymakers needed to change these rules to reduce systematic risk to the deposit market given the growth of the money market fund.

The competition reply has been to develop Fixed Maturity plans offered by wealth groups to compete, often mixing some leverage to increase returns. These are different to a money market fund, then a money market fund is different from a savings account. One in three households use Yu’e Bao data suggests and most of the investors are individuals. Compare this to the largest money market fund in the USA and its mostly institutions that are invested. Yu’e Bao drive into the consumer market has been successful because of the link to the payment gateway so suggesting consumer growth means linking into infrastructure that is connected to a consumer group you cannot replicate independently or directly. This encourages fintechs to work with financial institutions that have a large client base themselves and space in their product shelf for a new service/product that reduces the parcel size and is an easy access point, hallmarks we feel of bondsmart.

Musings listening to Accenture acceleration of fintechs

“Nearly everything you think you know about strategy and innovation is wrong” – the opening sentence for an article from Accenture five years ago. The main argument was that information technology or digitisation was driving down costs so innovators needed to build beloved products to command a premium price.

In our journey with DIFC Fintech Hive 2018 cohort we are meeting interesting people and leaders in financial institutions. It is striking listening to one global Accenture director as he spoke about the growth of their innovation hubs in London, New York and Hong Kong. Dubai, where we are, is one of the latest Accenture legs to this global ecosystem. I’m hearing suggestions that the rules that have defined strategy planning for the past few decades are out of the window.

What we are learning that to win in financial technology you need to create a love or buzz for your innovation and consider unusual models to be more dynamic. And importantly have a single, simple goal that strips things back to one gem.

Our simple goal is to give risk-averse investors access to an institutional asset previously out of reach.

Reading pieces on the growth of the Accenture fintech network it is interesting that an article five years ago encouraged an undisciplined strategy and just fail-fast to build a beloved product.

It resonates with us to be encouraged to not watch what others are doing and focus on the simple customer need.

Welcome Day DIFC FinTech Hive 2018 cohort

The 2018 cohort for DIFC FinTech Hive has begun and bondsmart are part of the clan. We had spent time in the summer focusing energies on working on the model and acceleration we desired for the UAE. The UAE has a fast-growing mass affluent market and are large buyers of direct bonds and Sukuk.

The launch event was held at Etihad Museum which celebrates the Union of the UAE’s seven emirates. During welcoming speeches the head of Accenture Middle East, Amr ElSaadani, shared his opinion that “experiences” frame the opportunities we develop – experience of getting off a plane, experiences from the people we meet and experiences we have in work, life and play. The theme of experiences and union are good signposts for the next 12 weeks and here I use to shape thoughts as we start this programme.

“Experiences” in bondsmart

When starting on a startup journey it is often the problems you see that are the pain points you set out to solve.  To us, risk-averse investors saw poor returns in fixed deposits and equities are a rollercoaster. Institutional bonds are an ideal asset class but difficult for retail investors to access and that was the experience we set out to change and pilot our tech.

“Union” in bondsmart

Disruption was the way that FinTech set out to grow but in reality, new ways of working and owner of the customer now work together. So disruption is now replaced with co-operation and spawned what we commonly see as “innovation labs” in financial instructions. With bondsmart technology, we hope to work on pilots with the partner institutions of the programme in the coming weeks with speed dating as a starter.

The DIFC FinTech Hive journey now begins. Watch out for more.

 

Amongst leaders in the Int’l Fund & Product Awards

News in brief following a pleasant notification into our mailbox.

The shortlist for International Investment’s 19th Annual International Fund & Product Awards 2018, has been announced following a record number of entries. These awards cover the world of international products and investments.

Bondsmart are amongst local, international, new and old groups plus innovators as Best International Platform.

Nominations are listed below.

Best International Platform
Ardan International Wealth Platform
Bondsmart
Capital International Platform, by Capital International Group
Sharing Alpha
Wealth Interactive, by Old Mutual International

Heatwave and Hive interviews

July is usually a quiet month in Dubai. Families away on holidays and commerce quieter with soaring temperatures outdoors (whilst we had a heatwave in Europe too). Two weeks ago we pitched at the DIFC Hive interview day in Dubai. 300 firms down to a small number for 3 days of interviews. We were part of it.

10:06pm emails are not always something you look out for but that was when our news of a place at interview arrived. Hoorah but then more work to do to prepare.

First decision: video interview or in person. We chose in person as we had a few other tasks in the region so with one trip we could do a few things in one go.

So a recap on what is the DIFC Hive, a 12-week programme, where startups work closely with partners to create solutions that address the evolving needs of their respective industries. The partners include

  • ADIB,
  • Emirates Islamic,
  • Standard Chartered,
  • UAE Exchange,
  • Mashreq,
  • Zurich Insurance,
  • First Abu Dhabi Bank,
  • Emirates NBD,
  • Citi,
  • HSBC,
  • National Bank of Fujairah,
  • Riyad Bank,
  • Arab Bank,
  • MasterCard,
  • ADNIC,
  • Zurich Insurance,
  • AIG Insurance,
  • Takaful Emarat,
  • Noor Takaful; and
  • Noor Bank.

Why do we want to be in Hive? To pilot our beta with financial institutions and with innovation managers, that task is easier especially where Accenture is part of the frame and you are in a hub designed to achieve that.

The format we understood was 10mins pitch and 10 mins Q&A. The usual format for pitches was: problem, solution, opportunity, traction and ask. We learned on the day the partners had asked after the first day of interviews to focus on the product rather than pitch. Fine, so bin all the work on the pitch we had done and just get wifi, access the demo, show the best bits of the beta in 9mins 30 seconds (30 seconds to tell the story what we did and why we were there).

With the demo we tried to focus on the innovations and simplifications that brought to the partners. Our focus when we setup was always on the B2B2C market, so our demo lived true to that aim. We left feeling we had done a decent job but with some many faces in the auditorium it was hard to know how we had been received.

Our application thinking and applying to DIFC Hive

Here’s some behind the scene thinking in our Hive application. Interestingly it’s a good opportunity to reflect on some of the lessons on looking at ourselves a year ago. When it came to creating a fintech application we had followed a few accelerators and looked at their application forms. https://www.f6s.com/ has been popular for a lot of leading fintech accelerators to use and a broad theme was consistent for fintechs.

Most applications follow a common lean starting pitch format: problem, solution, opportunity, traction and ask. Commentary on each of these elements is well known and a google search will provide lots of articles on them.

Here are a few standout memories looking back on the task.

One of the early things we did when formed was spent time on marketing and brand to consider what we represented and valued. These things seem a little too abstract at the start but getting them nailed means no mass brand changes when you have traction and when it’s heavy work to execute. It does not require massive investment as a startup but being clear is better than not having done anything at all.

Where to begin

Most application will ask for a “tweet of what you do” or a “pitch you would give in an elevator”. This is the start of many pitch application but it was actually the end in our process. We did this as the last thing as it’s a perfect example of the detail needing an awesome filter and fine-tuning.

The pitch video

This is now a standard feature for accelerators. Videos are about telling a story and not an advert, sales pitch or speeches. Brevity is king. Short and clear articles are the key. I have learned that knowing nothing and trying to explain it is not the key; knowing all the detail and then having a finely tuned filter to strip it back is important. It has also taken many iterations and there is not one that works for every audience.

The pitch video was something we have massively improved. Talking to the camera I don’t think works for accelerators (unless it is accompanied with an appropriate background setting). Also for some people in corporate settings they do not always have speakers or can listen so text and video are what’s needed.

Professional video editors have a place and a role. We did ours in house as again the editing tells our story. I am also a big believer of build, view, edit and this is a lot quicker inhouse than with an external agency. Our eventual video has no founder interview but its basic structure follows the prescribed pitch format. It won’t win an Oscar but hopefully it tells our story. Our video is 1min 12 seconds long, under 140 words, a tech-rock soundtrack (not all will hear that if seeing on a corporate network), no sentence longer than 10 words, background video of a Dubai fly- by and produced on Camtasia software on a Dell PC.

The startup fintech world has moved on in the past year. Ideas used to get funding but now you need a beta product and test clients. That’s a big shift and also a ravine to get over for a startup running as a lean business. Hopefully, these insights help you crossing the many ravines a startup sees.

Bridging the wholesale – retail divide

Most industries have a supply chain from the distributor to the wholesaler to the retailer to the consumer. At each stage the minimum quantity gets less until at the consumer end they can buy a single item.

The problem with financial services is that sometimes the consumer does not actually get the same product as the wholesaler sells.

The retailer often repackages it in a different format and gives the consumer something else. In the case of direct bonds, the consumer most frequently ends up with a mutual fund and no way to get a bond.

Improving the structure of bond markets for smaller investors is our primary goal. Retail investors suffer because they pay much higher prices than institutions do and rarely have access to the same securities. This differs from equity markets where every investor, large or small, can buy a share of Apple Inc at the same price at the same time. By “retailing” through co-ownership wholesale corporate bonds, which tend to have minimum subscriptions of £100,000 that’s obviously a deterrent to private investors, we are opening the market to more investors.

Even for wealthier investors the onerous capital outlay to buy a single wholesale bond results in a lack of ability to diversify. Subscribing for smaller lots allows retail investors to enjoy the benefits of yield/return certainty that comes with investing directly in corporate bonds yet still enjoy the diversification benefits too.